As filed with the Securities and Exchange Commission on April 7, 2000
Registration No. 333-xxxxx
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
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WORLDRES.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 4724 94-3357972
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
1510 Fashion Island Boulevard, Suite 100
San Mateo, CA 94404
(650) 372-1700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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Gregory A. Jones
President and Chief Executive Officer
1510 Fashion Island Boulevard, Suite 100
San Mateo, CA 94404
(650) 372-1700
(Name, Address Including Zip Code, and Telephone Number Including Area Code,
of Agent for Service)
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Copies to:
Alan Talkington, Esq. Gregory C. Smith, Esq.
Scott D. Elliott, Esq. Celeste E. Greene, Esq.
Orrick, Herrington & Sutcliffe LLP Skadden, Arps, Slate, Meagher & Flom LLP
400 Sansome Street 525 University Avenue
San Francisco, CA 94111 Palo Alto, CA 94301
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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.
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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, 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 the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title Of Each Class Of
Securities Proposed Maximum Aggregate Amount of
To Be Registered Offering Price(1) Registration Fee
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Common Stock, par value
$0.001...................... $69,000,000 $18,216
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
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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 which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 7, 2000
[LOGO]
WORLDRES.COM
Shares
Common Stock
WorldRes.com, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "WRES." We anticipate that the initial public
offering price will be between $ and $ per share.
-----------
Investing in our common stock involves risks.
see "Risk Factors" beginning on page 6.
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Per
Share Total
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Public Offering Price.......................................... $ $
Underwriting Discounts and Commissions......................... $ $
Proceeds to WorldRes.com....................................... $ $
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
WorldRes.com has granted the underwriters a 30-day option to purchase up to
an additional shares of our common stock to cover over-allotments.
Joint Lead Managers
Robertson Stephens J.P. Morgan & Co.
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Prudential Volpe Technology
a unit of Prudential Securities
The date of this prospectus is , 2000
[INSIDE FRONT COVER]
[Color Artwork]
WorldRes.com provides a leading business-to-business e-commerce solution
for online marketing and reservations to the highly fragmented global hotel
industry.
[Description of Graphics and Text on left front and right front
gatefold: WorldRes logo in center with lines on left side to different types
of distribution partners and on right side to member hotels.]
Distribution Partners: destination marketing organizations, activity-based
partners, internet-based partners, call centers, travel agents, hotel web
sites, WorldRes web sites.
Member Hotels: B&Bs, independent inns, resorts, hotel groups, representation
companies, hotel chains, independent hotels.
Travel Web Site Partners WorldRes.com Highlights
. Access to broad range of Lodging
inventory .1,075 travel web sites
. Offer rich content for leisure
travelers .11,500 hotel properties
. Process real time reservation .142 countries
. Share transaction revenue .over 325,000 reservations processed
Participating Hotels
. Open to any property
. Differentiate through rich content
. Receive online reservations
. No sign-up fees, low cost channel
[Description of graphics on right front gatefold page]
[Series of photos of various hotels available on our system]
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WorldRes is a registered trademark and PlacesToStay is a trademark of
WorldRes.com. WorldRes.com, PlacesToStay.com and BedandBreakfast.com are each
trade names of WorldRes.com. All other brand names or trademarks appearing in
this prospectus are the property of their respective holders.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
Until , 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
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TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Note on Forward-Looking Statements....................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial and Operating Data....................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 33
Management............................................................... 43
Related Party Transactions............................................... 52
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 64
Experts.................................................................. 64
Additional Information Available to You.................................. 64
Index to Consolidated Financial Statements............................... F-1
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Except as otherwise indicated, information in this prospectus assumes the
following:
. the reincorporation of WorldRes.com in Delaware before the
consummation of this offering;
. the conversion of all outstanding shares of our preferred stock
into shares of common stock upon the consummation of this
offering; and
. no exercise of the underwriters' over-allotment option.
Although we refer to travel web site and other distribution partners that
we have contracts with, we do not act as an agent or legal representative for
any of these entities. We do not have the power or authority to legally bind
any of these travel web site and other distribution partners and we do not have
the types of liabilities in relation to our partner entities that a general
partner of a partnership would have.
The terms "WorldRes.com," "WorldRes," "our," "we" and "us" as used in
this prospectus, refer to WorldRes.com, Inc. and its wholly owned subsidiaries,
except where it is made clear that such term means only the parent company, and
not to the underwriters. The term "BedandBreakfast.com" refers to Goldreyer
Incorporated doing business as BedandBreakfast.com.
PROSPECTUS SUMMARY
This is only a summary and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including the "'Risk Factors" section and our
financial statements and the related notes included in this prospectus.
WorldRes.com
WorldRes.com provides a leading business-to-business e-commerce solution
for online marketing and reservations to the highly fragmented global hotel
industry. Our Internet-based reservation system connects hotels to travel web
sites creating an e-commerce network. This network enables these web sites to
provide travelers with the ability to collect information and make real-time,
confirmed hotel reservations online. Since inception, we have processed
approximately 325,000 reservations at a broad range of hotels globally. During
the three months ended March 31, 2000, we processed $31.1 million in gross
value of hotel bookings, compared to $16.4 million in the three months ended
December 31, 1999 and $9.3 million in the three months ended March 31, 1999. As
of February 29, 2000, our network consisted of approximately 11,500 hotel
properties in 142 countries and 1,075 travel web sites and call centers as well
as over 1,800 web sites that are part of our affiliate program managed by Be
Free. As of that date, we also had contracts in place to add approximately
12,900 additional properties to our network.
Our network includes large hotel chains such as Choice Hotels and Accor,
as well as many independent hotels and resorts including Vail Resorts and St.
Moritz. Our travel web site partners include broad travel sites such as Yahoo!
Lodging and Travelocity.com, as well as activity-based web sites such as Resort
Sport Network, SkiNet.com and MountainZone.com. Through our network, these
travel web site partners are able to offer their users the ability to check
availability on a real-time basis and book a room through their web sites at
any of the hotels that are part of our network. In addition, we maintain two
branded web sites, PlacesToStay.com and BedandBreakfast.com, which offer a
reservation solution to travel web sites desiring an established brand to
include on their web site.
The worldwide hotel industry is particularly well suited for business-to-
business e-commerce because it is large and fragmented, spends billions of
dollars on marketing and distribution, and still operates at significantly less
than full occupancy. The Internet has emerged as a more convenient, efficient
and cost-effective medium than either the phone or fax for hotels to distribute
inventory and for travelers to book accommodations. The Internet's
capabilities, however, remain underutilized in generating and processing online
reservations, particularly for the leisure market.
We believe that our network and reservation solution provide significant
benefits to hotels and travel web site partners. We enable hotels to reach more
customers and increase occupancy through our growing network of travel web
sites and other distribution partners. Additionally, our Internet-based
reservation system allows hotels to differentiate themselves by offering
descriptive content and photographs on our network. Hotels can easily and
continuously update their descriptive information, available inventory and
pricing across multiple web sites simply by accessing and updating our system.
Our solution aggregates a supply of hotel rooms and enables travel web sites to
provide their customers with the ability to search for rooms and make confirmed
reservations online. These online reservations generate additional transaction
revenue for travel web sites.
1
Our objective is to be the leading business-to-business e-commerce
reservation solution for the global hotel industry. To reach our goal, we
intend to:
. increase reservations by increasing the number of hotels and travel
web site partners that comprise our network;
. increase reservations by actively managing hotel and travel web
site relationships;
. pursue acquisitions;
. expand our service offerings; and
. maintain our technological leadership.
We will encounter various risks and uncertainties in connection with the
implementation of our strategy. We have a limited operating history and have
incurred substantial losses. As of December 31, 1999, we had an accumulated
deficit of approximately $34.9 million. We expect to incur substantial losses
for the foreseeable future.
WorldRes.com, formerly WorldRes, Inc., was incorporated as Places To
Stay, Inc. in California in October 1995. Prior to the completion of this
offering, we intend to reincorporate under the laws of the State of Delaware.
Our principal executive offices are located at 1510 Fashion Island Boulevard,
Suite 100, San Mateo, California 94404. Our telephone number at that location
is (650) 372-1700. Our World Wide Web site is www.worldres.com. The information
contained on our web site is not a part of this prospectus.
2
The Offering
Common stock offered................................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate
purposes, including
working capital to fund
anticipated operating
losses and expenses
associated with sales and
marketing efforts. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. WRES
The common stock to be outstanding after this offering is based on the
number of shares outstanding as of February 29, 2000. The number of shares
outstanding excludes:
. 1,898,653 shares of common stock issuable as of February 29, 2000
upon the exercise of outstanding stock options issued under our
stock plans at a weighted average exercise price of $3.98 per
share;
. 765,961 shares of common stock available for future issuance under
our stock plans as of February 29, 2000; and
. 637,840 shares of common stock issuable upon the exercise of
warrants outstanding as of February 29, 2000 at a weighted average
exercise price of $3.31 per share.
3
Summary Consolidated Financial and Operating Data
(in thousands, except per share data)
The tables below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements and related notes thereto included
elsewhere in this prospectus.
October 10,
1995 Three Months
(inception) Fiscal Years Ended Ended
through September 30, December 31,
September 30, -------------------------- ----------------
1996 1997 1998 1999 1998 1999
------------- ------- ------- -------- ------- -------
(unaudited)
Consolidated Statement of
Operations Data:
Net revenue:
Reservation............ $ 3 $ 71 $ 294 $ 1,322 $ 151 $ 479
Other.................. -- -- 162 406 105 179
------- ------- ------- -------- ------- -------
Total net revenue.... 3 71 456 1,728 256 658
Gross profit............. 3 67 398 1,496 226 566
Total operating
expenses................ 1,762 4,350 6,629 15,098 2,321 9,848
Loss from operations..... (1,759) (4,283) (6,231) (13,602) (2,095) (9,282)
Net loss................. $(1,796) $(4,350) $(6,147) $(13,489) $(2,075) $(9,170)
Basic and diluted net
loss per share.......... $(12.71) $(10.77) $(10.80) $ (18.03) $ (3.12) $ (4.31)
Shares used in computing
basic and diluted net
loss per share.......... 141 404 569 748 666 2,128
Pro forma basic and
diluted net loss per
share (unaudited)....... $ (1.96) $ (0.80)
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)....... 6,865 11,427
Supplemental Data:
Gross value of hotel
bookings................ $ 119 $ 1,748 $ 8,577 $ 41,368 $ 4,856 $16,401
December 31, 1999
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents........................... $24,242 $29,242 $
Working capital..................................... 21,939 26,939
Total assets........................................ 36,372 41,372
Long-term obligations less current portion.......... 642 642
Additional paid-in capital.......................... 71,459 76,457
Total shareholders' equity.......................... 31,016 36,016
Gross value of hotel bookings equals the number of nights per stay times
the hotel room rate for all the reservations processed through our system.
Gross value of hotel bookings is not equivalent to and is not intended to
represent our revenue or backlog. Gross value of hotel bookings has not been
prepared or disclosed in accordance with generally accepted accounting
principles and should not be considered in isolation or as a
4
substitute for other information prepared or disclosed in accordance with
generally accepted accounting principles. We use gross value of hotel bookings
as an indicator of general business activity, success of promotional efforts
and capacity to handle customer demand. In addition, we believe that gross
value of hotel bookings may provide a useful comparison between historical
periods, and year to year changes of this information may provide a useful
measure of market acceptance of our network.
The "Pro Forma" column reflects our summary consolidated balance sheet
data after giving effect to the conversion of all shares of outstanding
preferred stock into shares of common stock upon the consummation of this
offering and the sale to Accor of 430,293 shares of Series E preferred stock in
April 2000.
The "Pro Forma As Adjusted" column reflects our pro forma balance sheet
data as adjusted to reflect the receipt of the estimated net proceeds of
$ from the sale of shares of common stock in this offering
at an assumed initial public offering price of $ per share, after deducting
the underwriting discount and estimated offering expenses.
5
RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related To Our Business
Our limited operating history makes it difficult to evaluate our future
prospects.
We were formed in October 1995 and have a limited operating history,
which makes an evaluation of our future prospects very difficult. We initially
focused on offering our services through our branded web site PlacesToStay.com
and, in January 1998, we refined our business model to focus on creating the
WorldRes.com online reservation network. We will encounter risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets. Some of these risks and uncertainties are:
. we may be unable to significantly increase and maintain adoption
of our Internet-based reservation system by hotels and travel web
sites;
. we depend substantially on an Internet-based reservation solution
that has been present in the market for a limited time and may not
be successful;
. we may be unable to adapt to rapidly changing technologies and
developing markets;
. we may be unable to effectively manage our rapidly expanding
operations and increasing use of our services;
. we may be unable to attract, retain and motivate qualified
personnel; and
. we may be unable to compete in a highly competitive market
dominated by larger, more established companies with substantial
financial resources and significant customer relationships.
If we are unable to successfully address these risks and uncertainties, our
business would be seriously harmed.
Our business model is unproven and we may be unsuccessful.
Our strategy is based on an unproven business model, and we cannot be
certain that our reservation system will achieve broad market acceptance. Our
business model is based on the acceptance of our service by hotels and travel
web sites. We will be successful only if hotels and travel web sites join our
network. Many of the factors influencing hotels' and web sites' willingness to
use our network are outside our control, including Internet access and cost
issues. Hotels may continue to market their properties through existing methods
and may not adopt an Internet-based reservation solution because of security
and privacy concerns, or general reticence about technology or the Internet. We
cannot predict the degree to which hotels and travel web sites will join our
network. Hotels and travel web sites may not utilize our network to the degree
necessary for us to achieve profitability.
We have an accumulated deficit, are not currently profitable and expect to
incur future losses.
We have incurred substantial losses since our inception and we anticipate
continuing to incur substantial losses for the foreseeable future. As of
December 31, 1999, we had an accumulated deficit of approximately $34.9
million. Although revenue generated from our network has grown in recent
quarters, we may not be able to sustain these growth rates. In fact, we may not
have any revenue growth, and our revenues could decline. The extent of our
losses will also be contingent, in part, on the amount of growth in operating
6
expenses. We expect to incur significant sales and marketing, technology and
development and general and administrative costs. In addition, in the future we
expect to incur non-cash costs relating to the amortization of deferred
compensation which will contribute to our net losses. As a result, if our
revenue fails to grow at anticipated rates, or our operating expenses increase
without a commensurate increase in our revenues, or we fail to adjust operating
expenses accordingly, our business would be harmed.
Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of securities analysts or investors, the market
price of our common stock may suffer.
Our quarterly results of operations have varied significantly in the past
and are expected to fluctuate significantly in the future as a result of a
variety of factors, many of which are outside our control. You should be aware
that these factors make financial forecasting difficult. As a result of our
limited operating history and the emerging nature of the market for online
commerce, we believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indicators of
future performance. Our operating results may fall below the expectations of
securities analysts or investors in some future quarter or quarters. The price
of our common stock may suffer if our financial performance falls below our
forecasts or the expectations of securities analysts or investors.
Factors that may adversely affect our quarterly operating results
include:
. success in maintaining and enhancing existing relationships with
hotels and travel web site and other distribution partners using
our network;
. ability to attract new hotels and travel web site and other
distribution partners to our network;
. ability to develop, introduce and market new services and
enhancements to our existing services on a timely basis;
. seasonality and other cyclical factors;
. success in maintaining current levels of gross margins on
commission revenue;
. announcement or introduction of new web sites, services and
products by our competitors;
. changes in our pricing policies or those of our competitors;
. ability to upgrade and develop our systems and infrastructure to
accommodate growth;
. ability to attract new personnel in a timely manner;
. technological changes in our markets and occurrences of technical
difficulties or service interruptions;
. amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure; and
. general economic conditions and economic factors specific to the
Internet and online commerce industries, as well as the worldwide
travel and lodging industries.
As a result of entering into contracts with chain hotels, we have added
large numbers of properties to our network during certain quarters. These
additions have resulted in large percentage increases in the number of
properties available through our network when compared to prior periods. We do
not anticipate consistently adding chain hotels to our network in each quarter.
Accordingly, the percentage growth in the number of properties on our network
in subsequent periods may be lower because of the impact of adding these chain
hotels in prior periods. We expect this trend to continue which may cause our
quarterly results of operations to fluctuate.
Our reservation revenue historically has been derived from transactions
processed through our network for travel web site and other distribution
partners including tourism offices, convention and visitor bureaus, call
7
centers and travel agents. Some travel web site and other distribution partners
may perceive that our branded sites will take consumers away from their sites,
causing them not to join at all. As a result, the timing of any terminations of
our relationships with travel web site and other distribution partners or a
determination by others not to join our network could harm our operating
results and also cause our quarterly operating results to fluctuate.
Our financial results may be subject to seasonal and cyclical factors.
Our limited operating history and rapid growth make it difficult for us
to assess the impact of seasonal factors on our quarterly results.
Nevertheless, we expect our business to be subject to seasonal fluctuations,
reflecting a combination of seasonality trends for lodging and travel services
offered through our network and seasonality affecting Internet use generally.
For example, demand for leisure travel may decrease after summer vacations and
holiday periods, while Internet usage may decline during the summer months. Our
results also may be affected by seasonal fluctuations in the hotel room
inventory made available to our network by participating properties. For
instance, hotels typically enjoy high demand for rooms during holiday and
vacation periods. As a result, during these periods hotels may not offer as
much inventory through our network. Our business may also be subject to
cyclical variations for the services offered; for example, leisure travel tends
to decrease during economic downturns. Moreover, as a result of seasonal and
cyclical factors we may process fewer reservations despite adding new hotels
and travel web site and other distribution partners to our network. Seasonal
and cyclical variations are beyond our control and may seriously harm our
business.
The success of our business depends on maintaining the existing number of
hotels and attracting new hotels to our network.
Our success depends in large part upon our ability to offer and deliver a
large number of hotels to travel web site and other distribution partners. We
rely on a wide variety of hotels to supply us with inventory to offer through
our network. To increase the breadth of our services we must establish
relationships with additional hotels. Some potential suppliers may view us as
detrimental to their business since hotels compete with one another for
customers. We may also encounter resistance from hotels who are reluctant to
replace their current electronic commerce solution and adopt our solution even
if our network is deemed to offer superior services. These hotels may have made
substantial up-front payments, and because the business-to-business e-commerce
market is new, they may be confused or uncertain about the relative merits of a
particular solution. This may prevent hotels from joining our network, which
would harm our business.
Our agreements with hotels are typically short-term and can be canceled
with little notice. We cannot assure you that these agreements will be renewed
beyond the initial term. In addition, hotels are not contractually required to
allocate rooms for distribution through our network. Accordingly, we depend on
our relationships with hotels for a continued supply of hotel inventory. If we
fail to secure inventory from hotels that comprise our network or if a
significant number of hotels do not renew their agreements with us, the breadth
of properties offered through our network would decrease. This could result in
decreased revenues, which would have a negative effect on our results of
operations.
The success of our business depends on our ability to maintain the existing
number of travel web site and other distribution partners and to attract new
travel web site and other distribution partners to our network.
Our success also depends in large part on our ability to offer a large
number of travel web site and other distribution partners through which hotels
can distribute their inventory. We rely on a wide variety of travel web site
and other distribution partners to distribute the online lodging inventory
through our network. Travel web site and other distribution partners may not
join our network because the business-to-business e-commerce market is new or
they may be confused or uncertain about the relative merits of a particular
solution. We will not be able to retain existing nor attract new travel web
site and other distribution partners if we do not have a sufficient number and
a wide variety of hotels. In addition, travel web site and other distribution
partners may view as inadequate the portion of lodging commissions that we
share with them. Our agreements with
8
travel web site and other distribution partners are typically short-term and
can be canceled with little notice. We cannot assure you that these agreements
will be renewed beyond the initial term. If we fail to secure additional travel
web site and other distribution partners or if a significant number of travel
web site and other distribution partners do not renew their agreements with us,
the breadth of distribution through our network would decrease. This could
result in decreased revenues, which would harm our business.
You should not rely upon gross value of hotel bookings as an indication of
subsequent revenue or future prospects.
Gross value of hotel bookings equals the number of nights per stay times
the hotel room rate for all the reservations processed through our system.
Gross value of hotel bookings is not equivalent to and is not intended to
represent our revenue or backlog. Gross value of hotel bookings has not been
prepared or disclosed in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
other information prepared and disclosed in accordance with generally accepted
accounting principles. You should not rely upon gross value of hotel bookings
as an indication of subsequent revenue or future prospects. We use gross value
of hotel bookings as an indicator of general business activity, success of
promotional efforts and capacity to handle customer demand. Reservations are
subject to cancellation at any time. Therefore, the amount of revenue
calculated using gross value of hotel bookings would be expected to exceed
actual reservation revenue realized by us from such bookings. In addition,
gross value of hotel bookings may or may not result in recognizable revenue for
us. Gross value of hotel bookings is also subject to significant fluctuations
due to changes or events that affect the hotel industry and leisure travel
generally. See "Economic changes in the hotel industry or a decline or
disruption in leisure travel may harm our business."
If we do not successfully manage any rapid growth we experience, the increased
strain on our resources could hinder our ability to provide quality services,
retain existing customers and become profitable.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion. This expansion has placed, and we expect it will
continue to place, a significant strain on our management, operational and
financial resources. Our inability to manage any future growth effectively
could hurt our business. We have recently added a number of key managerial and
technical employees, and we expect to add additional key personnel in the
future. Our current database, information systems, procedures, personnel and
controls may not continue to support our operations and may hinder our ability
to increase reservations through our system. To manage the expected growth of
our operations and personnel, we plan to:
. improve and upgrade transaction-processing, operational, partner
service and financial systems, procedures and controls;
. maintain and improve our relationships with various hotel
properties, Internet portals and other travel web site companies
and other third parties necessary to our business;
. expand our finance, administrative and operations staff; and
. continue to attract, train and manage our employee base.
Even after we implement these initiatives, our database, information
systems, procedures, personnel and controls may be inadequate to support our
planned growth, and our management may not be able to identify, manage and
exploit existing and potential market opportunities successfully.
A large percentage of reservations on our system was made at one supplier and
the loss of this supplier could harm our business.
As of February 29, 2000, properties owned or operated by Choice Hotels
International, Inc. represented 37% of the total hotels available through our
system. In the month of February 2000, approximately 18% of the total
reservations made through our system were made at these properties. Revenue
generated from these reservations represented approximately 7% of our total net
revenue in this month. Accordingly, the loss of Choice Hotels as a lodging
supplier could harm our business.
9
We may not be able to hire and retain sufficient sales, marketing and technical
personnel that we need to succeed because these personnel are limited in number
and in high demand.
We need to substantially expand our sales operations and marketing
efforts, both domestically and internationally, to increase market awareness
and revenue generated from our network and branded web sites. We will also need
to increase our technical staff to support the growth of our business. If we
fail to hire and retain sufficient numbers of sales, marketing and technical
personnel, our business could be harmed. Competition for qualified sales,
marketing and technical personnel is intense as these personnel are in limited
supply, and we might not be able to hire and retain sufficient numbers of such
personnel to grow our business.
We face competition that could limit our ability to expand our network of
hotels and travel web site partners.
The market for business-to-business e-commerce and Internet-based hotel
booking is new and rapidly evolving, and competition is intense and is expected
to increase significantly in the future. This increased level of competition
could reduce operating margins and profitability, and result in loss of market
share, any one of which could seriously harm our business. Competitors vary in
size and in the scope and breadth of the products and service offered. We face
competition from a number of areas:
. online lodging e-commerce web sites;
. traditional travel agencies, tour operators and wholesalers;
. global distribution systems and other related intermediaries;
. hotel chains;
. individual leisure properties; and
. broad travel, activity and destination based web sites.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than us. These competitors include Expedia, Inc.
and Travelocity.com. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater resources. To remain competitive, we must respond promptly and
effectively to the challenges of technological change, evolving standards and
our competitors' innovations by enhancing our own system and service offerings,
as well as our sales and marketing programs. We believe that our ability to
compete depends in part on factors outside our control, including the
development by others of products and services that compete with our products
and services, the prices at which others offer their products and services, the
extent of competitors' responsiveness to customer needs and market conditions
affecting our ability to recruit and retain qualified personnel. Any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, or our failure to compete effectively, could harm our business and
results of operations. See "Business--Competition in our Industry."
We intend to expand international operations and these efforts may not be
successful in generating additional revenues.
Although we have yet to generate any significant international revenues,
we are planning to significantly expand our international operations. We expect
to incur significant expenses in connection with these efforts. Revenue from
our international operations may prove inadequate to cover the expenses of
establishing and maintaining our international offices and marketing to
international clients.
There are risks inherent in doing business on an international level,
including:
. difficulties in staffing and managing foreign operations;
. trade barriers and potentially adverse tax consequences;
. political instability;
10
. the risks related to global economic turbulence and changing
economic conditions;
. fluctuations in currency exchange rates;
. exposure to different legal standards (particularly with respect
to intellectual property); and
. seasonal fluctuations in purchasing patterns.
If any of these risks occur, our international operations may suffer
causing our business to be harmed. We have only limited experience in managing
international offices and in marketing services to international clients. In
addition, usage of the Internet in international markets is typically
significantly lower than in the United States.
If our e-commerce services do not contain the features and functionality hotels
and travel web site and other distribution partners want, these hotels and
partners may not participate in our network.
Our success depends upon our ability to accurately determine the features
and functionality required by hotels and travel web site and other distribution
partners that enable their customers to make reservations online and to design
and implement business-to-business e-commerce services that meet these
requirements in a timely and efficient manner. If we fail to accurately
determine these feature and functionality requirements, enhance our existing
services and develop new services, our current and potential future
participants in our network will not continue to participate in our network. To
date, our solution has been based on our internal efforts and on feedback from
a limited number of existing and potential participants, including hotels and
travel web site and other distribution partners. We cannot assure you that we
have determined or will successfully determine all of these requirements or
that the features and functionality of our future services will adequately
satisfy current or future participants' demands.
We may not be able to develop new services in the future, which could prevent
us from benefiting fully from our growth strategy.
We plan to introduce new and expanded services. We may not be able to
offer such services in a cost-effective or timely manner, and our efforts may
not be successful. Our inability to generate revenues from such expanded
services sufficient to offset their development and other costs could harm our
business by delaying or preventing us from becoming profitable. Further, any
new service that is not favorably received by the participants in our network
could damage our business reputation or brand names. Expansion of our services
could also require significant additional expenses and may strain our
management, financial and operational resources. If we cannot develop such new
services in the future, we may not be able to benefit fully from our growth
strategy.
If we do not successfully develop and introduce new versions of our
reservations system in a timely manner, our business may be harmed.
We are currently in the process of developing and integrating new
technology into our Internet-based reservation system as part of our planned
release of several enhanced versions of our system. These new releases may
include enhancements to the user interfaces, database management, search
technology, application servers and security controls. Enhancing and
introducing new technology into our reservations system involves numerous
technical challenges and substantial personnel resources and may take many
months to complete. We cannot be certain that we will be successful at
enhancing or integrating this technology into our Internet-based reservations
system on a timely basis, or in accordance with our milestones or our timing
objectives. In addition, we cannot be certain that, once integrated, this
technology or our Internet-based reservations solution will function as
expected. If we are unable to enhance and integrate this new technology into
our reservations system on a timely basis, we may lose hotels and travel web
site and other distribution partners or experience difficulty attracting new
participants to our network, which could harm our business. Major enhancements
and new solutions and services often require long development and testing
periods. In addition, our Internet-based reservations system is complex and,
despite vigorous testing and quality control procedures, may contain
11
undetected errors or "bugs" when first introduced or updated. Inability to
deliver timely a quality solution and services could harm our business.
Economic changes in the hotel industry or a decline or disruption in leisure
travel may harm our business.
Since we derive most of our revenues either directly or indirectly from
the hotel industry, our revenues may be harmed by events that result in a
decrease in occupancy rates at hotels. In particular, because most of our
revenue consists of fees generated by leisure hotel bookings, our earnings are
especially sensitive to events that affect leisure travel. Leisure travel is
highly sensitive to personal discretionary spending levels and thus tends to
decline during general economic downturns and events such as recession,
inflation, fuel price escalation, travel-related accidents, bad weather,
airline or other travel related strikes, lockouts or other labor disturbances,
foreign political instability, armed hostilities or terrorism. If the
occurrence of such events causes a significant decline in the volume of leisure
travel or an overall downturn in the leisure travel industry, our business
could be harmed.
Our business could be harmed if we make acquisitions that are not successful.
We have in the past and may in the future broaden the scope and content
of our business through the acquisition of existing complementary businesses.
We may not be successful in overcoming problems encountered in connection with
such acquisitions, and our inability to do so could harm our business by
resulting in unforeseen costs and interfering in our business relationships and
operations. Although we are not currently contemplating any material
acquisitions, we may consider the acquisition of companies providing similar
services in complimentary markets or in other sectors of the travel or hotel
industries in the future. Future acquisitions may expose us to increased risks.
These include risks associated with:
. the assimilation of new operations, sites and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
. the inability to generate revenues from acquired companies
sufficient to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and
policies; and
. the impairment of relationships with employees and existing
participants that comprise our network as a result of integration
of new businesses.
If we consummate one or more significant acquisitions in which the
consideration consists of stock or other securities, your equity could be
significantly diluted. If we consummate one or more significant acquisitions in
which the consideration included cash, we could be required to use a
substantial portion of our available cash, including proceeds of this offering.
Acquisition financing may not be available on favorable terms, or at all.
Acquisitions may also result in additional expenses associated with
amortization of goodwill and other intangible assets of acquired businesses,
which may negatively impact our results of operations.
Any misappropriation of our intellectual property could deprive us of our
important competitive advantage and could seriously harm our business.
Infringement by us on the intellectual property rights of others could expose
us to substantial liabilities which would materially and adversely harm our
business.
Any misappropriation of our intellectual property could seriously harm
our business. We currently have no patents and we protect our proprietary
technology and information primarily through trade secret, copyright and
trademark laws, license agreements and employee and third-party non-disclosure
agreements. Existing trade secret and copyright laws offer only limited
protection. Moreover, the provisions of our license agreements, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of some jurisdictions. We
cannot assure you that the steps taken by us to protect our proprietary
information will be adequate to prevent misappropriation of our intellectual
property. Any legal proceedings to protect and enforce our intellectual
property rights could be burdensome and expensive and may
12
not be resolved in our favor. We do not have in-house legal staff that monitors
our activities in foreign jurisdictions. In addition, the laws of some foreign
countries do not protect our proprietary information to the same extent as the
laws of the United States. The laws of many countries in which we sell our
products protect trademarks solely on the basis of registration. We possess and
have applied for foreign trademark registrations in only a few jurisdictions.
Accordingly, in certain foreign jurisdictions we may be unable to use
trademarks that are important to us, which could adversely affect our sales and
marketing efforts in those jurisdictions.
There has been a substantial amount of litigation in the Internet
industry regarding intellectual property rights. It is possible that in the
future third parties may claim that we or our current or potential future
services infringe their intellectual property. We expect that providers of
electronic commerce solutions will increasingly be subject to infringement
claims as the number of services and competitors in our industry segment grows
and the functionality of services in different industry segments overlaps. Any
claims, with or without merit, could be time consuming, result in costly
litigation, or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our business. We may in
the future have to license or otherwise obtain access to intellectual property
of third parties and we may not be able to obtain any required third party
intellectual property in the future.
Our reservation system and operations may be vulnerable to computer viruses and
other disruptions that could cause our services to be interrupted and we may
lose data.
Although we believe we have taken precautions to protect our reservation
system and data facilities, computer viruses, physical or electronic break-ins,
natural or manmade disasters or other calamities, such as an earthquake or
fire, could cause significant damage to our systems or facilities.
Specifically, computer viruses, break-ins and other disruptions could lead to
interruptions, delays, loss of data or the inability to accept and confirm
reservations. Anyone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our
reservation system, or the operations of participants that comprise our
network. This could occur through the introduction of known or undetected
errors, bugs, or viruses or by other means. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
litigation or a significant loss of revenue. In addition, because both our data
centers are located in the same geographic region, we do not have as much
protection from disasters or calamities as might otherwise be the case. We also
rely on several communications companies in the United States and
internationally to provide network connections between our data center and our
partners' web sites. If any of the communications companies are unable to
provide the network connections and our contingency plans fail, our business
may suffer.
We may not be able to meet our future capital requirements, which would hinder
our ability to expand, develop and enhance our services or respond to
competitive pressures.
We may not be able to fund our expansion, develop or enhance our services
or respond to competitive pressures if we lack adequate funds. We cannot be
certain that additional financing will be available in the future to the extent
required or that, if available, it will be on acceptable terms. If we need to
obtain additional financing and are unable to do so, our business would be
harmed because of our inability to expand, develop or enhance our services or
respond to competitive pressures. Based on our current operating plan, we
anticipate that the net proceeds of this offering, together with our available
funds, will be sufficient to satisfy our anticipated needs for working capital,
capital expenditures and business expansion for at least the next twelve
months. After that time, we may need additional capital. Alternatively, we may
need to raise additional funds sooner in order to fund more rapid expansion, to
develop new or enhanced services, or to respond to competitive pressures. If we
raise additional funds by issuing equity or securities convertible into equity,
the percentage ownership of our stockholders will be diluted. Further, any new
securities could have rights, preferences and privileges senior to those of the
common stock. We currently do not have any commitments for additional
financing.
13
Incorrect use of our network could impede the growth of our network, damage our
business reputation and potentially expose us to legal liability.
The incorrect use of our network by either travel web site or other
distribution partners, hotels or end-users could damage our reputation or
expose us to legal liability. The posting by hotels of accurate rates,
availability or other information is important to the growth of our business.
Hotels may submit to our network inaccurate information on their properties or
not accurately record reservations made through our network. These inaccuracies
could impede the growth of our network, damage our business reputation and
potentially expose us to legal liability.
Regulatory and legal uncertainties could harm our business.
Although there are currently few laws and regulations directly applicable
to the Internet and online commerce, it is likely that new laws and regulations
will be adopted in the United States and elsewhere covering issues such as
copyrights, privacy, pricing, content, advertising, taxation, distribution,
antitrust and characteristics and quality of Internet services. The adoption of
restrictive laws or regulations could slow Internet growth or expose us to
significant liabilities associated with our network. The application of
existing laws and regulations governing Internet issues such as property
ownership, defamation, obscenity and personal privacy is also subject to
substantial uncertainty. We are subject to federal regulations prohibiting
unfair and deceptive practices. However, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws. Current or new government laws and regulations, or the
application of existing laws and regulations, may expose us to significant
liabilities, significantly slow Internet growth and otherwise harm our
business.
In many states, there is currently great uncertainty whether or how
existing laws governing issues such as property ownership, sales and other
taxes, libel and personal privacy apply to the Internet and commercial online
services. These issues may take years to resolve. For example, tax authorities
in a number of states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject us to additional
state sales and income taxes. Federal legislation imposing certain limitations
on the ability of states to impose taxes on Internet-based sales was enacted in
1998. The Internet Tax Freedom Act, as this legislation is known, imposes on
electronic commerce a three-year moratorium on state and local taxes imposed
after October 1, 1998, but only where such taxes are discriminatory on Internet
access. It is possible that the legislation could not be renewed when it
terminates in October 2001. Failure to renew the legislation could allow state
and local government to impose taxes on Internet-based sales, and such taxes
could hurt our business.
Although certain aspects of the travel industry are heavily regulated by
the United States and other governments, the services we currently offer are
not now subject to any material industry specific government regulation. Any
existing government regulations could affect any future services we propose to
offer, which could harm our business. Further, any future regulations
implemented by federal, state or foreign governmental authorities affecting one
or more of our current or future services could harm our business.
14
Risks Related to the Internet and E-Commerce Industry
The success of our business will depend on continued growth of online commerce
and Internet infrastructure.
Our future revenues and profits depend, to a certain degree, upon the
widespread acceptance and use of the Internet and online services as a medium
for commerce by hotels and travel web site and other distribution partners. If
acceptance and growth of Internet use does not continue, our business may be
harmed. Rapid growth in the use of the Internet and online services is a recent
phenomenon. This growth may not continue. A sufficiently broad number of
potential consumers may not accept, or continue to use, the Internet as a
medium of commerce. Demand for and market acceptance of recently introduced
services over the Internet are subject to a high level of uncertainty. For us
to achieve significant growth, consumers who have historically used traditional
means of commerce will instead need to make hotel reservations online, and
hotels will need to accept or expand use of the Internet as a distribution
channel. Our revenues and profits depend on consumers visiting web sites and
actually making reservations. Consumers could potentially use these sites for
information only and then choose to book reservations directly with the hotels
or through another intermediary.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and security,
and the timely development of complementary services, such as high-speed
modems, for providing reliable Internet access and services. Major online
service providers and the Internet itself have experienced outages and other
delays as a result of software and hardware failures and could face such
outages and delays in the future. Outages and delays are likely to affect the
level of Internet usage and the processing of transactions through our network.
It is unlikely that we could make up for the level of orders lost in those
circumstances by later online bookings. In addition, the Internet could lose
its viability by reason of delays in the development or adoption of new
standards to handle increased levels of activity or of increased government
regulation. The adoption of new standards or government regulation may require
us to incur substantial compliance costs.
The accelerated growth and increasing volume of Internet traffic may cause
performance problems which may slow adoption of our Internet-based reservation
solution.
The growth of Internet traffic to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays and, in some cases, system outages. This decreased
performance is caused by limitations inherent in the technology infrastructure
supporting the Internet and the internal networks of Internet users. If
Internet usage continues to grow rapidly, the infrastructure of the Internet
and its users may be unable to support the demands of growing e-commerce usage,
and the Internet's performance and reliability may decline. If the existing or
potential participants that comprise our network experience frequent outages or
delays on the Internet, the adoption or use of our Internet-based, e-commerce
hotel reservation solution may grow more slowly than we expect or even decline.
Our ability to increase the speed and reliability of our Internet-based hotel
reservation solution is limited by and depends upon the reliability of both the
Internet and the internal networks of the existing and potential participants
that comprise our network. As a result, if improvements in the infrastructure
supporting both the Internet and such internal networks are not made in a
timely fashion, we may have difficulty obtaining new participants, or
maintaining our existing participants, either of which could reduce our
potential revenues and have a negative impact on our business, results of
operations and financial condition.
Online security breaches could hurt our business.
Concerns over the security of transactions conducted on the Internet and
the potential compromise of privacy may inhibit the growth of commercial online
services as a means of conducting commercial transactions. In our business,
secured transmission of confidential information over public networks is also
essential to maintain the confidence of the participants that comprise our
network. If any compromise of our
15
security were to occur, it could hurt our business. We have expended
significant resources to protect against security breaches and to alleviate
problems caused by such breaches, and we may need to make further expenditures
for this purpose in the future. We rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to transmit securely confidential information, such as
credit card numbers. In addition, we maintain an extensive confidential
database of profiles and transaction information. Our current security measures
may not be adequate and advances in computer capabilities, new discoveries in
the field of cryptography, or other events or developments may result in a
compromise or breach of the methods we use to protect partner transaction and
personal data. A party who can circumvent our security might be able to
misappropriate proprietary information or cause interruptions in our
operations. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential
information.
We may not be able to keep up with the online industry's rapid technological
and other changes.
The online industry in which we compete is characterized by:
. rapid technological change;
. changes in user and customer requirements and preferences;
. frequent new service introductions embodying new technologies;
. the emergence of new industry standards and practices; and
. the emerging importance of the Internet and the proliferation of
companies offering Internet-based services.
These developments could quickly render our existing online network and
proprietary technology and systems obsolete. Our inability to modify or adapt
our infrastructure in a timely manner or the expenses incurred in making such
adaptations could hurt our business. As a result, we will be required to
continually improve the performance, features and reliability of our services,
particularly in response to competitive offerings. Our success will depend, in
part, on our ability to enhance our existing services and develop new services
in a cost-effective and timely manner. The expansion and maintenance of our
network and the development and maintenance of our proprietary technology
entails significant technical and business risks and requires substantial
expenditures and lead time. We may not be able to adapt successfully to the
requirements of participants that comprise our network or emerging industry
standards. We have already made a significant investment in our technology
infrastructure. As a result, our technology costs would remain relatively
constant even if our booking volumes were to decline. In addition, the
widespread adoption of Internet, networking or telecommunications technologies
or other technologies could require us to incur substantial expenditures to
modify or adapt our services or infrastructure in the future.
Interruptions in service from third parties could hurt our business.
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the hotel
industry to make online hotel room reservations. We also rely on third parties
to host our network infrastructure, web and database servers. Any interruption
in these third-party services or a deterioration in their performance could
hurt our business. If our arrangement with any of these third parties is
terminated, we may not find an alternative source of systems support on a
timely basis or on commercially reasonable terms.
16
Risks Related to the Offering
Internet-related stock prices are especially volatile and this volatility may
depress our stock price.
The stock market and, specifically, the stock prices of Internet-related
companies have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of our common stock, without regard to
our operating performance. Due to this volatility, the market price of our
common stock could significantly decrease. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. The
institution of such litigation against us could result in substantial costs and
a diversion of our management's attention and resources, which could seriously
harm our business.
There has been no prior public market for our common stock.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. If such a market does not develop or is not
sustained, it may be difficult for you to sell your shares of common stock at a
price that is attractive to you. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of our common stock
after the offering. See "Underwriting."
The market price of our common stock could suffer because a significant portion
of our common stock is closely controlled.
Upon consummation of this offering, our officers and directors and their
affiliates will beneficially own approximately % of our outstanding common
stock ( % if the underwriters exercise the over-allotment option in full).
As a result, if they act together, they will have the ability to influence the
outcome of all matters requiring stockholder approval, including the election
and removal of directors and any merger, consolidation or sale of all or
substantially all of our assets, and to control our management and affairs.
Such ownership concentration could discourage others from initiating potential
merger, takeover or other change of control transactions. For more information
on beneficial ownership of our stock, please refer to "Principal Stockholders."
There may be sales of a substantial amount of our common stock after this
offering, which could depress our stock price.
We cannot predict if future sales of our common stock, or the
availability of our common stock for sale, will depress the market price for
our common stock or our ability to raise capital by offering equity securities.
Sales of substantial amounts of common stock, or the perception that these
sales could occur, may depress prevailing market prices for the common stock.
After this offering, approximately shares of common stock will be
outstanding. All of the shares sold in this offering will be freely tradable.
The remaining 14,239,932 shares of common stock outstanding after this offering
will be restricted as a result of securities laws or lock-up agreements. These
remaining shares will be available for sale in the public market as follows:
Number of Shares Date of Availability
---------------- --------------------
At the date of this prospectus
180 days after the date of this prospectus, if the sales
meet certain restrictions under the federal securities
laws
At various times thereafter, if the sales meet certain
restrictions under the federal securities laws
Robertson Stephens may release all or a portion of the shares subject to
lock-up agreements at any time without notice. See "Underwriting" and "Shares
Eligible for Future Sale."
17
Our management has broad discretion over the use of the proceeds and our
business could be hurt if management uses the proceeds of this offering
inappropriately.
The net proceeds of this offering are estimated to be approximately
$ million at an assumed initial public offering price of $ per
share and after deducting the underwriting discount and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, the
net proceeds are estimated to be approximately $ million. We intend
generally to use the net proceeds from this offering for general corporate
purposes, including working capital to fund anticipated operating losses and
expenses associated with sales and marketing efforts. We have not yet
determined the actual expected expenditures and thus cannot estimate the
amounts to be used for each specified purpose. Accordingly, our management will
retain broad discretion as to the allocation of the proceeds of this offering.
Failure to use the net proceeds in a manner beneficial to us would harm our
business. For more information on our use of proceeds from this offering,
please refer to "Use of Proceeds."
The net tangible book value of our common stock issued in this offering will be
less than the offering price.
The initial public offering price for this offering is substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after the offering. If you purchase common stock in the
offering, you will incur immediate and substantial dilution in the amount of
$ per share. Dilution is a reduction in the net tangible book value per
share from the price you pay per share for our common stock. We also have a
large number of stock options and warrants to purchase common stock outstanding
with exercise prices significantly below the estimated initial public offering
price of the common stock. To the extent these options or warrants are
exercised, there will be further dilution. We intend to continue to grant
substantial stock options to our employees. See "Dilution."
We have adopted anti-takeover provisions that could delay or deter a change of
control.
Provisions of our certificate of incorporation and by-laws and provisions
of applicable Delaware law may discourage, delay or prevent a merger or other
change of control that a stockholder may consider favorable. Upon completion of
this offering our board of directors will have the authority to issue up to
2,000,000 shares of preferred stock, par value $0.001 per share, and to
determine the price and the terms, including preferences and voting rights, of
those shares without stockholder approval. Although we have no current plans to
issue additional shares of our preferred stock, any such issuance could:
. have the effect of delaying, deferring or preventing a change in
control of our company;
. discourage bids for our common stock at a premium over the market
price; or
. adversely affect the market price of, and the voting and other
rights of the holders of, our common stock.
We are subject to certain Delaware laws that could have the effect of
delaying, deterring or preventing a change in control of our company. One of
these laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless certain conditions are met. In
addition, certain provisions of our certificate of incorporation and by-laws,
and the significant amount of common stock held by our executive officers,
directors and affiliates, could together have the effect of discouraging
potential takeover attempts or making it more difficult for stockholders to
change management. These governance provisions also could hurt the market price
of our common stock. For more information on our capital stock, please refer to
"Description of Capital Stock."
18
NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, including:
. implementing our growth strategies;
. attracting and retaining hotels and travel web site partners;
. increasing reservations through account management of existing
network participants;
. expanding our network and services through strategic acquisitions;
. expanding substantial resources to enhance and improve our
technology;
. our intention to introduce new services;
. forecasts of Internet usage and the size and growth of relevant
markets;
. anticipated trends in our businesses, including trends in the
market for e-commerce and leisure lodging industry; and
. competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements
and events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus. We
assume no obligation to update them or to explain the reasons why actual
results may differ.
19
USE OF PROCEEDS
The primary purposes of this offering are to obtain additional capital,
create a public market for the common stock and facilitate future access to
public markets. The net proceeds to us from the sale of the shares of
common stock offered hereby are estimated to be approximately $ million
(approximately $ million, if the underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $ per
share and after deducting estimated offering expenses and the underwriting
discount payable by us. We intend to use the net proceeds for general corporate
purposes, including working capital to fund anticipated operating losses, and
expenses associated with our various marketing efforts. We also could use a
portion of the net proceeds to acquire or invest in businesses, technologies,
products or services, although no specific acquisitions are planned and no
portion of the net proceeds has been allocated for any acquisition. As of the
date of this prospectus, we cannot specify with certainty the particular uses
for the net proceeds to be received upon the consummation of this offering.
Accordingly, our management will have broad discretion in the application of
the net proceeds. Pending such uses, we intend to invest the net proceeds from
this offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock
since our inception and do not expect to pay any cash dividends in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business.
20
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual, pro forma and pro forma as adjusted basis.
The "Pro Forma" column reflects our capitalization as of December 31,
1999, after giving effect to the conversion of all shares of outstanding
preferred stock into shares of common stock upon the consummation of this
offering and the sale of shares of Series E preferred stock in April 2000.
The "Pro Forma as Adjusted" column reflects our pro forma capitalization
as adjusted to reflect the receipt of the estimated net proceeds of
$ from the sale of shares of common stock in this offering
at an assumed initial public offering price of $ per share, after deducting
the underwriting discount and estimated offering expenses.
This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands, except per
share data)
Capital lease obligations--less current
portion....................................... $ 588 $ 588 $
-------- -------- ----
Stockholders' equity:
Preferred stock: $0.001 par value; none
authorized actual and pro forma and none
issued and outstanding, actual and pro forma;
2,000,000 shares authorized, none issued and
outstanding, pro forma as adjusted ........... -- --
Convertible preferred stock: $0.001 par
value--16,011,922 shares authorized, issuable
in series, and 9,676,098 shares issued and
outstanding, actual; no shares authorized,
none issued and outstanding, pro forma and
pro forma as adjusted........................ 10 --
Common stock: $0.001 par value--25,000,000
shares authorized, 3,162,596 shares issued
and outstanding actual; 25,000,000 shares
authorized, 14,882,008 shares issued and
outstanding, pro forma; 50,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted........... 3 15
Additional paid-in capital.................... 71,459 76,457
Note receivable from officers................. (1,862) (1,862)
Deferred compensation......................... (3,677) (3,677)
Accumulated deficit........................... (34,917) (34,917)
-------- -------- ----
Total shareholders' equity................... 31,016 36,016
-------- -------- ----
Total capitalization....................... $ 31,604 $ 36,604
======== ======== ====
The number of shares outstanding in the actual, pro forma and pro forma
as adjusted columns excludes:
. 2,050,306 shares of common stock issuable as of December 31, 1999
upon the exercise of outstanding stock options issued under our
stock plans at a weighted average exercise price of $3.91 per share;
. 587,204 shares of common stock available for future issuance under
our stock plans as of December 31, 1999; and
. 600,658 shares of common stock issuable upon the exercise of
warrants outstanding as of December 31, 1999 at a weighted average
exercise price of $3.21 per share.
21
DILUTION
The pro forma net tangible book value of WorldRes.com as of December 31,
1999 was $25.8 million or $ per share. Pro forma net tangible book value per
share is determined by dividing the net tangible book value of WorldRes.com
(total tangible assets less total liabilities) by the pro forma number of
outstanding shares of common stock. Pro forma assumes the conversion of all
outstanding shares of preferred stock into common stock and the sale of shares
Series E preferred stock in April 2000. After giving effect to the
shares of common stock offered in this offering at an assumed initial public
offering price of $ per share and after deducting the underwriting
discount and estimated offering expenses, the pro forma net tangible book value
of WorldRes.com as of December 31, 1999 would have been approximately $ ,
or $ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an
immediate and substantial dilution of $ per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
Assumed initial public offering price per share............ $
Pro forma net tangible book value per share as of
December 31, 1999....................................... $
Increase in pro forma net tangible book value per share
attributable to new investors...........................
-------
Pro forma net tangible book value per share after the
offering..................................................
-------
Dilution per share to new investors........................ $
=======
The following table summarizes as of December 31, 1999 on the pro forma
basis described above, the number of shares of capital stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by investors purchasing shares of common stock in
this offering at an assumed initial public offering price of $ (before
deducting the underwriting discount and estimated offering expenses):
Shares Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders................ % $ % $
New investors........................ % %
--- --- ---- ---
Total.............................. 100% $ 100%
=== === ==== ===
The foregoing discussion and tables exclude:
. 2,050,306 shares of common stock issuable as of December 31, 1999
upon the exercise of outstanding stock options issued under our
stock plans at a weighted average exercise price of $3.91 per
share;
. 587,204 shares of common stock available for future issuance under
our stock plans as of December 31, 1999; and
. 600,658 shares of common stock issuable upon the exercise of
warrants outstanding as of December 31, 1999 at a weighted average
exercise price of $3.21 per share.
22
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should
be read together with the consolidated financial statements, the notes thereto
and the other information contained in this prospectus. The selected
consolidated balance sheet data as of September 30, 1998 and 1999, and the
selected consolidated statement of operations data for each of the three years
ended September 30, 1999, have been derived from the audited consolidated
financial statements of WorldRes.com presented elsewhere in this prospectus.
The selected consolidated balance sheet data as of September 30, 1996 and 1997
and the selected consolidated statement of operations data for the period from
October 10, 1995 (inception) through September 30, 1996 have been derived from
consolidated audited financial statements of WorldRes.com that are not included
in this prospectus. The selected consolidated balance sheet data as of December
31, 1999, and the selected consolidated statement of operations data for the
three months ended December 31, 1998 and 1999 have been derived from unaudited
consolidated financial statements presented elsewhere in this prospectus. We
have prepared this unaudited information on the same basis as the audited
consolidated financial statements and have included all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for these periods.
Historical results are not necessarily indicative of future results and
operating results for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending September 30, 2000.
October 10,
1995 Three Months
(inception) Fiscal Years Ended Ended
through September 30, December 31,
September 30, -------------------------- ----------------
1996 1997 1998 1999 1998 1999
------------- ------- ------- -------- ------- -------
(unaudited)
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net Revenue:
Reservation............. $ 3 $ 71 $ 294 $ 1,322 $ 151 $ 479
Other................... -- -- 162 406 105 179
------- ------- ------- -------- ------- -------
Total net revenue...... 3 71 456 1,728 256 658
------- ------- ------- -------- ------- -------
Cost of revenue:
Reservation............ -- 4 30 191 15 65
Other................... -- -- 28 41 15 27
------- ------- ------- -------- ------- -------
Total cost of revenue.. -- 4 58 232 30 92
------- ------- ------- -------- ------- -------
Gross profit............. 3 67 398 1,496 226 566
Operating expenses:
Technology and
development............ 591 1,123 1,531 3,178 667 2,005
Sales and marketing..... 665 2,461 3,948 8,588 1,322 5,511
General and
administrative......... 506 766 1,150 2,204 317 876
Deferred stock
compensation and
warrant expense........ -- -- -- 742 15 762
Amortization of goodwill
and other intangibles.. -- -- -- 386 -- 694
------- ------- ------- -------- ------- -------
Total operating
expenses.............. 1,762 4,350 6,629 15,098 2,321 9,848
------- ------- ------- -------- ------- -------
Loss from operations..... (1,759) (4,283) (6,231) (13,602) (2,095) (9,282)
Interest and other income
(expense), net.......... (1) 28 236 268 50 152
Interest expense......... (36) (95) (152) (155) (30) (40)
------- ------- ------- -------- ------- -------
Net loss................. $(1,796) $(4,350) $(6,147) $(13,489) $(2,075) $(9,170)
======= ======= ======= ======== ======= =======
23
October 10,
1995
(inception) Fiscal Years Ended Three Months Ended
through September 30, December 31,
September 30, ------------------------- ------------------
1996 1997 1998 1999 1998 1999
------------- ------- ------- ------- ------ -------
(unaudited)
(in thousands, except per share data)
Consolidated Statement
of Operations Data:
Basic and diluted net
loss per share(1)...... $(12.71) $(10.77) $(10.80) $(18.03) $(3.12) $ (4.31)
======= ======= ======= ======= ====== =======
Shares used in
calculating basic and
diluted net loss per
share(1)............... 141 404 569 748 666 2,128
======= ======= ======= ======= ====== =======
Pro forma basic and
diluted net loss per
share (unaudited)(1)... $ (1.96) $ (0.80)
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)(1)... 6,865 11,427
Consolidated
Supplemental Data:
Gross value of hotel
bookings(2)............ $ 119 $ 1,748 $ 8,577 $41,368 $4,856 $16,401
September 30,
------------------------------- December 31,
1996 1997 1998 1999 1999
------ ------ ------- ------- -----------
(unaudited)
(in thousands)
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 88 $ 304 $ 4,873 $ 4,510 $24,242
Working capital
(deficit).............. (1,207) (826) 4,417 2,607 21,939
Total assets............ 407 780 6,217 14,266 36,372
Long term obligations,
less current portion... 162 268 505 690 642
Additional paid-in
capital................ 697 5,476 17,196 42,121 71,459
Total shareholders'
equity (net capital
deficiency)............ (1,098) (670) 4,909 10,411 31,016
- --------
(1) See Note 1 of the notes to consolidated financial statements for an
explanation of the determination of the shares used to compute net loss per
share.
(2) Gross value of hotel bookings equals the number of nights per stay times
the hotel room rate for all the reservations processed through our system.
Gross value of hotel bookings is not equivalent to and is not intended to
represent our revenue or backlog. Gross value of hotel bookings has not
been prepared or disclosed in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
other information prepared or disclosed in accordance with generally
accepted accounting principles. We use gross value of hotel bookings as a
key indicator of general business activity, success of promotional efforts,
and capacity to handle customer demand. In addition, we believe that gross
value of hotel bookings provides a useful comparison between historical
periods, and year to year changes in such information provide a useful
measure of market acceptance of our network.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those discussed under "Risk Factors," "Business"
and elsewhere in this prospectus. The following discussion should be read in
conjunction with our financial statements and unaudited pro forma condensed
combined financial information and related notes thereto included elsewhere in
this prospectus.
Overview
We provide a leading business-to-business e-commerce solution for online
marketing and reservations to the highly fragmented global hotel industry. Our
Internet-based reservation system connects hotels to travel web site and other
distribution partners creating an e-commerce network that enables these
entities to provide travelers with the ability to collect information and make
real-time, confirmed reservations online.
We were formed in October 1995 and initially focused on raising capital,
building our corporate infrastructure, developing relationships with hotels and
offering reservation services through our branded web site, PlacesToStay.com.
In January 1998, we refined our business model to focus on expanding our
distribution of hotel inventory by adding a broad array of travel web site
partners, creating the WorldRes.com online reservation network. Accordingly,
comparisons for the period from October 10, 1995 (inception) to September 30,
1996 and the years ended September 30, 1997, 1998 and 1999, may not be as
meaningful as our recent quarterly results of operations.
As of February 29, 2000, our network had grown to approximately 11,500
properties and 1,075 web sites and call centers. Through that date, we had
successfully processed approximately 325,000 reservations, of which 317,000 had
been processed since January 1998. Approximately 73,000 of these reservations
came through our own PlacesToStay.com web site, while approximately 252,000
came through our travel web site partners and other distribution partners.
During the three months ended December 31, 1999, approximately 84% of the
reservations came through our travel web site partners and 16% came through our
PlacesToStay.com web site.
We have incurred net losses and experienced negative cash flow from
operations since inception. As of December 31, 1999, we had an accumulated
deficit of approximately $34.9 million. Our ability to achieve profitability
and positive cash flow from operations will be dependent upon our ability to
grow revenue substantially and achieve other operating efficiencies. We
currently expect our losses to increase in the future and we may be unable to
achieve or sustain profitability.
From inception, we have continually increased our level of spending to
build our infrastructure and develop our network. We intend to continue to
increase our sales, marketing, technology, development and administrative
activities. We anticipate these expenses will significantly precede any revenue
generated by this increased spending.
Gross value of hotel bookings equals the number of nights per stay times
the hotel room rate for all the reservations processed through our system.
Gross value of hotel bookings does not represent our reservation revenue or
backlog. Our reservation revenue is the commission we charge hotels for
reservations made at their properties. Reservation revenue is recognized at the
scheduled check-out date, net of a provision for cancellations. We use gross
value of hotel bookings as a key indicator of general business activity,
success of promotional efforts and capacity to handle customer demand. In
addition, we believe that gross value of hotel bookings may provide a useful
comparison between historical periods insofar as such information provides a
useful measure of market acceptance of our network. Reservations are subject to
cancellation at any time.
25
Therefore, the amount of revenue calculated using gross value of hotel bookings
would be expected to exceed actual reservation revenue realized by us from such
bookings. Accordingly, gross value of hotel bookings is not equivalent to
reservation revenue and should not be viewed as a substitute for revenue. Gross
value of hotel bookings has not been prepared or disclosed in accordance with
generally accepted accounting principles and should not be considered in
isolation or as a substitute for other information prepared or disclosed in
accordance with generally accepted accounting principles.
Our gross value of hotel bookings has increased significantly in all
quarters presented as compared to the prior year period due to the expansion of
our network of travel web site partners, the increase in supply of hotel rooms
on our network, the growth in repeat purchases by existing consumers and
increased customer acceptance of e-commerce generally. Reservation revenue has
grown consistent with the growth in gross value of hotel bookings in every
quarter. You should not, however, rely upon gross value of hotel bookings as an
indication of subsequent revenue or future prospects.
Reservation revenue consists of commissions we charge hotels for
reservations made at their properties using our system. Reservation revenue is
recognized at the scheduled check-out date, net of a provision for
cancellations. Prior to June 30, 1999, other revenue primarily consisted of
implementation fees for designing and developing seamless Internet-based links
into our reservation network for hotels and travel web site partners. These
fees are recognized ratably over the period during which a hotel or
distribution partner agrees to use our reservation network. For the quarter
ended December 31, 1999, other revenue primarily consisted of membership dues
paid by hotels for listing on our BedandBreakfast.com web site. Membership
revenue is recognized ratably over the membership term, which is generally one
year. Other revenue also includes advertising revenue on the
BedandBreakfast.com web site, which is recognized as earned on the basis of
impressions delivered to advertisers. In the future we expect other revenue to
include other types of fees derived from new service offerings.
Our cost of reservation revenue consists of the percentage of commissions
that we share with certain of our travel web site partners. Cost of reservation
revenue also includes payroll, software and hardware costs associated with
processing reservations. Our cost of other revenue consists of costs directly
related to agreements with hotels and travel web sites to provide them with
additional services. Subsequent to our acquisition of BedandBreakfast.com, cost
of other revenue also includes payroll, software and hardware costs associated
with operating BedandBreakfast.com's web site.
Technology and development expenses consist principally of payroll and
related expenses for designing and implementing our reservation system,
developing applications for our network and improving our technology
infrastructure and database. Sales and marketing expenses consist primarily of
personnel costs, advertising, placement fees, public relations and
participation in trade shows and other industry events as well as an allocation
of facility and related overhead costs. General and administrative expenses
primarily represent personnel costs, allocated facility and related overhead
costs as well as our legal and accounting expenses.
A key element of our strategy is to market our solution directly to the
sales and distribution managers of hotels that are the primary suppliers to our
Internet-based lodging distribution network. We devote significant sales,
marketing and management resources to this sales process, without any assurance
that the hotels will use our network for distribution of their inventory.
In August 1999, we acquired all of the outstanding stock of
BedandBreakfast.com in exchange for 1,462,106 shares of our common stock with
an estimated fair value of $7.8 million. We also assumed net liabilities of
$400,000 and incurred other acquisition-related expenses of $100,000. Of these
amounts, $5.7 million was accounted for as a purchase and allocated to
intangible assets, which will be amortized over their estimated useful lives of
24 to 30 months. The remaining $2.6 million was allocated to deferred stock
compensation, which will be amortized over four years using a graded vesting
method. This amortization will result in non-cash expenses, which will increase
our reported operating expenses over these future periods. Our results of
operations include the results of BedandBreakfast.com since the date of
acquisition.
26
In connection with the grant of certain stock options primarily to
employees during the fiscal year ended September 30, 1999 and the three months
ended December 31, 1999, we recorded deferred stock compensation of $2.7
million representing the difference between the deemed fair value of the
underlying common stock for accounting purposes and the exercise price of these
options at the date of grant. These option grants will be amortized over their
corresponding vesting periods, which is generally four years, using a graded
vesting method. At December 31, 1999, we had approximately $3.7 million
remaining to be amortized with regard to these options and deferred stock
compensation relating to the BedandBreakfast.com acquisition.
Our fiscal year ends on September 30. References to fiscal 1996 refer to
the period from October 10, 1995 (inception) to September 30, 1996. References
to fiscal 1997, fiscal 1998 and fiscal 1999 refer to the fiscal years ended
September 30, 1997, 1998 and 1999, respectively.
Results of Operations
Three Months Ended December 31, 1999 and December 31, 1998
Net revenue
Net reservations revenue increased $328,000, or 217%, to $479,000 for the
quarter ended December 31, 1999 from $151,000 for the quarter ended December
31, 1998. The increase in net reservations revenue resulted primarily from an
increase in the number of hotel reservations made using our network. As a
result of signing significant contracts, we expanded the number of hotels
available on our network and increased the number of travel web site partners.
Other revenue increased $74,000, or 70%, to $179,000 for the quarter
ended December 31, 1999 from $105,000 for the quarter ended December 31, 1998.
The increase in other revenue resulted from the acquisition of
BedandBreakfast.com which contributed significant sources of non-reservation
based revenue.
Cost of revenue
Total cost of revenue increased $62,000, or 207%, to $92,000 for the
quarter ended December 31, 1999 from $30,000 for the quarter ended December 31,
1998. The increase in cost of revenue resulted primarily from an increase in
the number of reservations made through our travel web site partners. We expect
these costs to increase for the foreseeable future as we increase the absolute
number and percent of the total number of reservations made on our network
through our travel web site partners.
Operating expenses
Technology and development. Technology and development expenses increased
$1.3 million, or 200%, to $2.0 million for the quarter ended December 31, 1999
from $667,000 for the quarter ended December 31, 1998. This increase was
primarily due to an increase in personnel and related costs dedicated to the
design and development of our solution, as well as higher allocated
depreciation and amortization costs. We expect these costs to continue to
increase for the foreseeable future as we continue to increase the number of
our development personnel and increase our investment in technological
infrastructure.
Sales and marketing. Sales and marketing expenses increased $4.2 million,
or 316%, to $5.5 million for the three months ended December 31, 1999 from $1.3
million for the three months ended December 31, 1998. This increase was
primarily due to increased investments in sales and marketing infrastructure,
both domestically and internationally, which included personnel and related
expenses, recruiting fees, travel expenses, as well as increased marketing
activities, including trade shows, public relations, and special promotions. We
expect to significantly increase these expenditures in the future as we
aggressively seek to market our services.
27
General and administrative. General and administrative expenses increased
$559,000, or 176%, to $876,000 for the three months ended December 31, 1999
from $317,000 for the three months ended December 31, 1998. This increase was
due to an increase in salaries and related expenses, and an increase in
overhead expenses related to moving our business to an expanded location. We
expect general and administrative expenses to increase as we expand our staff
and incur additional cost.
Deferred stock compensation and warrant expense. In connection with the
granting of certain stock options to our management and employees, we recorded
deferred stock-based compensation totaling approximately $309,000 for grants
made during the three months ended December 31, 1999. This amount represents
the difference between the exercise price and the deemed fair value of our
common stock for financial reporting purposes on the date these stock options
were granted and is being amortized to expense ratably over the four year
vesting period of the options granted. Amortization of deferred compensation
for stock options and for shares related to the acquisition of
BedandBreakfast.com was $743,000 during the three months ended December 31,
1999.
Amortization of goodwill and other intangibles. In connection with the
acquisition of BedandBreakfast.com, we recorded goodwill and other intangible
assets of approximately $5.7 million. Such amounts will be amortized ratably
over their estimated useful lives of 24 to 30 months. During the three months
ended December 31, 1999, we recorded $694,000 of amortization related to these
intangibles.
Interest and other income (expense), net
Interest and other income (expense), net, is comprised primarily of
interest income earned by the company on its cash and short-term investments.
Interest income increased $102,000, or 206%, to $152,000 for the three months
ended December 31, 1999 from $50,000 for the three months ended December 31,
1998. The increase was primarily due to investment of the proceeds of $29.3
million from the Company's sale of Series E preferred stock in November and
December of 1999. Interest expense increased $10,000 to $40,000 for the three
months ended December 31, 1999 from $30,000 for the three months ended December
31, 1998. This increase was due to the increase in capital lease obligations
entered into by the Company for the purpose of financing equipment and software
purchases. We expect interest income and expenses to fluctuate in future
periods as we undertake various investing and debt financing activities.
Fiscal Years Ended September 30, 1999, 1998 and 1997
Net Revenue
Total net revenue increased $1.3 million, or 279%, to $1.7 million in
fiscal 1999 from $456,000 in fiscal 1998, and increased $385,000, or 542%, from
$71,000 in fiscal 1997, and increased $68,000, or 2,267%, from $3,000 in fiscal
1996. In fiscal 1999, net reservation revenue and other revenue accounted for
77% and 23% respectively of total net revenue. In fiscal 1998, net reservation
revenue and other revenue accounted for 64% respectively and 36% respectively
of total net revenue. In fiscal 1997 and 1996, net reservation revenue
accounted for 100% of total net revenue.
Net reservation revenue increased $1.0 million, or 350%, to $1.3 million
in fiscal 1999 from $294,000 in fiscal 1998, and increased $223,000, or 314%,
from $71,000 in fiscal 1997, and increased $68,000, or 2,267%, from $3,000 in
fiscal 1996. The increase in net reservation revenue resulted from an increase
in the number of reservations made on our network.
Other revenue increased $244,000, or 150%, to $406,000 in fiscal 1999
from $162,000 in fiscal 1998 and from none in fiscal 1997 and 1996. This
increase was due primarily to increased design and development activities and
the acquisition of BedandBreakfast.com which contributed $80,000 of other
revenue.
28
Cost of revenue
Total cost of revenue increased $174,000, or 300%, to $232,000 in fiscal
1999 from $58,000 in fiscal 1998 and from a negligible amount in fiscal 1997
and 1996. In fiscal 1999 cost of reservation revenue and cost of other revenue
accounted for 82% and 18%, respectively, of total cost of revenue. In fiscal
1998, cost of reservation revenue and cost of other revenue accounted for 52%
and 48%, respectively, of total cost of revenue. The increase in cost of
reservation revenue in 1998 resulted from the commencement of our partnerships
with travel web sites and resulting sharing of our commission revenue with
those web sites. The increase in cost of reservation revenue in 1999 resulted
from an increase in the reservations made through partner web sites. Cost of
other revenue increased to $41,000 in 1999 from $28,000 in 1998 due to
additional services provided to hotels.
Operating expenses
Technology and development. Technology and development expenses increased
$1.6 million, or 108%, to $3.2 million in fiscal 1999, and increased $408,000,
or 36%, to $1.5 million in fiscal 1998 from $1.1 million in fiscal 1997, and
increased $532,000, or 90%, from $591,000 in fiscal 1996. These increases were
primarily due to increases in personnel and related costs associated with the
development and enhancement of our reservation booking engine and redundant
capacities, depreciation of capital equipment, and facilities costs.
Sales and marketing. Sales and marketing expenses increased $4.7 million,
or 118%, to $8.6 million in fiscal 1999 from $3.9 million in fiscal 1998, and
increased $1.5 million, or 60%, from $2.5 million in fiscal 1997, and increased
$1.8 million, or 270%, from $665,000 in fiscal 1996. These increases were
primarily due to increases in personnel and related costs, including sales
commissions and bonuses, and increased investment in sales and marketing
infrastructure.
General and administrative. General and administrative expenses increased
$1.1 million, or 92%, to $2.2 million in fiscal 1999 from $1.1 million in
fiscal 1998, and increased $384,000, or 50%, from $766,000 in fiscal 1997, and
increased $260,000, or 51%, from $506,000 in fiscal 1996. This increase was
primarily due to increased personnel and related costs associated with the
expansion of our operations.
Deferred stock compensation and warrant expense. In fiscal 1999 we
recorded total deferred stock compensation of $2.4 million in connection with
stock options granted during the period. This amount represents the difference
between the exercise price of stock option grants and the deemed fair value of
our common stock at the time of such grants. In connection with the acquisition
of BedandBreakfast.com we recorded total deferred stock compensation of $2.6
million. This amount reflects the total shares owned by BedandBreakfast.com
employees subject to repurchase under employment agreements multiplied by the
acquisition price per share of $5.35. Amortization of deferred stock
compensation was $742,000 in fiscal year 1999, and none in prior periods.
Amortization of goodwill and other intangibles. In connection with the
acquisition of BedandBreakfast.com we also recorded $5.7 million of intangible
assets, which will be amortized over their estimated useful lives of 24 to 30
months. In fiscal year 1999 we recorded amortization of $386,000 related to
those assets.
Interest and other income (expense), net
Interest and other income (expense), net, increased $29,000, or 35%, to
$113,000 in fiscal 1999 from $84,000 in fiscal 1998, and increased $151,000,
from net expenses of $67,000 in fiscal 1997, and increased $30,000 from net
expense of $37,000 in fiscal 1996. The increases were primarily due to interest
earned on investment of the proceeds from sales of various series of preferred
stock.
29
Income Taxes
We incurred operating losses and accordingly did not record a provision
for income taxes for any of the periods presented. At September 30, 1999, we
had U.S. federal net operating loss carryforwards of approximately $24.5
million. These net operating loss carryforwards will expire at various dates
beginning in 2011 through 2019, if not utilized. Certain future changes in our
share ownership, as defined in the Tax Reform Act of 1986 and similar state
provisions, may restrict the utilization of carryforwards. A valuation
allowance has been recorded for the entire deferred tax asset as a result of
uncertainties regarding the realization of the assets due to our lack of
earnings history.
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statement
of operations data for the six quarters ended December 31, 1999, for the
periods indicated. The information for each of these quarters has been prepared
on substantially the same basis as the audited consolidated financial
statements included elsewhere in this prospectus and, in the opinion of our
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. Historical results are not necessarily indicative of the results
to be expected in the future, and the results of interim periods are not
necessarily indicative of results for the entire year.
Three Months Ended
---------------------------------------------------------
Dec.
Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, 31,
1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------
(in thousands)
Consolidated Statement of
Operations Data:
Net revenue:
Reservation.............. $ 167 $ 151 $ 245 $ 329 $ 597 $ 479
Other.................... 78 105 94 95 112 179
------- ------- ------- ------- ------- -------
Total net revenue....... 245 256 339 424 709 658
------- ------- ------- ------- ------- -------
Cost of revenue:
Reservation.............. 12 15 28 46 102 65
Other.................... 6 15 16 7 3 27
------- ------- ------- ------- ------- -------
Total cost of revenue... 18 30 44 53 105 92
------- ------- ------- ------- ------- -------
Gross profit.............. 227 226 295 371 604 566
Operating expenses:
Technology and
development............. 580 667 719 767 1,025 2,005
Sales and marketing...... 1,120 1,322 1,389 2,049 3,828 5,511
General and
administrative.......... 344 317 314 512 1,061 876
Deferred stock
compensation and warrant
expense................. -- 15 27 186 514 762
Amortization of
intangible assets....... -- -- -- -- 386 694
------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,044 2,321 2,449 3,514 6,814 9,848
------- ------- ------- ------- ------- -------
Loss from operations...... (1,817) (2,095) (2,154) (3,143) (6,210) (9,282)
Interest and other income
(expense), net........... 42 20 (3) 88 8 112
------- ------- ------- ------- ------- -------
Net loss.................. $(1,775) $(2,075) $(2,157) $(3,055) $(6,202) $(9,170)
======= ======= ======= ======= ======= =======
Supplemental Data:
Gross value of hotel
bookings................. $ 3,744 $ 4,856 $ 9,332 $12,466 $14,714 $16,401
Our quarterly results of operations have varied significantly in the
past. Our limited operating history and rapid growth make it difficult for us
to assess the impact of seasonal factors on our financial results.
Nevertheless, we expect our business to be subject to seasonal fluctuations,
reflecting a combination of seasonality trends for hotel and travel services
offered through our network and seasonality affecting Internet use generally.
For example, demand for leisure travel may decrease after summer vacations and
holiday periods, while Internet usage may decline during the summer months. Our
results also may be affected by
30
seasonal fluctuations in the hotel inventory made available to our network by
participating hotels. For instance, hotels typically enjoy high demand for
rooms during holiday and vacation periods. As a result, during these periods
hotels may not offer as much inventory through our network. Our business may
also be subject to cyclical variations for the services offered; for example,
leisure travel tends to decrease during economic downturns. Moreover, as a
result of seasonal and cyclical factors, we may process fewer reservations
despite adding new hotels and travel web sites to our network. Seasonal and
cyclical variations are beyond our control and may seriously harm our
business. In fact, in the three months ended December 31, 1998 and 1999, our
reservation revenue decreased as compared to the prior fiscal quarters due to
these factors. We expect seasonality to continue to impact our reservation
revenue. We also experienced significant fluctuations between quarters in our
other revenue. These fluctuations were primarily the result of the timing of
achieving defined milestones in contracts with the participants on our
network.
Due to the foregoing factors, our quarterly revenue and operating results
are difficult to forecast. We believe that period-to-period comparisons of our
operating results may not be meaningful and should not be relied upon as an
indication of future performance. In addition, it is possible that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would almost certainly be harmed.
Liquidity and Capital Resources
Through December 31, 1999, we have satisfied our liquidity needs
primarily from the net proceeds of approximately $63.2 million from private
sales of common and preferred stock, and to a lesser extent from the exercise
of warrants and stock options. We have also financed our operations through
capital lease obligations, of which $1.1 million in long- and short-term
principal balances were outstanding as of December 31, 1999. In addition, we
have used a bank facility and the issuance of convertible debt, neither of
which is outstanding as of December 31, 1999. As of December 31, 1999, our
principal sources of liquidity included $24.2 million of cash and cash
equivalents.
Cash used in operating activities totaled $11.7 million for fiscal 1999
and $6.2 million for fiscal 1998, primarily due to our net losses, which were
partially offset by non-cash charges of depreciation and amortization.
Cash used in investing activities totaled $1.5 million for fiscal 1999
and $225,000 for fiscal 1998. We have made investments in computer equipment,
computer software, office furniture and leasehold improvements. As of
September 30, 1999, we had non-cancelable commitments under our operating and
capital leases in the amount of $12.6 million.
Net cash provided by financing activities totaled $12.8 million for
fiscal 1999 and $11.0 million for fiscal 1998. Net cash provided by financing
activities has primarily resulted from the sale of preferred stock. We expect
to fund future operating expenses from revenue received from commissions on
hotel bookings, private financings and the proceeds of this offering.
In April 2000 we raised approximately $5.0 million through the sale of
our Series E preferred stock.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we devote to development of our
services and the resources we devote to sales and marketing. We have
experienced a substantial increase in our capital expenditures and operating
expenses since our inception, consistent with the growth in our operations and
staffing. We anticipate that this increase will continue for the foreseeable
future. Additionally, we expect to make further investments in technologies
and plan to expand our sales and marketing programs. We currently anticipate
that the net proceeds of this offering, together with our existing cash and
sources of liquidity, will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next 12 months.
Thereafter, we will need to raise additional capital, and we may elect to do
so earlier.
31
We intend to continue to consider our future financing alternatives,
which may include the incurrence of additional indebtedness, additional public
or private equity offerings or an equity investment by a strategic partner.
However, other than the bank facility, we have no present commitments or
arrangements assuring us of any future equity or debt financing, and additional
equity or debt financing may not be available to us on favorable terms, if at
all.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. Costs required to be capitalized under SOP 98-1
have been insignificant to date and were expensed as incurred. Prior to the
adoption of SOP 98-1, costs incurred by us to develop, enhance, manage, monitor
and operate its web site were expensed as incurred.
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting
for Derivative Financial Instruments and for Hedging Activities. SFAS 133
provides comprehensive and consistent standards for the recognition and
measurement of derivatives and hedging activities. In June 1999, FASB issued
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Financial Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133, or SFAS 137. As a result, we are required to adopt SFAS
133 in fiscal year 2001. We do not anticipate SFAS 133 to have an impact on our
results of operations or financial condition when adopted because we currently
do not hold any derivative financial instruments and do not expect to engage in
hedging activities in the near future.
In March 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-2, Accounting for Website Development Costs, ( the
"Issue") which addresses how an entity should account for costs incurred to
develop a website. The EITF developed a model that would account for specific
website development costs based on the nature of each cost. The Issue is
effective prospectively for all costs incurred for quarters beginning after
June 30, 2000, although early adoption is encouraged. Companies also have the
option of adopting by cumulative catch-up adjustment. We do not anticipate
adoption of the Issue will have a significant impact on our results of
operations or financial condition.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) 101, "Revenue Recognition" to provide
guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe that our revenue recognition practices are in
conformity with SAB No. 101.
Market Risk
We are exposed to interest rate risk on investments of our excess cash.
The primary objective of our investment activities is to preserve capital. To
achieve this objective and minimize the exposure due to adverse shifts in
interest rates, we invest in money market funds operated by reputed financial
institutions in the United States and commercial papers of short maturities.
Due to the nature of our investments, management has concluded that it does not
have a material market risk exposure.
Exchange Rate Sensitivity
Although we expect to expand our international operations in the future,
to date we have operated primarily in the United States, and substantially all
revenues and assets and liabilities have been denominated in U.S. dollars.
Accordingly, we have had no material exposure to foreign currency fluctuations.
In the future, however, an increasing number of contracts may be denominated in
foreign currencies. Therefore, we may increasingly be subject to currency
fluctuations, which could harm our business.
32
BUSINESS
Overview
WorldRes.com provides a leading business-to-business e-commerce solution
for online marketing and reservations to the highly fragmented global hotel
industry. Our Internet-based reservation system connects hotels to travel web
sites creating an e-commerce network. This network enables these web sites to
provide travelers with the ability to collect information and make real-time,
confirmed hotel reservations online. Since inception, we have processed
approximately 325,000 reservations at a broad range of hotels globally. During
the three months ended March 31, 2000, we processed $31.1 million in gross
value of hotel bookings, compared to $16.4 million in the three months ended
December 31, 1999 and $9.3 million in the three months ended March 31, 1999. As
of February 29, 2000, our network consisted of approximately 11,500 hotel
properties in 142 countries and 1,075 travel web sites and call centers as well
as over 1,800 web sites that are part of our affiliate program managed by Be
Free. As of that date, we also had contracts in place to add approximately
12,900 additional properties to our network.
Industry Background
Growth of Business-to-Business Commerce on the Internet
The Internet is emerging as one of the most significant global
communications media in history, enabling millions of people to share
information and conduct business electronically. International Data Corporation
estimates that the number of users on the Internet will grow from 142 million
at the end of 1998 to over 500 million by the end of 2003. This growth in
users, combined with the unique functionality of the Internet, creates
tremendous opportunities for businesses to conduct e-commerce. Specifically,
the Internet enables businesses to reach other businesses without regard to
geographic or temporal limitations, to deliver detailed and interactive content
to one or more users on a real-time basis at little incremental cost and to
create trading networks among groups of fragmented customers, suppliers and
distributors.
With an increasing number of businesses migrating to the Internet to
leverage its flexibility, reach and cost-effectiveness, business-to-business e-
commerce is poised for rapid growth. Business-to-business e-commerce is
expected to be a significantly larger opportunity than business-to-consumer e-
commerce. According to Forrester Research, the business-to-business e-commerce
market in the U.S. alone was $43 billion in 1998, while the business-to-
consumer e-commerce market was $8 billion. Forrester Research further reports
that business-to-business e-commerce is expected to grow to $2.7 trillion in
2004.
The Worldwide Hotel Industry
The worldwide hotel industry is large and fragmented with international
hotel chains and independently owned hotels ranging in size from resorts to
smaller inns and bed and breakfasts. According to Smith Travel Research, $135
billion in hotel room revenue was generated in 1999 from 67,000 properties
worldwide with approximately 6.8 million rooms. The total market, however, is
significantly larger, with approximately 13 million rooms worldwide in 1997,
according to a study by the World Tourism Organization.
The hotel industry spends billions of dollars on marketing and
distribution annually and operates at significantly less than full capacity.
According to Horwarth International and Smith Travel Research, average
occupancy rates for chain hotels was 68% in 1998, while average occupancy rates
for independent hotels was even lower at 64%. Unsold hotel rooms represent tens
of billions of dollars in lost revenue opportunities. This low capacity
utilization, compounded by inefficient distribution practices, highlights the
need for a solution designed to more effectively connect the sources of supply
and demand for hotel inventory.
33
Legacy Hotel Distribution Channels
Hotels typically receive a majority of their reservations over the
telephone or fax. In order to sell to as large an audience as possible,
however, most hotels also allocate blocks of their inventory to a variety of
distribution channels, including:
. branded chains; . event managers;
. representation companies for . tour operators;
non-chain hotels; . government-backed
. proprietary electronic destination marketing
global distribution systems organizations (DMOs); and
(GDSs) and switch systems . wholesalers.
(switches);
To participate in these distribution channels, hotels often pay fixed-
fees as well as significant commissions to various intermediaries. We believe
that the transaction costs charged by these intermediaries can equal more than
20% of hotel room revenue generated by the booking. In addition, because
certain distribution channels, such as GDSs, do not work with properties on an
individual basis, many independent properties cannot access these distribution
channels unless they incur further costs to sign up with a chain or
representation company.
An additional limitation of GDSs is that they were initially built
primarily for travel agents to book airline and car reservations for business
travelers. They were later adapted so that travel agents could access hotel
inventory through an electronic interface called a "switch" to book
accommodations for business travelers at chain hotels. As a result, these
systems are not designed to help properties deliver descriptive information,
editorial content or rich images that are critical to the purchasing decisions
of many travelers, especially for leisure-oriented trips, which, according to a
worldwide hotel industry study conducted by Horwarth International, represents
approximately one-half of the total annual hotel market.
Internet-Enhanced Hotel Distribution Channels
The Internet has emerged as a more convenient, efficient and cost-
effective medium for hotels to distribute inventory and for travelers to book
accommodations than either the phone, fax or many of the other legacy
distribution channels. Moreover, online leisure hotel bookings are expected to
grow as a result of the rapid adoption of the Internet and the Internet's
ability to provide detailed lodging information, including comparisons of
available hotel accommodations, amenities and rates. Forrester Research
estimates that online leisure hotel bookings are expected to grow from
$1.1 billion in 1998 to $10 billion in 2003.
Limitations of Current Internet-Enhanced Distribution Channels
Use of the Internet represents a significant opportunity for both hotels
and travel web sites to provide access to real-time lodging information and
reservations. The vast majority of current implementations, however, are merely
web sites attached to existing legacy distribution channels. As a result, they
remain expensive for hotels to use and fail to solve the needs of properties
wishing to cost effectively expand distribution, especially to the leisure-
oriented travel market.
Hotels have used the following Internet-based options to enhance their
distribution:
. Create their own web sites. Many individual hotels have created
their own web sites to provide lodging information and, in some
cases, real-time reservations. A hotel must have the technological
expertise to create and maintain both a web site and online
reservation capabilities, and must incur significant marketing
costs to attract online travelers to its web site.
34
. Sell through third-party web sites. In order to gain broader
distribution, a hotel can join a hotel chain and be distributed on
the chain's web site as well as other third-party travel web
sites, such as Travelocity.com and Expedia, Inc., which generally
access hotel inventory through GDSs or switches. An independent
hotel must pay the fixed costs to affiliate with a chain or
representation company, and pay additional costs for each
transaction. Moreover, distributing inventory through GDSs or
switches limits the ability of hotels to present detailed
photographic or multimedia content, which hinders their ability to
effectively sell their inventory to leisure travelers.
Alternatively, an individual hotel can expand its Internet
distribution by creating and maintaining multiple technical links
and business relationships with multiple third-party web sites,
but at significant expense.
Similarly, many new online distribution sources (e.g., online travel
agents, travel web sites and other online intermediaries) have added online
reservations as a service on their sites. These travel web sites have used the
following Internet-based options to obtain a supply of lodging inventory:
. Link directly to multiple hotels. Travel web sites can link
directly to multiple hotels. This requires a travel web site to
develop a reservation booking engine, establish business
relationships and communication links between its web site or call
center and potentially up to tens of thousands of properties.
These activities are both costly and time-consuming.
. Link to GDSs or switches. Travel web sites can also link to GDSs
or switches for hotel inventory. We believe this provides access
to less than 20% of hotels worldwide, however, and an even smaller
percentage of leisure-oriented hotels. Moreover, in order for a
travel web site that links to GDSs or switches to provide rich
content and images around available room inventory, it must
identify and integrate the content from sources other than the
GDSs or switches, which is often costly and inefficient.
The fragmentation of the leisure hotel market and the limitations of
current web-enabled distribution create the opportunity for a business-to-
business Internet-based e-commerce solution that seamlessly links thousands of
hotels with multiple travel web sites and call centers, allowing them to
provide travelers with rich content and process real-time reservations online.
The WorldRes.com Solution
WorldRes.com provides a leading business-to-business e-commerce solution
for online marketing and reservations to the highly fragmented global hotel
industry. Our online hotel distribution network and reservation system comprise
an integrated e-commerce platform that connects hotels to a broad array of
travel web site and other distribution partners, including tourism offices,
convention and visitor bureaus, call centers and travel agents. For hotels, our
network provides a low-cost distribution channel to market, differentiate and
sell their room inventory. For travel web sites and other distribution
partners, our network provides information and real-time e-commerce booking
capabilities for a wide range of hotels. As of February 29, 2000, our network
consisted of approximately 11,500 hotel properties in 142 countries and 1,075
travel web sites and call centers as well as over 1,800 web sites that are part
of our affiliate program managed by Be Free. As of that date, we also had
contracts in place to add approximately 12,900 properties to our network.
Benefits to Hotels
We act as a marketing and distribution partner for hotels, making
information about their properties and room inventory available to a variety of
travel web site and other distribution partners through a single user
interface. This enables any hotel, whether independent or affiliated with a
chain or representation company, to reach more customers and increase
occupancy. Additionally, hotels can use the robust capabilities of our
Internet-based reservation system to differentiate themselves with descriptive
content and photographs. Hotels can easily and continuously update their
descriptive information, available inventory and pricing across multiple web
sites simply by accessing and updating our system. Hotels can also create
targeted e-mail promotions for us to distribute to generate additional
reservations and maximize occupancy.
35
Our solution provides a low-cost distribution channel for hotels to
market and sell their lodging inventory. A hotel pays us a commission only
after a guest checks out. A hotel pays no initial set-up or fixed monthly fees
to participate in our network, and needs to make little or no incremental
investment in information technology. In addition, our solution often bypasses
multiple traditional intermediaries, resulting in lower transaction costs
compared with legacy hotel distribution channels. Lastly, a hotel that links to
our network can reduce its operating costs by automating and streamlining
traditional manual paper-intensive processes.
Benefits to Travel Web Site and Other Distribution Partners
Our business-to-business e-commerce platform enables our travel web site
and other distribution partners that have traditionally processed hotel
bookings offline, to generate transaction revenue from real time online
bookings at any of our hotel properties. Through our system, all travel web
site and other distribution partners are able to provide their users with the
ability to search for rooms at any or all of our hotels using a variety of
criteria, including, price, availability, amenities, location and room type.
Such features and enhanced functionality are critical for enabling our
partners, with a minimum investment of time and capital, to convert site
visitors into actual purchasers of online hotel room inventory.
Growth Strategy
Our objective is to provide the leading business-to-business e-commerce
online marketing and reservation solution for the global hotel industry. Key
elements of our strategy to achieve this objective include:
Increase the number of hotels and travel web site partners that comprise
our network. We plan to increase the number of reservations made on our network
by increasing the number of domestic and international hotels that comprise our
network through strategic partnership initiatives and substantial sales and
marketing efforts. We intend to continue to work with a variety of government
tourism authorities as well as hotel and motel associations to help us sign up
a broad range of hotels in targeted markets. We also plan to focus on adding
travel web site partners in key sectors of the travel market.
Actively manage hotel and travel web site relationships. We plan to
increase the number of reservations made on our network through active account
management of hotels and travel web site partners. We will continue to work
with hotels to improve their occupancy rates by helping them better match
online inventory offerings with online demand through targeted promotions and
pricing strategies. We will continue to work with travel web site partners to
improve the integration of our Internet-based reservation system into their web
sites, thereby improving the conversion rates of browsing consumers. We intend
to continue to improve the quality of our two branded web sites,
PlacesToStay.com and BedandBreakfast.com, to add value to our co-branded and
affiliate partners and to improve conversion.
Pursue acquisitions. We intend to expand our network and the services we
offer through strategic acquisitions with the goal of increasing the number of
reservations booked and transaction revenue generated on our network. For
example, in August 1999, we acquired BedandBreakfast.com to enhance our
relationships with bed and breakfast properties and to accelerate the addition
of these types of properties to our network. BedandBreakfast.com historically
focused on building the dominant web-based brand in the bed and breakfast
industry and on compiling what we believe to be the largest electronic database
of bed and breakfast properties in the world. As of February 29, 2000, the
BedandBreakfast.com web site database included listings for over 24,000
properties worldwide, including approximately 80% of the bed and breakfast
properties and inns located in the United States. In October 1999, we acquired
a leading provider of software used by independent lodging properties at their
front desks to manage the reservation process and other key operating
functions. We provide this software free of charge to any bed and breakfast
providing us with bookable room inventory, and we believe this will assist us
in adding inventory from these properties to our network.
36
Expand our service offerings. We intend to use our system and network to
expand into complementary services. These services could include packaging of
non-lodging and activity-based travel services. In addition, we plan to enhance
our data reporting and analytical tools to enable hotels to better manage
inventory and provide hotels with insight into promising marketing
opportunities.
Maintain our technological leadership. We intend to continue to improve
our technology to meet the evolving needs of our hotels and travel web site
partners. For example, we provide our partners with multilingual booking
capabilities. We plan to continue to develop, purchase or license technological
advancements to our reservation system that enhance its reliability,
functionality, and ease of use. For example, we have partnered with a number of
property management software vendors to further automate the collection and
updating of rates and availability. In addition, as Internet broadband usage
and availability increases, we intend to improve the multimedia capabilities of
our system to further allow our suppliers to differentiate their hotel
properties.
The WorldRes.com Network
Our network enables hotels and travel web site partners to provide
travelers with the ability to collect travel information and make real-time,
confirmed reservations online.
Hotels
As of February 29, 2000, we offered the ability to make reservations at
approximately 11,500 properties, located in 142 countries. In addition, as of
February 29, 2000, we had contracts in place to add approximately 12,900
properties to our network. The properties in our network include hotel/motel
chains, independent properties, bed and breakfast properties, inns, resorts and
condominiums, providing our travel web site and other distribution partners
with access to a broad range of global lodging choices.
The following is a sample list of domestic and international properties
that can be accessed through our reservation system:
Bed &
Hotel Chains Independents Breakfasts/Inns Resorts
- ------------ ------------ --------------- -------
Accor Baldwin Hotel Inn at Pasetiempo Grand Wailea Resort
Choice Hotels Bay Park Hotel Larchwood Inn Sandestin
Hong Kong Hotel Beach House Inn Oxford Hotel South Seas Resorts
Association Inn by the Sea Roma Bed & Breakfast St. Moritz
Vagabond Inns Joie de Vivre Snow Cap Inn Vail Resort
In addition, we have entered into contracts with several major hotel
chains, including one of our strategic partners Starwood Hotels & Resorts, to
add their properties to our network.
Travel Web Site and Other Distribution Partners
By accessing our network, travel web sites and other distribution
partners are able to offer their users detailed information on a wide range of
accommodations, as well as the ability to check availability and reserve a room
on a real-time basis. Our robust content capabilities allow travel-related web
sites to differentiate their sites and better feature available hotel inventory
and our real-time reservation system allows them to generate transaction
revenue on their sites. Our travel web site and other distribution partners
include:
. Activity-based sites. These web sites are dedicated to specific
activities, such as skiing, which often involve travel and
lodging. Web sites such as Resort Sports Network, MountainZone.com
and other activity-based web sites traditionally have offered rich
content, but have lacked access to lodging and other travel
packages. Our solution can provide these web sites with online
reservation capability for potentially all of the lodging
alternatives around a particular resort, which significantly
increase the value of these sites to their end-users.
37
. Destination marketing organizations. Destination marketing
organizations, or DMOs, promote tourism within specific geographic
regions through web sites, call centers and tourist information
centers. Our reservation system enables their customers to search
for available hotel inventory and book reservations which are
features traditionally not offered by DMOs. Some of our DMO
partners also use our system to enable their offline sources, such
as call centers and tourist information desks, to process real-
time reservations.
. SABRE system. The SABRE system is one of the four major GDSs. We
have built a link that enables over 190,000 SABRE-connected travel
agents to make reservations at some of the hotels that comprise
our network, which are not otherwise available through the SABRE
system.
. Online travel agents and other web sites. These web sites are
focused on providing either a broad range of travel services, such
as air, car and hotel reservations, or more narrowly focused
travel-related content. The broad travel sites, which include
Travelocity.com, Infoseek, GO Network, Yahoo! and Lycos, generally
use GDSs for access to lodging inventory. Our reservation system
supplies these sites with a broader and more unique range of
hotels specifically oriented towards leisure travelers then
otherwise would be available on these sites for online booking. We
provide other content-rich web sites, such as Frommer's and
MapBlast!, with inventory from all of the hotels that comprise our
network.
. Hotel web sites. Independent hotels and hotel chains on our
network often have their own web sites that are electronic
brochures without reservation capabilities. Many of these hotels
use our WebConnect service to process real-time room reservations
on their web sites.
We also maintain our PlacesToStay web site through which we process
reservations for hotels that comprise our network. In some cases we have co-
branded our PlacesToStay.com web site with our travel-related web site
partners, such as Lycos. In the year ended September 30, 1999, our
PlacesToStay.com web site was responsible for approximately 33,000
reservations, or 20% of our total reservations. For the three months ended
December 31, 1999, our PlacesToStay.com web site was responsible for
approximately 8,600 reservations or 16% of our total reservations. In addition,
we offer our PlacesToStay.com Affiliate Link in partnership with Be Free. As
part of this program, we offer smaller, content-rich web sites the opportunity
to provide their users with access to our system. This access enables travelers
to make online reservations, which is an effective way to strengthen customer
relationships and increase revenue. As of February 29, 2000, we had over 1,800
active affiliates capable of processing reservations and had received
applications from more than 2,800 additional potential affiliates.
Our travel web site partners include:
Destination Marketing
Broad Travel Activity WebConnect Organizations
- ------------ -------- ---------- ---------------------
Lycos American Skiing Company Amfac Resorts LLC Golden State Reservations
MapBlast! Booth Creek Grand Wailea Resort Monterey Marketing Venture
SABRE system Intrawest Pink Shell Beach Ohio Hotel & Lodging Association
Yahoo! Park City Suisse Chalet Suites Pocono Mountains Vacation Bureau
Hotel Reservation Vail Vagabond Inns Chicago Convention and Tourism
Network Bureau
International Operations
As of February 29, 2000, approximately 5,000 properties in 141 countries
outside of the United States could be accessed through our network and we had
approximately an additional 5,300 international properties under contract.
WorldRes.com is targeting international expansion primarily in the European
market. We established our first international office in the United Kingdom in
1997, our European headquarters in Germany in August 1999 and opened an office
in France in October 1999. We are contemplating selling a minority interest in
our European subsidiaries to strategic investors to help grow our business in
Europe. We
38
believe that further international expansion represents a significant growth
opportunity for us because fewer international properties participate in GDSs
or switches, and the international leisure travel market is larger and more
fragmented than the domestic market.
Strategic Relationships
We have entered into strategic relationships to increase the number of
reservations made through our network. These strategic relationships include
hotels and travel web site and other distribution partners that are willing to
commit resources to expand our network and leverage the advantages of our
network to increase their revenues. In some instances we have granted strategic
partners warrants that vest based on achieving performance based milestones.
Additionally, some of our strategic partners, such as Accor, Micros Systems,
Sabre Inc., Times Mirror Company and Starwood Hotels & Resorts, have made
equity investments in WorldRes.com.
Sales and Marketing
We sell and market our solution through our sales staff located in
offices throughout the United States and in Europe. Our sales and marketing
functions are focused on selling to two distinct groups, hotels and travel web
site partners.
Our hotel sales channels include:
. direct sales to major hotel groups;
. telesales;
. agent sales; and
. online sales through our web sites.
We also have dedicated sales personnel focused on adding travel web site
and other distribution partners to our network. The primary targeted customers
are travel web site and other distribution partners that are broad travel,
activity-based or destination-based oriented. We also offer participants the
ability to join our network through an affiliate program that can be accessed
online.
We market our solution through a variety of methods, including trade
shows, print ads, online advertising, trade associations and promotional
events. We often speak at industry conferences and seminars to educate the
hotel and Internet industries about the benefits of distributing inventory
online.
Customer Support
Our customer support operations are centered around providing high-
quality support to the sales and marketing staffs of our hotel property
partners. Customer support is organized around three progressive phases:
. property activation;
. ongoing proactive support; and
. ongoing reactive support.
After a hotel has signed a definitive contract, been screened for
authenticity, enrolled, trained and activated on our network, it may then
receive online reservations.
We attempt to work with each hotel to help it develop its online content,
to create special promotions and to use our network to increase reservations.
In addition, we offer a hotel the ability to outsource its web design, content
or maintenance functions to us. Finally, we provide a global, 24 hours a day,
seven days a week help desk which is available to consumers, hotel properties
and partners via either phone, fax or e-mail to assist with questions and
problems.
39
Technology
Our reservation solution consists of an Internet-based reservation system
and our network of hotels and travel web site partners. Our Internet-based
reservation system resides entirely on our servers, is accessible by standard
browsers and requires minimal software installation for hotels. Our reservation
system enables travel web sites partners to display detailed lodging
information and inventory, and provides real-time hotel search and reservation
capabilities.
Systems Architecture
Our systems architecture provides the foundation for the scalable, high-
availability and fault tolerant characteristics of our online distribution
network. The system is designed to operate continuously, 24 hours a day, seven
days a week through both hardware and software failures and systems upgrades
and expansions. Each server is replicated and equipped to regulate the amount
of information passing through it, allowing a server to be removed without
interrupting service. Our database is also replicated in real time to eliminate
data loss. Database connections are pooled and shared to allow the database to
be removed for repair or upgrade without impacting the performance of the
system. Our data centers are housed at high-availability sites with multiple
power and data communication feeds and with diesel generators for emergency
power. Each data center is served by a different Internet service provider to
protect against service failures.
We have undertaken substantial measures to protect sensitive information
passing through our network. Firewalls are installed to limit the points of
interaction between the Internet and our system. Administrative access to the
site is controlled by group privileges and user identification and passwords.
Proprietary Software
The proprietary software components of our reservation system, together
with our robust systems architecture, enable us to effectively deliver our
reservation solution. The software components include transaction databases,
shopping servers, reservation engines, supply managers and a decision support
system.
. Transaction databases. Transaction databases form the core of our
online distribution system. These databases contain detailed hotel
property and room descriptions, photographs, hotel room inventory
availability and rate information. They also contain the
reservation rules and record the reservation transactions
including form-of-payment.
. Shopping servers. Shopping servers assist the search for hotel
room inventory. These servers are tailored to the needs of a
specific travel web site, permitting each to control the hotels
and inventory to be displayed. The shopping servers also allow
users to assess properties by providing detailed descriptions and
photographs.
. Reservation engines. Reservation engines allow the reservation of
hotel rooms and the receipt of reservation confirmations. They
also verify hotel inventory availability, validate the reservation
request against the reservation rules, confirm the price, and
remove hotel inventory from the system. The reservation engines
also collect the form of payment data and allow reservations to be
modified and cancelled. A direct message interface to the
reservation engine is supported to allow reservations to be made
directly from other systems such as the airline global
distributions systems or a travel agency's system.
. Supply managers. Supply managers refresh the reservation system
with available inventory and current room rates. Additionally,
supply managers automatically notify the hotels when inventory has
been reserved. These managers provide tools for describing
products using text and images, for setting rates, rules and
policies, and for controlling inventory. The supply managers
provide several means of supplier interaction to meet the needs of
hotels from the smallest bed and breakfast to the largest hotel
chain. The means of interaction include a supplier administration
web site, an email interface, a file transfer interface, and real-
time gateways connecting directly to the suppliers' central
reservation or property management systems.
40
. Decision support system. The decision support system allows the
data collected by the online distribution system to be utilized to
increase reservation volume and to improve hotel and online hotel
distributor operations. This system employs a database, data
replication tools and data query tools. Data collected in the
transaction databases and in the web servers' log files are used
to populate the decision support database. Reports derived from
this data include inventory profiles, web traffic analysis, and
reservation summaries.
Our development organization is focused on designing, implementing and
supporting our reservations system, developing applications for and supporting
our network and maintaining and improving our technology, infrastructure and
database. To date, substantially all software development costs related to our
reservations system and network have been expensed as incurred.
We believe that significant investments in technology are required to
remain competitive. We are continuing to invest significant resources to
further improve our technology and add new services and enhancements. We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current reservation system and network, develop new
offerings that achieve market acceptance, maintain technological
competitiveness and meet expanded hotel and travel web site partner
requirements.
Competition
Our primary source of competition comes from existing phone and fax-based
methods of booking reservations with the Internet accounting for less than 2%
of all hotel bookings in 1999 according to PhoCusWright, Inc. As a greater
percentage of lodging reservations move on-line over the next several years, we
expect increased competition from an array of sources including:
. online lodging e-commerce web sites;
. traditional travel agencies, tour operators and wholesalers;
. GDSs and other related intermediaries;
. hotel chains;
. individual leisure properties; and
. broad travel, activity and travel web site partners.
We believe that our system encompasses each of these segments and in many
cases we currently partner with companies within these categories in certain
circumstances while competing with them in others. While we compete with
companies within these categories, we believe there is no other single company
currently addressing all of the segments. Online lodging e-commerce web sites
include Expedia, Inc. and Travelocity.com. Traditional travel agencies include
American Express Travel Services and Carlson Wagonlit Travel. GDSs include the
SABRE system, Galileo and Apollo systems, AMADEUS and WORLDSPAN and related
intermediaries including switches owned by Pegasus and Cendant. There are
numerous hotel chains and individual hotels with web sites against which some
portion of our business competes. While there are numerous web sites competing
for leisure lodging bookings, there is no dominant player in this market. We
could face further competition in the future from any of the competitors listed
above or from new companies that enter into business-to-business e-commerce
over the Internet either on their own or by partnering with other companies.
Our current and potential competitors may develop superior Internet-based
reservation solutions that achieve greater market acceptance than our solution.
We believe that the principal competitive factors affecting our market include
a significant base of customers, breadth and depth of solution, critical mass
of hotel suppliers and web sites, system performance, customer service and
technology and system features. Although we believe that our solutions
currently compete favorably with respect to these factors, our market is
relatively new and is evolving rapidly. We may not be able to maintain our
competitive position against current and
41
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources.
Intellectual Property
We protect our proprietary rights by relying on copyright, trade secret,
trademark, confidentiality procedures and contractual provisions. Some of our
software, documentation and other written materials are protected under the
federal copyright law. We also rely on trade secret laws of the State of
California and the states in which we do business to protect our software
designs and other proprietary information. In addition, non-disclosure
agreements contained in our employment contracts protect our proprietary
information from disclosure by current and former employees.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us or our other
intellectual property.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grow and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays
or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could seriously harm our business.
Employees
As of February 29, 2000, we had 176 employees located in the United
States and 23 employees located in Europe. Of the employees in the United
States, 66 were involved in business development, sales and marketing efforts,
33 in customer services and support, 49 in technical operations and 28 in
general and administrative functions. We have not experienced any work
stoppages and we consider our relations with our employees to be good.
Legal Proceedings
We are not currently subject to any material legal proceedings. We may
from time to time become a party to various legal proceedings arising in the
ordinary course of business.
Facilities
Our principal executive offices are located in San Mateo, California
where we lease approximately 46,000 square feet under a lease that expires in
July 2005. Our principal administrative, sales and marketing, customer service,
and product development facilities are also at this location.
BedandBreakfast.com is located in Denver, Colorado where we lease approximately
11,000 square feet under a lease that expires in April, 2010. Our European
headquarters are located in Dusseldorf, Germany where we lease approximately
4,500 square feet. We also lease sales offices and other small facilities in
the United States, the United Kingdom and France. We believe that our current
domestic facilities are adequate to meet our needs through the end of 2000, at
which time we may need to lease additional space. We anticipate opening at
least two additional facilities in Europe during calendar year 2000.
42
MANAGEMENT
Executive Officers and Directors
The names and ages of WorldRes.com's executive officers and directors as
of April 4, 2000 are as follows:
Name Age Position(s)
- ---- --- ----------
Eric J. Christensen..... 40 Chairman of the Board of Directors
Gregory A. Jones(1)..... 39 Chief Executive Officer, President and Director
Gregory S. Curhan....... 38 Chief Financial Officer
Domenic A. Rinaldi...... 37 Chief Operating Officer
Paul N. Wyatt........... 53 Chief Technology Officer
Yen Lee................. 32 Executive Vice President of Business Development
Eric L Goldreyer........ 34 President of BedandBreakfast.com
Wolfgang Kitza.......... 38 Vice President and Managing Director of WorldRes Europe GmbH
Steven L. Eskenazi(2)... 37 Director
Gregory T.
George(1)(2)........... 51 Director
E. Stanton McKee(1)..... 55 Director
Thomas Unterman(2)...... 55 Director
- --------
(1) Member of compensation committee
(2) Member of audit committee
Eric J. Christensen co-founded WorldRes.com in October 1995 and has
served as Chairman of the Board of Directors of WorldRes.com since then. Mr.
Christensen served as President of WorldRes Europe from March 1998 to July
1999. Mr. Christensen served as Chief Executive Officer of WorldRes.com from
October 1995 until February 1998. Prior to founding WorldRes.com, Mr.
Christensen served as an investment consultant with the investment management
firm of Cambridge Associates from 1993 until 1995. From 1987 until 1993, Mr.
Christensen served as Manager of Strategic Planning with Euro Disney in Paris,
France where he was responsible for hotel strategic planning and reservation
systems. From 1982 until 1985, Mr. Christensen served as a hotel consultant
with Laventhol & Horwath. Mr. Christensen holds a B.A. degree from Dartmouth
College and an M.B.A. degree from Stanford University.
Gregory A. Jones co-founded WorldRes.com in October 1995 and currently
serves as Chief Executive Officer, President and Director of WorldRes.com.
Prior to joining WorldRes.com, Mr. Jones served in various capacities at
Synopsys, a software company, from October 1991 to October 1995, including
Acting Vice President of Marketing and Director of the Advanced Technology
Group. Prior to joining Synopsys, Mr. Jones was a management consultant with
McKinsey & Co. Mr. Jones holds a B.A. degree from Dartmouth College and an
M.B.A. degree from Stanford University.
Gregory S. Curhan joined WorldRes.com in May 1999 and has served as Chief
Financial Officer since that time. Prior to joining WorldRes.com, Mr. Curhan
served as Director of Global Technology Research Marketing and Managing
Director Specialty Technology Institutional Equity Sales at Merrill Lynch & Co.
from May 1998 to May 1999. Prior to joining Merrill Lynch, Mr. Curhan was
Director of Equities and a research analyst at the investment banking firm of
Volpe Brown Whelan & Co. from May 1993 to May 1998. Mr. Curhan holds a B.A.
degree from Dartmouth College.
Domenic A. Rinaldi joined WorldRes.com in July 1997 and since February
2000 has served as Chief Operating Officer. From July 1997 through February
2000 Mr. Rinaldi served as Senior Vice President of Sales and Operations. Prior
to joining WorldRes.com, Mr. Rinaldi served in various management, sales and
operations positions at Sprint Corporation from 1984 to 1997, most recently as
Vice President of Sales for Sprint's Hospitality Division. Mr. Rinaldi holds an
A.A. degree from Skyline College.
43
Paul N. Wyatt joined WorldRes.com in March 1998 and since April 2000 has
served as Chief Technology Officer. From March 1998 through April 2000 Mr.
Wyatt served as Vice President of Systems Development. Prior to joining
WorldRes.com, Mr. Wyatt served from December 1997 to March 1998 as Consultant
and Interim Vice President of Engineering at WebFlow Corporation, a software
company. Prior to WebFlow Corporation, Mr. Wyatt served from January 1997 to
November 1997 as Vice President of Engineering at Cygnus Solutions, a software
company. Prior to Cygnus Solutions, Mr. Wyatt served from February 1995 to
January 1997 as Vice President of Engineering at TravelNet, a software company.
Prior to TravelNet, he served from June 1993 to December 1994 as Vice
President, Research and Development for the software company the ASK Group.
Prior to the ASK Group, he served from November 1989 to June 1993 as Vice
President, Engineering and Chief Technology Officer for Covalent Systems, a
software company. Mr. Wyatt holds a B.S. degree from University of Cincinnati.
Yen Lee joined WorldRes.com in August 1997 and since January 2000 has
served as Executive Vice President of Business Development. From August 1997 to
December 1999 Mr. Lee served as Director of Business Development. Prior to
joining WorldRes.com, Mr. Lee served as Director of Operations at Ticketmaster-
CitySearch's first market in San Francisco from April 1996 to July 1997. Prior
to joining Ticketmaster-CitySearch, Mr. Lee was a consultant at McKinsey & Co.
from September 1990 to June 1993. Mr. Lee received his MBA degree in June 1996
from Massachusetts Institute of Technology and an honors degree from the
University of Western Ontario.
Eric L. Goldreyer founded BedandBreakfast.com in July 1995 and has served
as President of BedandBreakfast.com since that time. Prior to founding
BedandBreakfast.com, Mr. Goldreyer was Senior Account Executive of Southwestern
Bell Telephone from June 1990 to June 1995. Mr. Goldreyer holds a B.A degree
from Texas A&M University.
Wolfgang Kitza joined WorldRes.com in May 1999 as Vice President and
Managing Director of WorldRes Europe GmbH & Co. KG. Prior to joining WorldRes
Europe GmbH & Co. KG, Mr. Kitza was Managing Director of CityWeb Network from
January 1998 to October 1998. Prior to joining CityWeb Network, Mr. Kitza was
Managing Director of Bertelsmann's Internet technology division from November
1993 to November 1997. Mr. Kitza holds B.S. degrees from the University of
Cologne and the University of Bonn.
Steven L. Eskenazi has been a director of WorldRes.com since December
1997. Mr. Eskenazi has been a General Partner at Walden VC, a venture capital
firm, since March 1997. Prior to joining Walden VC, Mr. Eskenazi was Securities
Analyst and Managing Director of Alex. Brown, a stock brokerage firm, from
February 1990 to March 1997. Mr. Eskenazi is also a director of DigitalThink,
Inc. Mr. Eskenazi holds a B.S. degree from Union College and an M.B.A. degree
from Dartmouth's Amos Tuck School.
Gregory T. George has been a director of WorldRes.com since March 1998.
Mr. George has been a General Partner at Technology Funding Ltd. and Vice
President of Technology Funding Inc. since August 1986. Mr. George is presently
an officer or director of several privately held development stage companies.
From February 1987 to December 1997, Mr. George was a Director of Viewlogic
Systems, Inc. and Wasatch Education Systems Corp. Mr. George holds an A.B.
degree from Harvard College.
E. Stanton McKee has been a director of WorldRes.com since November 1998.
Mr. McKee has been Executive Vice President, Chief Financial and Administrative
Officer at Electronic Arts since July 1996. From March 1989 to July 1996, Mr.
McKee was Senior Vice President, Chief Financial and Administrative Officer of
Electronic Arts. Mr. McKee holds a B.A. degree from Stanford University and an
M.B.A. degree from Stanford University.
Thomas Unterman has been a director of WorldRes.com since March 1999. Mr.
Unterman is the Managing Partner and CEO of the Rustic Canyon Group, which is
the general partner of TMCT Ventures, a venture capital investment fund.
Previously, Mr. Unterman was Executive Vice President and Chief Financial
Officer at Times Mirror Company from 1998 through January 2000 and served in
various senior management positions, most recently as Senior Vice President and
Chief Financial Officer, at Times Mirror from 1992 to
44
1998. He also oversaw the management of Eagle New Media Investments, LLC and
Eagle Publishing, LLC, affiliates of Times Mirror. Prior to joining Times
Mirror, Mr. Unterman was a partner in the Los Angeles office of Morrison &
Foerster where he specialized in corporate and securities law. Mr. Unterman is
also a director of Ticketmaster Online-CitySearch, Hollywood, Inc. and several
privately-held companies. Mr. Unterman holds a B.A. degree from Princeton
University and a J.D. degree from the University of Chicago.
The Company has entered into a consulting agreement with Mr. Christensen
pursuant to which the Company has agreed to nominate him for reelection to the
board of directors. See "Certain Transactions--Consulting Agreement."
Board Composition
We currently have authorized six directors. Each director is elected for
a period of one year at our annual meeting of stockholders and serves until the
next annual meeting or until his successor is duly elected and qualified. The
executive officers serve at the discretion of the board of directors. There are
no family relationships among any of our directors or executive officers.
Our amended and restated certificate of incorporation and bylaws that
become effective upon completion of this offering provide for a board of
directors consisting of seven members. When we are no longer subject to the
provisions of Section 2115 of the California Corporations Code, the board of
directors will be divided into three classes, each class serving staggered
three-year terms. At the first annual meeting of stockholders after we
establish a classified board, the terms of the directors that are classified as
Class I directors will expire, and the stockholders will elect two Class I
directors for three year terms. At the second annual meeting of stockholders
after we establish a classified board, the terms of the directors that are
classified as Class II directors will expire, and the stockholders will elect
two Class II directors for three year terms. At the third annual meeting of
stockholders after we establish a classified board, the terms of the directors
that are classified as Class III directors will expire, and the stockholders
will elect two Class III directors for three year terms. As a result, at each
of the three annual meetings of stockholders that follow the date of the
establishment of a classified board of directors, only one class of directors
will be elected with the other classes continuing for the remainder of their
respective terms.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are employees of
WorldRes.com are eligible to participate in our 1995 Stock Plan and 1999
Executive Stock Plan. We have in the past granted to our employee directors
options to purchase common stock pursuant to our 1995 Stock Plan. Directors who
are not employees of WorldRes.com are eligible to participate in our 2000
Directors' Stock Option Plan. Under this plan, each person who is a non-
employee director on the completion of this offering will receive an automatic
initial grant of an option to purchase 10,000 shares of common stock and each
person who becomes a non-employee director after the completion of this
offering will receive an automatic initial grant of an option to purchase
20,000 shares of common stock upon appointment or election. The plan also
provides for annual grants, on the date of each annual meeting of our
stockholders, to each non-employee director who has served on our board of
directors for at least six months. The annual grant to non-employee directors
is an option to purchase 5,000 shares of common stock. See "Stock Plans."
Board Committees
In March 1998, the board established the audit committee. The audit
committee reviews our annual audit and meets with our independent auditors to
review our internal controls and financial management practices. The board's
audit committee currently consists of Thomas Unterman, Steven L. Eskenazi and
Gregory T. George. In February 1997, the board established the compensation
committee. The compensation committee recommends compensation for certain of
our personnel to the board and administers our stock plans. The compensation
committee currently consists of Gregory T. George, Gregory A. Jones and E.
Stanton McKee.
45
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our board of directors are
currently Gregory T. George, Gregory A. Jones and E. Stanton McKee. No member of
the compensation committee of WorldRes.com 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. See "Executive Compensation" and "Related Party Transactions" for a
description of transactions between us and members of the compensation committee
and entities affiliated with them.
Executive Compensation
The following table provides summary information concerning the
compensation paid during the fiscal year ended September 30, 1999 to the Chief
Executive Officer and each of the other four most highly compensated executive
officers (the "Named Officers"), each of whose aggregate compensation during
our last fiscal year exceeded $100,000.
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
----------------------------- -------------------
Securities
Other Annual Underlying
Name and Principal Position Salary Bonus Compensation Options(#)
- --------------------------- -------- ------- ------------ -------------------
Gregory A. Jones
Chief Executive Officer,
President and Director...... $156,250 $22,442 385,000
Paul N. Wyatt
Vice President.............. 149,875 19,900 170,000
Eric J. Christensen
Chairman and Director....... 146,875 22,114 $60,900(1) 160,000
Scott Potter(2)
Former Executive Vice
President................... 137,500 20,909 242,500
Domenic A. Rinaldi
Senior Vice President....... 137,500 20,909 170,000
- --------
(1) Mr. Christensen received $56,000 per year in foreign housing and cost of
living allowance for his relocation to the United Kingdom. He also
received $4,900 to offset lost rental income on his U.S. property, which
resulted from his relocation.
(2) Mr. Potter terminated his employment with us in December 1999.
Option Grants
The following table provides summary information regarding stock options
granted to the Named Officers during the fiscal year ended September 30, 1999.
In the fiscal year ended September 30, 1999, we granted options to purchase up
to an aggregate of 1,956,207 shares to employees, directors and consultants.
All of these options were granted under our 1995 Stock Plan and 1999 Executive
Stock Plan at exercise prices equal to the fair market value of our common
stock on the date of grant, as determined in good faith by the board of
directors. All options have a term of ten years. Generally option shares vest
over four years, with 25% of the option shares vesting one year after the
option grant date, and the remaining option shares vesting ratably each month
for the next 36 months.
The potential realizable values are based on an assumption that the
price of our common stock will appreciate at the compounded annual rate shown
from the date of grant until the end of the option term. These
46
values do not take into account amounts required to be paid as income taxes
under the Internal Revenue Code and any applicable state laws or option
provisions providing for termination of an option following termination of
employment, non-transferability or vesting. These amounts are calculated based
on the requirements promulgated by the Securities and Exchange Commission and
do not reflect our estimate of future stock price growth of the shares of our
common stock.
Option Grants in Last Fiscal Year
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ------------- ----------- ---------- ---------------------
Gregory A. Jones........ 200,000 10.2% $3.00 5/21/09 $ 377,337 $ 956,246
110,000 5.6 6.00 8/31/09 415,071 1,051,871
Paul N. Wyatt........... 45,000 2.3 3.00 5/21/09 84,903 215,156
35,000 1.8 6.00 8/31/09 132,068 334,753
Eric J. Christensen..... 95,000 4.9 3.00 5/21/09 179,235 445,220
Scott Potter............ 60,000 3.0 3.00 5/21/09 113,203 286,874
82,500 4.2 6.00 8/31/09 311,303 790,904
Domenic A. Rinaldi...... 55,000 2.8 3.00 5/21/09 103,768 262,968
35,000 1.7 6.00 8/31/09 132,068 344,753
Mr. Potter terminated his employment with us in December 1999. Of the
142,500 securities underlying options shown above 83,139 vested and were
exercised by Mr. Potter.
47
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock acquired in the fiscal year ended September 30, 1999, the value
realized upon exercise of stock options in the fiscal year ended September 30,
1999, and the year-end number and value of unexercised options with respect to
each of the Named Officers as of September 30, 1999. The value of unexercised
options was calculated by determining the difference between the fair market
value of underlying securities of $6.00 for our common stock on September 30,
1999, as determined by our board of directors, and the exercise price. Options
may be exercised immediately pursuant to early exercise provisions contained in
the 1999 Executive Stock Plan. Any shares issued pursuant to such early
exercise provisions are subject to repurchase at the original exercise price
paid per share upon termination of employment. Such repurchase option
terminates at the rate of 25% after one year from the vesting commencement date
and thereafter at a rate of 1/48th of the original grant amount per month over
the remaining three years.
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at September 30, 1999 September 30, 1999
Acquired on Value ----------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
Gregory A. Jones........ 234,375 $785,625 111,562 39,063 $ 8,435 $210,940
Paul N. Wyatt........... 15,000 78,000 98,749 56,251 232,495 292,505
Eric J. Christensen..... 124,792 445,877 35,209 -- 190,129 --
Scott Potter............ 69,562 309,953 172,940 -- 412,309 --
Domenic A. Rinaldi...... 45,900 203,985 80,327 43,773 160,443 238,822
- --------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
Employment Agreements
We have entered into the following arrangements with our executive
officers:
. In March 1998, we entered into an offer letter with Mr. Paul N.
Wyatt. The agreement entitles Mr. Wyatt to a salary of $145,000
per year. The offer letter provides for an initial stock option
grant to purchase 90,000 shares of common stock at an exercise
price equal to the fair market value of the common stock at the
date of grant. The option vests at the rate of 1/4th of the shares
one year after commencement of employment and 1/48th of the shares
each month thereafter of completed employment.
. In January 2000, we entered into an offer letter with Mr. Domenic
A. Rinaldi. The agreement entitles Mr. Rinaldi to a salary of
$175,000 per year. Mr. Rinaldi was also entitled to receive
bonuses of up to $150,000. The offer letter provides for
acceleration of previous grants of stock options of 6,875 and
3,394 so that on September 30, 2000 such shares are vested.
Consulting Agreement
In December 1999, the Company entered into a Consulting Agreement with
Eric Christensen. Pursuant to this agreement, Mr. Christensen's employment with
the Company terminated on December 31, 1999, although he remained Chairman of
the Board of Directors of the Company. Mr. Christensen serves as a consultant
on a month-to-month basis and has been paid a total of $22,580 for consulting
services pursuant to this agreement through March 31, 2000. In addition, in
connection with the termination of his employment, Mr. Christensen will receive
monthly severance payments through October 2000 totaling $180,000.
Mr. Christensen has agreed to serve as a member of the Board of Directors
through this offering, and the Company has agreed to nominate Mr. Christensen
for re-election to the board of directors for no less than two annual meetings,
or, if the board of directors has staggered terms, to a term of no less than
two years.
48
Stock Plans
1995 Stock Plan. The 1995 Stock Plan was adopted by our board of
directors in November 1995. The 1995 Stock Plan was amended in April 2000 and
we will have submitted the amendment for approval by our stockholders prior to
completion of this offering. A total of 3,269,275 shares of common stock have
been reserved for issuance under the 1995 Stock Plan, as amended, of which
1,489,486 have been issued and are outstanding as of February 29, 2000. The
number of shares reserved for issuance under the 1995 Stock Plan, as amended,
will be increased on the first day of each of our fiscal years from 2001
through 2005 by the lesser of:
. 600,000 shares;
. 3% of the common stock outstanding on the last day of the
immediately preceding fiscal year; or
. a lesser number of shares as determined by our board of directors.
The 1995 Stock Plan, as amended, provides for the grant of incentive
stock options, as defined in Section 422 of the Internal Revenue Code, to
employees and the grant of nonstatutory stock options and stock purchase rights
to employees, non-employee directors and consultants. The plan may be
administered by our board or a committee appointed by the board. The
administrator of the 1995 Stock Plan, as amended, will determine number,
vesting schedule, and exercise price for options, or conditions for stock
purchase rights, granted under the 1995 Stock Plan, as amended, provided,
however, that an individual employee may not receive option grants and stock
purchase rights for more than 2,000,000 shares in any fiscal year. To the
extent an optionee would have the right in any calendar year to exercise for
the first time one or more incentive stock options for shares having an
aggregate fair market value in excess of $100,000 as of the date the options
were granted, the excess options will be treated as nonstatutory stock options.
Incentive stock options granted under the 1995 Stock Plan, as amended,
must have an exercise price equal to at least 100% of the fair market value of
the common stock on the date of the grant, and at least 110% of the fair market
value in the case of incentive stock options granted to an employee who holds
more than 10% of the total voting power of all classes of our stock or the
stock of any parent or subsidiary. Nonstatutory stock options granted under the
1995 Stock Plan, as amended, will have an exercise price as determined by the
administrator of the 1995 Stock Plan, as amended; provided, however, that the
exercise price of a nonstatutory stock option granted to certain of our
executive officers must equal at least 100% of the fair market value of the
common stock on the date of grant in order for that grant to qualify as
performance-based compensation under applicable tax law. Payment of the
exercise price may be made in cash or other forms of consideration approved by
the administrator.
The administrator determines the term of options, which may not exceed 10
years, or 5 years in the case of an incentive stock option granted to an
employee who holds more than 10% of the total voting power of all classes of
our stock or the stock of any parent or subsidiary. Generally an option may not
be transferred by the optionee other than by will or the laws of descent or
distribution and each option may be exercised during the lifetime of the
optionee only by such optionee. The administrator of the 1995 Stock Plan, as
amended, may grant nonstatutory stock options with limited transferability
rights under circumstances set forth in the plan.
Options granted under the 1995 Stock Plan, as amended, will generally
vest at the rate of 1/4th of the total number of shares subject to the options
twelve months after the date of grant and 1/48th of the total number of shares
subject to the options each month thereafter.
In addition to stock options, the administrator may issue stock purchase
rights under the 1995 Stock Plan, as amended, to employees, non-employee
directors and consultants. The administrator determines the number of shares,
price, terms, conditions and restrictions related to a grant of stock purchase
rights. The purchase price of a stock purchase right granted under the 1995
Stock Plan, as amended, will be as determined by the administrator. The period
during which the stock purchase right is held open is determined by the
49
administrator, but in no case shall this period exceed 30 days. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting us an option to
repurchase unvested shares at cost upon termination of the recipient's
relationship with us.
In the event we sell all or substantially all of our assets or merge with
or into another corporation, then each option may be assumed or an equivalent
option substituted by the successor corporation. However, if the successor
corporation does not agree to this assumption or substitution, the option or
stock purchase right will terminate. Upon the closing of the transaction,
outstanding repurchase rights will terminate unless assigned to the successor
corporation. The board of directors may amend, modify or terminate the 1995
Stock Plan, as amended, at any time as long as any amendment, modification or
termination does not impair vesting rights of plan participants and provided
that stockholder approval shall be required for an amendment to the extent
required by applicable law. The 1995 Stock Plan, as amended, will terminate in
November 2005 unless the board of directors terminates it earlier.
1999 Executive Stock Plan. The 1999 Executive Stock Plan was adopted by
our board of directors in May 1999. A total of 1,099,725 shares of common stock
have been reserved for issuance under the 1999 Executive Stock Plan. As of
February 29, 2000, 409,167 options were issued and outstanding or committed for
issuance with a weighted average exercise price of $4.67 per share and 117,276
shares remained available for future option or stock purchase right grants. We
do not intend to grant any additional options or stock purchase rights under
the 1999 Executive Stock Plan after the date of this offering. Unless
terminated earlier, the 1999 Executive Stock Plan will terminate in May 2009.
The terms of options and stock purchase rights under the 1999 Executive
Stock Plan are generally the same as those that may be issued under the 1995
Stock Plan, as amended, except with respect to the following features. The 1999
Executive Stock Plan does not impose a limitation on the number of shares
subject to options and stock purchase rights that may be issued to any
individual employee. Nonstatutory stock options and stock purchase rights
granted under the 1999 Executive Stock Plan are nontransferable in all cases
and must generally be granted with an exercise price or purchase price equal to
at least 85% of the fair market value of our common stock on the date of grant.
In the event we sell all or substantially all of our assets or merge with
or into another corporation, then each option may be assumed or an equivalent
option substituted by the successor corporation. However, if the successor
corporation does not agree to this assumption or substitution, the option or
stock purchase right will terminate. Upon the closing of the transaction,
outstanding repurchase rights will terminate unless assigned to the successor
corporation. In addition, the stock option agreements issued to optionees under
the 1999 Executive Stock Plan provide for accelerated vesting of specified
percentages of outstanding unvested options in the event that the optionee is
involuntarily terminated by us or our successor corporation within 12 months
following an asset sale or merger in which over 50% of our securities are
exchanged. The board of directors may amend, modify or terminate the 1999
Executive Stock Plan at any time as long as any amendment, modification or
termination does not impair vesting rights of plan participants and provided
that stockholder approval shall be required for an amendment to the extent
required by applicable law.
2000 Directors' Stock Option Plan. The 2000 Directors' Stock Option Plan
was adopted by our board of directors in April 2000. We will have submitted it
for approval by our stockholders prior to completion of this offering. A total
of 300,000 shares of common stock have been reserved for issuance under the
2000 Directors' Stock Option Plan, none of which have been issued as of the
date of this offering.
Under the 2000 Directors' Stock Option Plan, each person who is a non-
employee director on the completion of this offering will receive an automatic
initial grant of an option to purchase 10,000 shares of common stock and each
person who becomes a non-employee director after the completion of this
offering will receive an automatic initial grant of an option to purchase
20,000 shares of common stock upon appointment or election. The plan also
provides for annual grants, on the date of each annual meeting of our
stockholders, to
50
each non-employee director who has served on our board of directors for at
least six months. The annual grant to non-employee directors is an option to
purchase 5,000 shares of common stock. The initial options granted under the
plan will vest at the rate of 50% of the total number of shares subject to the
options on each of the first two anniversaries of the date of grant of the
initial options. The annual options granted under the plan will vest at the
rate of 100% of the number of shares subject to the options on the first
anniversary of the date of grant of the annual options. The exercise price of
all stock options granted under the 2000 Directors' Stock Option Plan shall be
equal to the fair market value of a share of our common stock on the date of
grant of the option. Options granted under this plan have a term of ten years.
However, options will terminate if they are not exercised within 12 months
after the director's death or disability or within 90 days after the director
ceases to serve as a director for any other reason.
In the event of a sale of all or substantially all of our assets or our
merger with or into another corporation, all outstanding options shall be
assumed or an equivalent option substituted by the successor corporation.
However, if the successor corporation does not agree to this assumption or
substitution, the option will terminate. In the event that an asset sale or
merger transaction results in a change in the ownership of more than 50% of the
total combined voting power of our outstanding securities, all outstanding
options shall become immediately exercisable prior to the closing of such
transaction.
The 2000 Directors' Stock Option Plan is designed to work automatically
without administration. However, to the extent administration is necessary, it
will be performed by the board of directors other than the director or
directors who have a personal interest at stake. Although the board of
directors may amend or terminate the 2000 Directors' Stock Option Plan, it may
not take any action that may adversely affect any outstanding option without
the consent of the optionee. The 2000 Directors' Stock Option Plan will have a
term of ten years unless terminated earlier. We have not issued any options
under the 2000 Directors' Stock Option Plan to date.
51
RELATED PARTY TRANSACTIONS
Since October 1, 1996, there has not been any transaction or series of
similar transactions to which we were or are a party in which the amount
involved exceeded or exceeds $60,000 and in which any of our directors or
executive officers, any holder of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest, other than:
. compensation arrangements, which are described where required
under "Management," and
. the transactions described below.
Agreements with Management
We have entered into indemnification agreements with our officers and
directors containing provisions that may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
Stock and Warrant Purchases
Common Stock
. In August 1999, we acquired all the outstanding stock of Goldreyer
Incorporated doing business as BedandBreakfast.com in exchange for
1,462,106 shares of our common stock. Of this amount, 523,987
shares of our common stock were transferred to Eric L. Goldreyer,
an executive officer, in exchange for his interest in Goldreyer
Incorporated.
. In September 1999, certain of our executive officers executed
promissory notes in connection with the exercise of options to
purchase our common stock held by them. The shares of common stock
acquired by these executive officers that had not vested are
subject to a repurchase option in our favor. Our repurchase option
lapses at the same rate the underlying options would have vested.
The interest rate on the notes is 5.89% per annum. The term of the
notes is four years. The notes are full recourse and secured by
pledges of common stock under a Pledge and Security Agreement. The
notes are for the following executive officers and amounts:
Name Amount
---- --------
Gregory A. Jones............................................... $600,000
Wolfgang Kitza................................................. 405,000
Eric L. Goldreyer.............................................. 328,350
Eric J. Christensen............................................ 283,110
Gregory S. Curhan.............................................. 99,999
Domenic A. Rinaldi............................................. 60,000
Scott Potter................................................... 85,560
Series B Preferred Stock
. In October 1996, we entered into a Note and Warrant Purchase
Agreement and Subordinated Promissory Note with Gregory A. Jones,
a director and executive officer, in the principal amount of
$200,000. We paid this note in full in January 1997. Pursuant to
this agreement we issued Mr. Jones a warrant to purchase 11,834
shares of Series B preferred stock at an exercise price of $3.38
per share.
. In January 1997, we sold 1,422,481 shares of Series B preferred
stock for $3.38 per share to various investors, including 295,858
shares to Technology Funding Partners III, L.P. and its
affiliates, which are affiliated with Gregory T. George, one of
our directors.
52
Series C Preferred Stock
. In October 1997, we issued warrants to purchase 60,724 shares of
Series C preferred stock at an exercise price of $3.70 per share
to various investors, including a warrant to purchase 10,134
shares to Technology Funding Partners III, L.P. and its
affiliates, which are affiliated with Gregory T. George, one of
our directors.
. In December 1997, we sold 1,764,479 shares of Series C preferred
stock for $3.70 per share to various investors, including the
following sales to entities affiliated with our directors:
- 253,377 shares to Technology Funding Partners III, L.P. and its
affiliates, which are affiliated with Gregory T. George, one of
our directors; and
- 810,809 shares to Walden Media and Information and Technology
Fund, L.P. and its affiliates, which are affiliated with Steven
L. Eskenazi, one of our directors.
. In March and April 1998, we sold 1,409,160 shares of Series C
preferred stock for $3.70 per share and issued warrants to
purchase 380,409 shares of Series C preferred stock at an exercise
price of $4.63 per share to various investors, including:
- warrants to purchase 30,371 shares to Technology Funding
Partners III, L.P. and its affiliates, which are affiliated
with Gregory T. George, one of our directors;
- 270,270 shares and a warrant to purchase 32,397 shares to Times
Mirror Company, an affiliate of Eagle New Media Investments,
LLC, both of which were affiliated with Thomas Unterman, one of
our directors; and
- warrants to purchase 97,189 shares to Walden Media and
Information and Technology Fund, L.P. and its affiliates, which
are affiliated with Steven L. Eskenazi, one of our directors.
. In March 1999, we sold 35,135 shares of Series C preferred stock
for $3.70 per share to E. Stanton McKee, one of our directors.
Series D Preferred Stock
. In March 1999, we sold 1,983,468 shares of Series D preferred
stock for $6.05 per share to various investors, including the
following sales to entities affiliated with our directors:
- 826,446 shares to Eagle New Media Investments, LLC, which was
affiliated with Thomas Unterman, one of our directors;
- 123,967 shares to Technology Funding Partners III, L.P. and its
affiliates, which are affiliated with Gregory T. George, one of
our directors; and
- 165,290 shares to Walden Media and Information and Technology
Fund, L.P. and its affiliates, which are affiliated with Steven
L. Eskenazi, one of our directors.
. In August 1999, we sold 25,000 shares of Series D preferred stock
to a family trust of Gregory S. Curhan, an executive officer and
trustee of the trust, for $6.05 per share.
. In September 1999, we sold 70,871 shares of Series D preferred
stock for $6.05 per share to various investors, including:
- 23,000 shares to Thomas Unterman, one of our directors;
- 30,871 shares to E. Stanton McKee, one of our directors; and
- 17,000 shares to Michael Song, who is affiliated with Eagle New
Media Investments, LLC.
53
Series E Preferred Stock
. In November and December 1999, we sold 2,518,259 shares of Series
E preferred stock for $11.62 per share to various investors,
including the following sales to our directors or entities
affiliated with our directors:
- 143,626 shares to Eagle New Media Investments, LLC, which was
affiliated with Thomas Unterman, one of our directors;
- 45,932 shares to Technology Funding Partners V, L.P., which is
affiliated with Gregory T. George, one of our directors;
- 64,544 shares to Walden Media and Information and Technology
Fund, L.P. and its affiliates, which are affiliated with Steven
L. Eskenazi, one of our directors; and
- 8,605 shares to E. Stanton McKee, one of our directors.
The following table summarizes the shares of preferred stock purchased
by 5% stockholders affiliated with directors, other 5% shareholders of
WorldRes.com and persons and entities associated with them in private
placement transactions. Each share of each series of preferred stock converts
automatically upon closing of the offering into one share of common stock. See
"Principal Stockholders."
Series B Series C Series D Series E
Entities Affiliated with Directors Preferred Preferred Preferred Preferred
- ---------------------------------- --------- --------- --------- ---------
Walden Media and Information and
Technology Fund, L.P.(1)........... -- 907,998(2) 165,290 64,544
Technology Funding Partners III,
L.P.(3)............................ 295,858 293,882(4) 123,967 45,392
Other 5% Stockholders
- ---------------------
Eagle New Media Investments,
LLC(5)............................. -- 302,667(6) 826,446 143,626
Sandler Capital IV Partners, L.P.... -- 635,601(7) 148,760 86,058
Fayez Sarofim Investment Partnership
No. 5, L.P......................... 295,858 369,001(8) 82,644 172,117
Scripps Ventures, LLC............... 591,716 133,769(9) -- --
- --------
(1) Includes shares held by Walden EDB Partners, L.P., Walden Japan Partners,
L.P., Walden-SBIC, L.P. and Walden Technology Ventures II, L.P.
(2) Includes 97,189 shares of Series C preferred stock issuable upon the
exercise of warrants.
(3) Includes shares held by Technology Funding Venture Partners IV, an
Aggressive Growth Fund, L.P., Technology Funding Venture Partners V, an
Aggressive Growth Fund, L.P. and Technology Funding Partners III, L.P.
(4) Includes 40,505 shares of Series C preferred stock issuable upon the
exercise of warrants.
(5) Includes shares held by the Times Mirror Company, which is an affiliate of
Eagle New Media Investments, LLC.
(6) Includes 32,397 shares of Series C preferred stock issuable upon the
exercise of warrants.
(7) Includes 68,034 shares of Series C preferred stock issuable upon the
exercise of warrants.
(8) Includes 48,547 shares of Series C preferred stock issuable upon the
exercise of warrants.
(9) Includes 32,418 shares of Series C preferred stock issuable upon the
exercise of warrants.
For descriptions of other transactions between management and us, see
executive compensation.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 29, 2000 and as adjusted to
reflect the sale of the common stock offered by WorldRes.com under this
prospectus by:
. each of our directors and Named Officers;
. all directors and executive officers as a group; and
. each person who is known to us to own beneficially more than 5% of
our common stock.
Except as otherwise noted, the address of each person listed in the table
is c/o WorldRes.com, 1510 Fashion Island Boulevard, Suite 100, San Mateo, CA
94404. The table includes all shares of common stock issuable within 60 days of
February 29, 2000 upon the exercise of options and other rights beneficially
owned by the indicated stockholders on that date. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to shares. To
our knowledge, except under applicable community property laws or as otherwise
indicated, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. The applicable
percentage of ownership for each stockholder is based on 14,107,229 shares of
common stock outstanding as of February 29, 2000, together with applicable
options for that stockholder. Shares of common stock issuable upon exercise of
options and other rights beneficially owned are deemed outstanding for the
purpose of computing the percentage ownership of the person holding these
options and other rights, but are not deemed outstanding for computing the
percentage ownership of any other person.
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering(1) Offering(1)
----------------- -----------------
Number Percent Number Percent
--------- ------- --------- -------
Gregory A. Jones(2)....................... 591,390 4.2% 591,390 %
Paul N. Wyatt(3).......................... 170,000 1.2 170,000
Scott Potter.............................. 83,139 0.6 83,139
Domenic A. Rinaldi(4)..................... 170,000 1.2 170,000
Eric J. Christensen(5).................... 534,667 3.8 534,667
Steven L. Eskenazi(6)..................... 1,137,832 8.1 1,137,832
Gregory T. George(7)...................... 1,043,507 7.4 1,043,507
E. Stanton McKee(8)....................... 100,378 0.7 100,378
Thomas Unterman........................... 23,000 0.2 23,000
Walden Media and Information and
Technology Fund, L.P.(9)
750 Battery Street, 7th Floor
San Francisco, CA 94111.................. 1,137,832 8.1 1,137,832
Technology Funding Partners III, L.P.(10)
2000 Alameda de las Pulgas
San Mateo, CA 94403...................... 1,043,507 7.4 1,043,507
Eagle New Media Investments, LLC(11)
220 W. 1st Street, 2nd Floor
Los Angeles, CA 90053.................... 1,272,739 9.0 1,272,739
Sandler Capital IV Partners, L.P.(12)
767 5th Avenue
New York, NY 10153....................... 870,419 6.2 870,419
Fayez Sarofim Investment Partnership No.
5, L.P. (13)
Two Houston Center, Suite 2907
Houston, TX 77010........................ 919,620 6.5 919,620
Scripps Ventures, LLC (14)
200 Madison Avenue
New York, NY 10016....................... 725,485 5.1 725,485
All directors and executive officers as a
group (12 persons) (15).................. 4,530,741 32.1 4,530,741
55
- --------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Includes options to purchase 347,500 shares and warrants to purchase 14,052
shares. Excludes 100,000 shares held by the Jones Family Revocable Trust of
which Mr. Jones is not the trustee.
(3) Includes options to purchase 115,625 shares exercisable within 60 days of
February 29, 2000.
(4) Includes options to purchase 127,946 shares exercisable within 60 days of
February 29, 2000.
(5) Includes options to purchase 127,500 shares exercisable within 60 days of
February 29, 2000.
(6) All shares are held by entities related to Walden Media and Information and
Technology Fund, L.P. Mr. Eskenazi is a manager and limited partner of
Walden Media and Information and Technology Fund, L.P. and disclaims
ownership of such shares in which he has no pecuniary interest. See Note
(9).
(7) All shares are held by entities related to Technology Funding Partners III,
L.P. Mr. George is managing general partner of Technology Funding Partners
III, L.P. and disclaims ownership of such shares in which he has no
pecuniary interest. See Note (10).
(8) Includes options to purchase 25,767 shares.
(9) Includes 702,374 shares and warrants to purchase 64,794 shares held by
Walden Media and Information and Technology Fund, L.P. ("Walden Media"),
34,680 shares and warrants to purchase 3,239 shares held by Walden EDB
Partners, L.P., 34,680 shares and warrant to purchase 3,239 shares held by
Walden Japan Partners, L.P., 216,856 shares and warrants to purchase 20,734
shares held by Walden-SBIC, L.P. and 52,053 shares and warrants to purchase
5,183 shares held by Walden Technology Ventures II, L.P., which are related
to Walden Media. Mr. Eskenazi, a director of WorldRes.com, is a manager and
limited partner of the general partnership of Walden Media and disclaims
ownership of such shares in which he has no pecuniary interest. See Note
(6).
(10) Includes 434,392 shares and warrants to purchase 24,305 shares held by
Technology Funding Partners III, L.P. ("Technology Funding III"), 268,210
shares and warrants to purchase 16,198 shares held by Technology Fund II
Pte Ltd, Singapore, 155,918 shares and warrants to purchase 9,721 shares
held by Technology Funding Venture Partners IV, an Aggressive Growth Fund,
L.P., 117,127 shares and warrants to purchase 6,479 shares held Technology
Funding Venture Partners V, an Aggressive Growth Fund, L.P. and 11,157
shares held by Technology Funding Venture Partners VI, L.L.C., which are
related to Technology Funding III. Mr. George, a director of WorldRes.com,
is a managing general partner of Technology Funding III, and disclaims
ownership of such shares in which he has no pecuniary interest. See Note
(7).
(11) Includes 970,072 shares held by Eagle New Media Investments, LLC and
302,667 shares held by The Times Mirror Company.
(12) Includes warrants to purchase 68,034 shares.
(13) Includes warrants to purchase 48,547 shares.
(14) Includes warrants to purchase 32,418 shares.
(15) Includes 3,251,513 shares and warrants to purchase shares held by entities
affiliated with certain directors as described in Notes (6) and (7) above
and 1,279,228 shares issuable pursuant to the exercise of outstanding
options and warrants.
56
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, WorldRes.com will be authorized to
issue 50,000,000 shares of common stock, $0.001 par value per share, and
2,000,000 shares of undesignated preferred stock, $0.001 par value per share.
All currently outstanding shares of preferred stock will be converted into
common stock upon the closing of this offering.
Common Stock
As of February 29, 2000 there were 14,239,932 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
Series A preferred stock, Series B preferred stock, Series C preferred stock,
Series D preferred stock, and Series E preferred stock, and the conversion of
such shares into common stock held of record by 186 stockholders. Options to
purchase 1,898,653 shares of common stock were also outstanding. There will be
shares of common stock outstanding (assuming no exercise of the
underwriter's over-allotment option or exercise of outstanding options under
our stock plans after February 29, 2000) after giving effect to the sale of the
shares in this offering.
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of WorldRes.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
prior distribution rights of any outstanding preferred stock. The common stock
has no preemptive or conversion rights or other subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon completion of this offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into shares of common stock and automatically retired.
Thereafter, the Board of Directors will have the authority, without further
action by the stockholders, to issue up to 2,000,000 shares of preferred stock,
$0.001 par value, in one or more series. The Board of Directors will also have
the authority to designate the rights, preferences, privileges and restrictions
of each such series, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series.
The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of WorldRes.com without further
action by the stockholders. The issuance of preferred stock with voting and
conversion rights may also adversely affect the voting power of the holders of
common stock. In certain circumstances, an issuance of preferred stock could
have the effect of decreasing the market price of the common stock. As of the
closing of the offering, no shares of preferred stock will be outstanding. We
currently have no plans to issue any shares of preferred stock.
Warrants
At February 29, 2000 there were warrants outstanding to purchase an
aggregate of 637,840 shares of capital stock. Generally, each warrant contains
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant under certain circumstances,
including stock dividends, stock splits, reorganizations, reclassifications,
consolidations and certain dilutive issuances of securities at prices below the
then existing warrant exercise price.
Registration Rights
The holders of 9,676,817 shares of common stock (assuming the conversion
of all outstanding preferred stock upon completion of this offering) and
options and warrants to purchase 520,658 shares of
57
common stock or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between WorldRes.com and the holders
of these securities. Subject to limitations in the agreement, the holders of at
least 40% of these securities then outstanding may require, on two occasions
beginning 180 days after the date of this prospectus, that WorldRes.com use its
best efforts to register these securities for public resale if Form S-3 is not
available. If WorldRes.com registers any of its common stock either for its own
account or for the account of other security holders, the holders of these
securities are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering. The holders of these securities may also
require WorldRes.com, not more than twice in any twelve-month period, to
register all or a portion of these securities on Form S-3 when the use of that
form becomes available to WorldRes.com, provided, among other limitations, that
the proposed aggregate selling price, net of any underwriters' discounts or
commissions, is at least $1,000,000. WorldRes.com will be responsible for
paying all registration expenses, and the holders selling their shares will be
responsible for paying all selling expenses.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of us and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of WorldRes.com to negotiate with us first.
We believe that the benefits of increased protection of our potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of
WorldRes.com without further action by the stockholders.
Our charter and bylaws, that become effective upon the completion of this
offering, provide that stockholder action can be taken only at an annual or
special meeting of stockholders and may not be taken by written consent. Our
bylaws provide that special meetings of stockholders can be called only by the
Board of Directors, the Chairman of the Board, if any, the President and
holders of 50% of the votes entitled to be cast at a meeting. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by the Board of Directors,
the Chairman of the Board, if any, the President or any such 50% holder. Our
Bylaws set forth an advance notice procedure with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before a
meeting of stockholders. In addition, our charter provides that when we are no
longer subject to the provisions of Section 2115 of the California Corporations
Code, the board of directors will be divided into three classes, each serving
staggered three-year terms. The classification of our board could have the
effect of making it more difficult for a third party to acquire control of us,
because it would typically take more than a year for our stockholders to elect
a majority of our board.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is Chase Mellon
Shareholder Services, LLC. The Transfer Agent's address and telephone number is
450 West 33rd Street, 10th Floor, New York, NY 10001, (212) 273-8040.
58
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for WorldRes.com common
stock. We cannot predict if future sales of our common stock, or the
availability of our common stock for sale, will depress the market price for
our common stock or our ability to raise capital by offering equity securities.
Sales of substantial amounts of common stock, or the perception that these
sales could occur, may depress prevailing market prices for the common stock.
After this offering, approximately shares of common stock will be
outstanding. All of the shares sold in this offering will be freely tradable,
except for any shares purchased by affiliates of WorldRes.com. The remaining
shares of common stock outstanding after this offering are "restricted
securities" within the meaning of Rule 144 under the Securities Act or are
subject to lockup agreements. These remaining shares will be available for sale
in the public market as follows:
Number of Shares Date of Availability
---------------- --------------------
As of the date of this prospectus
180 days after the date of this prospectus, if the sales
meet certain restrictions under the federal securities laws
At various times thereafter, if the sales meet certain
restrictions under the federal securities laws
FleetBoston Robertson Stephens Inc. may release all or a portion of the
shares subject to these lockup agreements at any time without notice. See
"Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then
outstanding, which will equal approximately shares
immediately after this offering; or
. the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period for any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
59
their shares. However, substantially all Rule 701 shares are subject to lockup
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lockup agreements or no sooner than 90 days after the
offering upon obtaining the prior written consent of FleetBoston Robertson
Stephens Inc.
In addition, we intend to file registration statements on Form S-8 under
the Securities Act as promptly as possible after the effective date registering
shares of common stock subject to outstanding options or reserved for issuance
under our stock plans. As of February 29, 2000, options to purchase a total of
1,898,653 shares were outstanding under our stock plans. The S-8 registration
statement will become effective immediately upon filing, at which time subject
to the satisfaction of applicable exercisability periods, Rule 144 volume
limitations applicable to affiliates and, in certain cases, the agreements with
the underwriters referred to above, shares of Common Stock to be issued upon
exercise of outstanding options granted pursuant to our stock plans will be
available for immediate resale in the open market.
60
UNDERWRITING
FleetBoston Robertson Stephens Inc., J.P. Morgan Securities Inc. and
Prudential Securities Incorporated are acting as representatives (the
"Representatives") of each of the underwriters named below. Subject to the
terms and conditions set forth in a purchase agreement (the "Purchase
Agreement") among us and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite
its name below.
Number
Underwriters of Shares
------------ ---------
FleetBoston Robertson Stephens Inc...............................
J.P. Morgan Securities Inc. .....................................
Prudential Securities Incorporated...............................
------
Total.....................................................
======
In the Purchase Agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to each such agreement if any of the shares of
common stock being sold pursuant to such agreement are purchased. In the event
of a default by an underwriter, the Purchase Agreement provides that, in
certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the Purchase Agreement may be terminated.
The Representatives have advised us that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $
per share of common stock. The underwriters may allow, and such dealers may re-
allow, a discount not in excess of $ per share of common stock to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of Common Stock offered hereby for
certain individuals who have expressed an interest in purchasing such shares of
Common Stock in this offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as other shares offered
hereby.
We have granted options to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise these options solely to cover over-allotments, if
any, made on the sale of the common stock offered hereby. To the extent that
the underwriters exercise these options, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
common stock proportionate to such underwriters initial amount reflected in the
foregoing table.
61
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
Per Share Without Option With Option
--------- -------------- -----------
Public Offering Price................ $ $ $
Underwriting Discount................ $ $ $
Proceeds, before expenses, to us..... $ $ $
The expenses of the offerings (exclusive of the underwriting discount and
commissions) are estimated at $ and are payable by us.
Prudential Securities Incorporated facilitates the marketing of new
issues online through its PrudentialSecurities.com division. Clients of
Prudential AdvisorSM, a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial
advisors.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
We and our executive officers, directors and certain stockholders
beneficially owning in the aggregate [ ] shares of common stock have
agreed, subject to certain exceptions, not to directly or indirectly (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of common stock or
securities convertible into or exchangeable or exercisable for or repayable
with common stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing; (2) enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the common stock whether any such swap or
transaction is to be settled by delivery of common stock or other securities,
in cash or otherwise; or (3) make any demand for, or exercise any right with
respect to, the registration of any share of common stock or any securities
convertible into or exchangeable for common stock, without the prior written
consent of FleetBoston Robertson Stevens Inc. on behalf of the underwriters for
a period of 180 days after the date of this prospectus. FleetBoston Robertson
Stevens Inc. may give its consent to do any of these things, and may release
all or a portion of the shares subject to these lockup agreements, at any time
without notice.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the Representatives. The factors to be considered
in determining the initial public offering price, in addition to prevailing
market conditions, are expected to be price-revenue and discounted price-
earnings ratios of publicly traded companies that the Representatives believe
to be comparable to us, certain of our financial information, the history of,
and the prospects for, us and the industry in which we compete, and an
assessment of our management, our past and present operations, the prospects
for, and timing of, our future revenues, and the present state of our
development. There can be no assurance that an active trading market will
develop for the common stock or that the common stock will trade in the public
market subsequent to this offering at or above the initial public offering
price.
The underwriters do not expect sales of the common stock to be made to
any accounts over which they exercise discretionary authority to exceed 5% of
the number of shares being offered hereby.
The underwriters do not intend to confirm sales of the common stock
offered hereby to any accounts over which they exercise discretionary
authority.
62
We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of this offering.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase the common stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering contemplated hereby, i.e., if they sell more
shares of common stock than are set forth on the cover page of this prospectus,
the Representatives may reduce that short position by purchasing common stock
in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment options described
above.
The Representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the Representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of the common stock.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued.
Entities affiliated with FleetBoston Robertson Stephens Inc. purchased an
aggregate of 99,751 shares and warrants to purchase 7,043 shares preferred
stock of WorldRes.com, on the same terms as other investors in private
placements by WorldRes.com. In addition, FleetBoston Robertson Stephens Inc.
received from us a fee of approximately $600,000 for acting as placement agent
in connection with the private placement of our Series E preferred stock.
63
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
WorldRes.com by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Skadden, Arps, Slate, Meagher and Flom LLP, Palo Alto,
California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at September 30, 1998 and 1999, and for each of the three
years ended September 30, 1999, as detailed in their report. We have included
our consolidated financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The financial statements of Goldreyer Incorporated included in this
prospectus and elsewhere in the registration statement to the extent and for
the periods indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding Goldreyer Incorporated's ability to continue as a going
concern as discussed in Note 1 to the financial statements.
ADDITIONAL INFORMATION AVAILABLE TO YOU
WorldRes.com has 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 hereby. This prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules. For further information with respect to WorldRes.com and the common
stock offered hereby, reference is made to the Registration Statement and to
the exhibits and schedules. Statements made in this prospectus concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement and the exhibits and schedules
may be inspected without charge at the public reference facilities maintained
by the SEC 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, NY 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
Registration Statement may be obtained from the SEC's offices upon payment of
fees prescribed by the SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is http://www.sec.gov.
64
INDEX TO FINANCIAL STATEMENTS
WORLDRES.COM
Consolidated Financial Information
Page
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets at September 30, 1998 and 1999, and December
31, 1999................................................................ F-3
Consolidated Statements of Operations for the years ended September 30,
1997, 1998, 1999, and three months ended December 31, 1998 and 1999..... F-4
Consolidated Statement of Shareholders' Equity for the years ended
September 30, 1996, 1997, 1998, 1999, and three months ended December
31, 1999................................................................ F-5
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1998, 1999, and three months ended December 31, 1998 and 1999..... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Pro Forma Condensed Combined Consolidated Financial Information
Unaudited Pro Forma Condensed Combined Consolidated Statement of
Operations for the year ended September 30, 1999........................ F-21
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
Audited Financial Information
Report of Independent Public Accountants................................. F-23
Balance Sheets at December 31, 1997 and 1998............................. F-24
Statements of Operations for the years ended December 31, 1996, 1997, and
1998.................................................................... F-25
Statement of Stockholders' Equity (Net Capital Deficiency) for the years
ended December 31, 1996, 1997, and 1998................................. F-26
Statements of Cash Flows for the years ended December 31, 1996, 1997, and
1998.................................................................... F-27
Notes to Financial Statements............................................ F-28
Unaudited Interim Financial Information
Unaudited Condensed Statements of Operations for the periods from January
1 to August 10, 1998 and 1999........................................... F-34
Unaudited Statements of Cash Flows for the periods from January 1 to
August 10, 1998 and 1999................................................ F-35
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
WorldRes.com
We have audited the accompanying consolidated balance sheets of WorldRes.com as
of September 30, 1998 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
ended September 30, 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide 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 WorldRes.com at September 30,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
October 15, 1999,
except for the paragraphs under the caption "Convertible Preferred Stock" in
Note 6, as to which the date is
December 17, 1999
F-2
WORLDRES.COM
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Pro Forma
Shareholders'
September 30, December 31, Equity at
------------------ ------------ December 31,
1998 1999 1999 1999
-------- -------- ------------ -------------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents..... $ 4,873 $ 4,510 $ 24,242
Accounts receivable, net of
allowance for doubtful
accounts of $17 and $58 at
September 30, 1998 and 1999,
and $64 at December 31,
1999......................... 142 562 548
Prepaid expenses and other
current assets............... 205 700 1,863
-------- -------- --------
Total current assets........ 5,220 5,772 26,653
Property and equipment, net..... 954 2,335 3,871
Intangible assets............... -- 5,283 5,041
Other assets.................... 43 876 807
-------- -------- --------
$ 6,217 $ 14,266 $ 36,372
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............. $ 227 $ 470 $ 1,851
Accrued liabilities........... 252 2,060 2,168
Deferred revenue.............. -- 175 227
Current portion of capital
lease obligations............ 324 460 468
-------- -------- --------
Total current liabilities... 803 3,165 4,714
Capital lease obligations and
other long term liabilities.... 505 690 642
Commitments
Shareholders' equity:
Preferred stock: $0.001 par
value; none authorized at
September 30, 1998 and 1999,
and December 31, 1999
(2,000,000 shares pro forma);
none issued and outstanding
at September 30, 1998 and
1999, December 31, 1999 and
pro forma.................... -- -- -- --
Convertible preferred stock:
$0.001 par value, issuable in
series, 10,882,024,
12,852,624 and 16,011,922
shares authorized at
September 30, 1998, 1999 and
December 31, 1999 (none pro
forma); 5,033,319, 7,157,839
and 9,676,098 shares issued
and outstanding at September
30, 1998, 1999 and December
31, 1999 (none pro forma);
aggregate liquidation
preference of $17,206,
$29,953 and $59,215 at
September 30, 1998, 1999 and
December 31, 1999 (none pro
forma)....................... 5 7 10 --
Common stock: $0.001 par
value; 24,000,000, 25,000,000
and 25,000,000 shares
authorized at September 30,
1998, 1999 and December 31,
1999 (50,000,000 pro forma);
775,567, 3,131,301 and
3,162,956 shares issued and
outstanding at September 30,
1998, 1999 and December 31,
1999 (14,214,193 pro forma).. 1 3 3 14
Additional paid-in capital.... 17,196 42,121 71,459 71,458
Notes receivable from
officers..................... -- (1,862) (1,862) (1,862)
Deferred stock compensation... -- (4,111) (3,677) (3,677)
Accumulated deficit........... (12,293) (25,747) (34,917) (34,917)
-------- -------- -------- --------
Total shareholders' equity.. 4,909 10,411 31,016 31,016
-------- -------- -------- --------
$ 6,217 $ 14,266 $ 36,372 $ 36,372
======== ======== ======== ========
See accompanying notes.
F-3
WORLDRES.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Years Ended Three Months Ended
September 30, December 31,
-------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- -------- --------- ---------
(Unaudited)
Net revenue:
Reservation................ $ 71 $ 294 $ 1,322 $ 151 $ 479
Other...................... -- 162 406 105 179
------- ------- -------- --------- ---------
Total net revenue........ 71 456 1,728 256 658
------- ------- -------- --------- ---------
Cost of revenue:
Reservation................ 4 30 191 15 65
Other...................... -- 28 41 15 27
------- ------- -------- --------- ---------
Total cost of revenue.... 4 58 232 30 92
------- ------- -------- --------- ---------
Gross profit................. 67 398 1,496 226 566
Operating expenses:
Technology and
development............... 1,123 1,531 3,178 667 2,005
Sales and marketing........ 2,461 3,948 8,588 1,322 5,511
General and
administrative............ 766 1,150 2,204 317 876
Deferred stock compensation
and warrant expense....... -- -- 742 15 762
Amortization of intangible
assets.................... -- -- 386 -- 694
------- ------- -------- --------- ---------
Total operating expenses..... 4,350 6,629 15,098 2,321 9,848
------- ------- -------- --------- ---------
Loss from operations......... (4,283) (6,231) (13,602) (2,095) (9,282)
Interest and other income,
net......................... 28 236 268 50 152
Interest expense............. (95) (152) (155) (30) (40)
------- ------- -------- --------- ---------
Net loss..................... $(4,350) $(6,147) $(13,489) (2,075) $ (9,170)
======= ======= ======== ========= =========
Basic and diluted net loss
per share................... $(10.77) $(10.80) $ (18.03) $ (3.12) $ (4.31)
======= ======= ======== ========= =========
Shares used in computing
basic and diluted net loss
per share................... 404 569 748 666 2,128
======= ======= ======== ========= =========
Pro forma basic and diluted
net loss per share
(unaudited)................. $ (1.96) $ (0.80)
======== =========
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited).. 6,865 11,427
======== =========
Technology and development expenses exclude $155,000 in the year ended
September 30, 1999, and $103,000 in the three months ended December 31, 1999,
relating to and therefore included in deferred stock compensation and warrant
expense.
Sales and marketing expenses exclude $292,000 in the year ended September
30, 1999, and $228,000 in the three months ended December 31, 1999, relating to
and therefore included in deferred stock compensation and warrant expense.
General and administrative expenses exclude $295,000 in the year ended
September 30, 1999, and $15,000 and $431,000 in the three months ended December
31, 1998 and 1999, relating to and therefore included in deferred stock
compensation and warrant expense.
See accompanying notes.
F-4
WORLDRES.COM
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Convertible Notes
Preferred Stock Common Stock Additional Receivable Deferred Total
---------------- ---------------- Paid-In from Stock Accumulated Shareholders'
Shares Amount Shares Amount Capital Officers Compensation Deficit Equity
--------- ------ --------- ------ ---------- ---------- ------------ ----------- -------------
Balance at September 30,
1996................... 437,199 $ 1 704,000 $ 1 $ 696 -- -- $ (1,796) $(1,098)
Issuance of common stock
to employees upon
exercise of stock
options................ -- -- 58,144 -- 18 -- -- -- 18
Issuance of Series B
convertible preferred
stock, net of issuance
costs.................. 1,422,481 1 -- -- 4,759 -- -- -- 4,760
Net loss................ -- -- -- -- -- -- -- (4,350) (4,350)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at September 30,
1997................... 1,859,680 2 762,144 1 5,473 -- -- (6,146) (670)
Issuance of common stock
to employees upon
exercise of stock
options................ -- -- 13,423 -- 2 -- -- -- 2
Issuance of Series C
convertible preferred
stock, net of issuance
costs.................. 3,173,639 3 -- -- 11,718 -- -- -- 11,721
Issuance of warrants.... -- -- -- -- 3 -- -- 3
Net loss................ -- -- -- -- -- -- -- (6,147) (6,147)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at September 30,
1998................... 5,033,319 5 775,567 1 17,196 -- -- (12,293) 4,909
Issuance of common stock
to employees upon
exercise of stock
options................ -- -- 893,628 1 2,006 $(1,862) -- -- 145
Issuance of Series C
convertible preferred
stock, net of issuance
costs.................. 35,726 -- -- -- 132 -- -- -- 132
Issuance of Series C
convertible preferred
stock upon exercise of
warrants............... 9,455 -- -- -- 39 -- -- -- 39
Issuance of Series D
convertible preferred
stock, net of issuance
costs.................. 2,079,339 2 -- -- 12,553 -- -- -- 12,555
Issuance of common stock
in exchange for
BedandBreakfast.com's
common stock........... -- -- 1,462,106 1 7,821 -- $(2,479) -- 5,343
Deferred stock
compensation related to
grant of stock
options................ -- -- -- -- 2,374 -- (2,374) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 742 -- 742
Currency translation
adjustment............. -- -- -- -- -- -- -- 35 35
Net loss................ -- -- -- -- -- -- -- (13,489) (13,489)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at September 30,
1999................... 7,157,839 7 3,131,301 3 42,121 (1,862) (4,111) (25,747) 10,411
Issuance of common stock
to employees upon
exercise of stock
options (unaudited).... -- -- 16,295 -- 31 -- -- -- 31
Issuance of Series E
convertible preferred
stock, net of issuance
costs.................. 2,518,259 3 -- -- 28,717 -- -- -- 28,720
Issuance of common stock
in exchange for
Munsenware common stock
(unaudited)............ -- -- 15,000 -- 114 -- -- -- 114
Deferred stock
compensation related to
grant of stock options
(unaudited)............ -- -- -- -- 309 -- (309) -- --
Issuance of warrants for
services (unaudited)... -- -- -- -- 167 -- -- -- 167
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 743 -- 743
Net loss (unaudited).... (9,170) (9,170)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at December 31,
1999 (unaudited) ...... 9,676,098 $10 3,162,596 $ 3 $71,459 $(1,862) $(3,677) $(34,917) $31,016
========= === ========= === ======= ======= ======= ======== =======
See accompanying notes.
F-5
WORLDRES.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended Three Months Ended
September 30, December 31,
-------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- -------- --------- ---------
(Unaudited)
Operating activities
Net loss..................... $(4,350) $(6,147) $(13,489) $(2,075) $ (9,170)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 129 259 636 117 357
Deferred stock compensation
and warrant expense....... -- -- 742 15 762
Amortization of intangible
assets.................... -- -- 386 -- 694
Changes in operating assets
and liabilities:
Accounts receivable...... (7) (132) (388) (104) 14
Prepaid expenses and
other current assets.... (2) (163) (463) 81 (1,015)
Other assets............. -- (17) (833) (1) 69
Accounts payable......... 151 (63) 40 (18) 1,381
Accrued liabilities...... 76 33 1,719 249 108
Deferred revenue......... -- -- (32) -- 52
------- ------- -------- --------- ---------
Net cash used in operating
activities.................. (4,003) (6,230) (11,682) (1,736) (6,748)
------- ------- -------- --------- ---------
Investing activities
Purchases of property and
equipment................... (14) (225) (1,466) (35) (1,893)
Payment for purchase of
Munsenware.................. -- -- -- -- (300)
------- ------- -------- --------- ---------
Net cash used in investing
activities.................. (14) (225) (1,466) (35) (2,193)
------- ------- -------- --------- ---------
Financing activities
Proceeds from issuance of
convertible preferred stock,
net......................... 3,952 10,598 12,725 -- 28,720
Proceeds from issuance of
common stock................ 18 2 146 2 31
Proceeds from issuance of
note payable to bank, net... 300 -- -- -- --
Repayment of note payable to
bank........................ -- (500) -- -- --
Proceeds from issuance of
note payable to officer..... 200 -- -- -- --
Repayment of note payable to
officer..................... (275) -- -- -- --
Proceeds from issuance of
convertible debt............ 100 1,123 -- -- --
Proceeds from issuance of
warrants.................... -- 3 -- -- --
Principal payments under
capital lease obligations... (62) (202) (86) (90) (78)
------- ------- -------- --------- ---------
Cash provided by financing
activities.................. 4,233 11,024 12,785 (88) 28,673
------- ------- -------- --------- ---------
Net increase (decrease) in
cash and cash equivalents... 216 4,569 (363) (1,859) 19,732
Cash and cash equivalents at
beginning of period......... 88 304 4,873 4,873 4,510
------- ------- -------- --------- ---------
Cash and cash equivalents at
end of period............... $ 304 $ 4,873 $ 4,510 $ 3,014 $ 24,242
======= ======= ======== ========= =========
Supplemental disclosure of
cash flow information
Cash paid for interest....... $ 110 $ 152 $ 153 $ 27 $ 39
======= ======= ======== ========= =========
Supplemental disclosure of
noncash transactions
Conversion of debt to
convertible preferred
stock....................... $ 808 $ 1,123 $ -- $ -- $ --
======= ======= ======== ========= =========
Equipment acquired under
capital lease arrangements.. $ 263 $ 590 $ 408 $ -- $ --
======= ======= ======== ========= =========
Deferred stock compensation.. $ -- $ -- $ 2,374 $ -- $ 309
======= ======= ======== ========= =========
Issuance of common stock in
exchange for
BedandBreakfast.com's common
stock....................... $ -- $ -- $ 5,343 $ -- $ --
======= ======= ======== ========= =========
See accompanying notes.
F-6
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
1. Organization and Summary of Significant Accounting Policies
Description of Business
WorldRes.com ("WorldRes" or the "Company"), formerly WorldRes, Inc., was
incorporated in California in July 1995. WorldRes provides a leading business-
to-business e-commerce solution for online marketing and reservations to the
highly fragmented global hotel industry. WorldRes' Internet-based reservation
system connects hotels to travel web sites creating an e-commerce network. This
network enables these web sites to provide travelers with the ability to
collect information and make real-time, confirmed hotel reservations online.
WorldRes has incurred operating losses from inception to date. WorldRes
had an accumulated deficit of $25.7 million at September 30, 1999, and $34.9
million at December 31, 1999. WorldRes' activities have been primarily financed
with the net proceeds from private placements of equity securities, such as a
$28.7 million Series E preferred stock issuance discussed in Note 6, as well as
capital equipment lease financing. WorldRes anticipates the need to raise
additional capital through the issuance of debt or equity securities. Such
financing may not be available on terms satisfactory to WorldRes, if at all.
Interim Financial Information
The financial information as of December 31, 1999 and for the three
months ended December 31, 1998 and 1999 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results for
the three months ended December 31, 1999 are not necessarily indicative of
results to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of WorldRes
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Foreign Currency Translation
WorldRes translates the assets and liabilities of its foreign
subsidiaries stated in local functional currencies to U.S. dollars at the rates
of exchange in effect at the end of the period. Revenues and expenses are
translated using rates of exchange in effect during the period. Gains and
losses from currency translation are included in shareholders' equity. Currency
transaction gains or losses are recognized in current operations and have not
been significant to its operating results in any period.
Cash and Cash Equivalents
WorldRes considers all highly liquid investment securities with
maturities from date of purchase of three months or less to be cash
equivalents.
F-7
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
Concentrations
Financial instruments that potentially subject WorldRes to concentrations
of credit risk consist principally of investments in debt securities and
accounts receivable. WorldRes is exposed to credit risks in the event of
default by the financial institutions or issuers of investments to the extent
recorded on the balance sheet. WorldRes generally does not require collateral
from its customers. WorldRes maintains an allowance for potential credit losses
and such losses have been within management's expectations. No allowance for
doubtful debts was deemed necessary during fiscal 1997. There were no write-
offs of uncollectible accounts during fiscal 1997. During fiscal 1998, 1999,
and the quarter ended December 31, 1999, WorldRes increased its allowance for
doubtful accounts by $31,000, $177,000 and $8,000, respectively and write-offs
of uncollectible accounts totaled $14,000, $136,000 and $1,000, respectively.
No individual customer accounted for greater than 10% of the total
revenues during fiscal 1997, 1998, 1999, or during the three months ended
December 31, 1998 or 1999.
Fair Value of Financial Instruments
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to WorldRes for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
Property and Equipment
Property and equipment, including equipment leased under capital leases,
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided on a straight-line basis over the
lesser of the estimated useful life, generally three years, or the lease term
of respective assets.
Development Costs
Since October 1, 1999, WorldRes has accounted for internal use software
costs, including web site development costs, in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). In accordance with SOP 98-1, WorldRes
capitalizes its costs to develop software for its web site and other internal
uses when preliminary development efforts are successfully completed and
management has authorized and committed project funding and it is probable that
the project will be completed and the software will be used as intended. Costs
incurred prior to meeting these criteria, together with costs incurred for
training and maintenance, are expensed. Costs incurred for upgrades and
enhancements that are probable to result in additional functionality are
capitalized. All capitalized costs are amortized to expense over their expected
useful lives. Costs required to be capitalized under SOP 98-1 have been
insignificant to date and were expensed. Prior to the adoption of SOP 98-1,
costs incurred by WorldRes to develop, enhance, manage, monitor and operate its
web site were expensed as incurred.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase price over the estimated
fair market value of tangible and intangible net assets acquired in a business
combination. Goodwill and other purchased intangible assets related to the
acquisition of Goldreyer Incorporated (doing business as BedandBreakfast.com)
are amortized on a straight-line basis over their estimated useful lives of 24
to 30 months.
F-8
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
Long-Lived Assets
WorldRes reviews for the impairment of long-lived assets and certain
identifiable intangible assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future cash flows expected
to result from use of the asset and its eventual disposition is less than its
carrying amount. No such impairment losses have been identified by WorldRes to
date.
Revenue Recognition
Reservation revenue consists of commissions WorldRes charges hotels for
reservations made at their properties using WorldRes' network. Reservation
revenue is recognized at the scheduled check-out date of a hotel guest's stay,
net of a provision for estimated cancellations. Such provisions were not
material during all the periods presented. Cost of reservation revenue consists
of commissions that WorldRes pays to certain travel web site partners, and
certain payroll, software and hardware costs associated with processing
reservations.
Prior to June 30, 1999 other revenue primarily consisted of
implementation fees for designing and developing seamless Internet-based links
into our reservation network for the hotels and travel web sites. These fees
are recognized ratably over the period during which a hotel or travel web site
partner agrees to use the reservation network. For the quarter ended December
31, 1999, other revenue primarily consisted of membership dues paid by hotels
for listing on the BedandBreakfast.com web site. Membership revenue is
recognized ratably over the membership term, generally one year. Other revenue
also includes advertising revenue on the BedandBreakfast.com's web site, which
is recognized as earned on the basis of impressions delivered to advertisers.
In the future WorldRes expects other revenue to include other types of fees
derived from new service offerings.
Advertising Expenses
Advertising expenses are expensed as incurred and are included in
marketing and sales expenses. Advertising expenses for fiscal 1997, 1998 and
1999, were approximately $133,000, $388,000, and $1,193,000.
Technology and Development
Technology and development expenses consist principally of payroll and
related expenses for designing and implementing the reservation system,
developing applications and improving the technology infrastructure and
database. To date, all such costs have been expensed as incurred.
Stock-Based Compensation
WorldRes accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123").
Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
for nominal consideration, prior to the anticipated effective date of the
initial public offering, are included in the
F-9
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, WorldRes has not had any
issuances or grants for nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period less shares subject to repurchase. Pro forma
basic and diluted net loss per share as presented in the statement of
operations has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock that will automatically convert upon completion of
WorldRes' proposed initial public offering (using the if-converted method) from
the later of the beginning of the period presented or original date of
issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
Three Months
Ended December
Fiscal Years Ended September 30, 31,
----------------------------------- ----------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ------- -------
Net loss................ $ (4,350) $ (6,147) $ (13,489) $(2,075) $(9,170)
========== ========== =========== ======= =======
Basic and diluted:
Weighted-average
shares of common
stock outstanding.... 728 766 1,059 783 3,158
Less weighted-average
shares subject to
repurchase........... (324) (197) (311) (117) (1,030)
---------- ---------- ----------- ------- -------
Weighted-average
shares used in
computing basic and
diluted net loss per
share................ 404 569 748 666 2,128
========== ========== =========== ======= =======
Basic and diluted net
loss per share....... $ (10.77) $ (10.80) $ (18.03) $ (3.12) $ (4.31)
========== ========== =========== ======= =======
Pro forma:
Net loss.............. $ (13,489) $(9,170)
Shares used above..... 748 2,128
Pro forma adjustment
to reflect weighted
effect of assumed
conversion of
convertible preferred
stock (unaudited).... 6,117 9,299
----------- -------
Shares used in
computing pro forma
basic and diluted net
loss per share
(unaudited).......... 6,865 11,427
=========== =======
Pro forma basic and
diluted net loss per
share (unaudited).... $ (1.96) $ (0.80)
=========== =======
WorldRes has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted loss per common share because all
such securities are antidilutive for all periods presented. The total numbers
of securities excluded from the calculations of diluted net loss per share were
2,554,359 for fiscal 1997, 6,642,187 for fiscal 1998, 10,564,608 for fiscal
1999, 6,905,515 for the three months ended December 31, 1998 and 14,657,766 for
the three months ended December 31, 1999. Such securities, had they been
dilutive, would have been included in the computations of diluted net loss per
share using the treasury stock method.
F-10
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
Unaudited Pro Forma Shareholders' Equity
If the offering contemplated by this prospectus is consummated under the
current terms, all of the convertible preferred stock outstanding will
automatically be converted into 11,051,237 shares of common stock. Unaudited
pro forma shareholders' equity at December 31, 1999, as adjusted for the
assumed conversion of convertible preferred shares based on the shares of
convertible preferred stock outstanding at December 31, 1999, is disclosed on
the balance sheet.
Comprehensive Income
Effective October 1, 1998, WorldRes adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). WorldRes has no material
components of other comprehensive income and accordingly the comprehensive loss
is materially the same as net loss for all periods presented.
Segment Information
Effective October 1, 1998, WorldRes adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 changes the way companies report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to shareholders. WorldRes has been
organized solely in one segment of providing an online marketing and
reservation solution for the global hotel industry. Therefore, there was no
impact to WorldRes' financial statements upon adoption of FAS 131. The overseas
revenues, operations, and assets of WorldRes were immaterial in all periods
presented.
Recently Issued Accounting Standards
In March 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-2, Accounting for Website Development Costs, (the
"Issue") which addresses how an entity should account for costs incurred to
develop a web site. The EITF developed a model that would account for specific
web site development costs based on the nature of each cost. The Issue is
effective prospectively for all costs incurred for quarters beginning after
June 30, 2000, although early adoption is encouraged. Companies also have the
option of adopting by cumulative catch-up adjustment. When adopted the Issue is
not expected to have a significant impact on the results of operations or
financial condition.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) 101, "Revenue Recognition" to provide
guidance on the recognition, presentation and disclosure of revenues in
financial statements. WorldRes' believes its revenue recognition practices are
in conformity with SAB No. 101.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("FAS 133") which provides
comprehensive and consistent standards for the recognition and measurement of
derivatives and hedging activities. In June 1999, Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Financial Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133" ("FAS 137") was issued. As a result, WorldRes is required to adopt FAS 133
in fiscal 2001. When adopted, FAS 133 is not anticipated to have an impact on
the results of operations or financial condition because WorldRes currently
does not hold any derivative financial instruments and does not expect to
engage in hedging activities in the near future.
F-11
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
2. Property and Equipment, Net
Property and equipment consist of the following:
September 30,
--------------- December 31,
1998 1999 1999
------ ------- ------------
(In thousands)
Computer equipment and software............. $1,327 $ 3,065 $ 4,574
Furniture and fixtures...................... 55 300 684
------ ------- -------
1,382 3,365 5,258
Accumulated depreciation and amortization... (428) (1,030) (1,387)
------ ------- -------
Property and equipment, net................. $ 954 $ 2,335 $ 3,871
====== ======= =======
Equipment with an aggregate cost of approximately $1.1 million $1.9
million and $1.9 million and accumulated amortization of approximately
$387,000, $807,000 and $940,000 on hand at September 30, 1998, 1999 and
December 31, 1999, respectively, is subject to capital lease arrangements.
WorldRes has the option to purchase the assets under these leases at the
conclusion of the lease term at a specified price.
3. Acquisition of BedandBreakfast.com
Effective August 10, 1999, WorldRes acquired BedandBreakfast.com, which
designs, develops, and markets online databases of bed-and-breakfast inns,
primarily in the United States and Canada. The acquisition was accounted for as
a purchase and, accordingly, the results of operations of BedandBreakfast.com
have been included in the consolidated financial statements since the date of
acquisition.
WorldRes issued 1,462,106 shares of common stock with an estimated fair
value, based on independent appraisal, of $7.8 million. WorldRes also assumed
net liabilities of approximately $400,000 and incurred other acquisition
related expenses of approximately $100,000 million, consisting primarily of
legal and other professional fees. Of these amounts, $5.7 million was accounted
for as a purchase and allocated to intangible assets, which will be amortized
over their estimated useful lives of 24 to 30 months. The remaining $2.6
million was allocated to deferred stock compensation as this consideration is
contingent upon continued employment of certain shareholders of
BedandBreakfast.com with WorldRes for four years. This deferred stock
compensation is being amortized over four years using a graded vesting method.
Intangible assets arising from the acquisition at September 30, 1999 are
summarized as follows (in thousands):
Goodwill........................................................... $1,664
Customer base...................................................... 3,336
Other.............................................................. 669
------
5,669
Less accumulated amortization...................................... (386)
------
$5,283
======
F-12
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
The following table presents unaudited pro forma results assuming
WorldRes had merged with BedandBreakfast.com at the beginning of fiscal 1998.
These unaudited pro forma results have been prepared for illustrative purposes
only and are not necessarily indicative of the operating results that would
have resulted had the combination occurred on October 1, 1997, or of future
results of operations of the consolidated entities (in thousands, except per
share data):
Fiscal Years
Ended September
30,
------------------
1998 1999
-------- --------
Revenue............................................... $ 594 $ 2,042
Net loss.............................................. $(12,369) $(18,251)
Basic and diluted net loss per share.................. $ (5.55) $ (7.88)
4. Notes Receivable from Officers
As of September 30, 1999 and December 31, 1999 WorldRes had outstanding
notes receivable under full recourse terms from certain officers in the amount
of $1.9 million, for the issuance of 566,578 shares of common stock upon
exercise of the officer's stock options. These shares are subject to
repurchase. The right to repurchase the shares generally lapses over a period
of four years. As of September 30, 1999 503,280 shares were subject to
repurchase. Interest on notes receivable accrues at the rate of 5.89% per
annum. The entire principal balance, together with all accrued interest,
becomes due and payable during September 2003.
5. Commitments
WorldRes leases its facilities under an operating lease agreement. Total
rent expense was approximately $200,000, $466,000, $489,000 and $370,000 in
fiscal 1997, 1998, 1999, and the three months ended December 31, 1999,
respectively.
Future minimum lease payments under operating and noncancelable capital
leases at September 30, 1999 are as follows:
Operating Capital
Leases Leases
--------- -------
(In thousands)
Year ending September 30,
2000.................................................. $ 1,841 $ 635
2001.................................................. 1,832 516
2002.................................................. 1,887 239
2003.................................................. 1,943 --
2004.................................................. 1,998 --
Thereafter............................................ 1,703 --
------- ------
Total minimum payments required..................... $11,204 1,390
======= ------
Less: amount representing interest...................... (240)
------
Present value of future minimum lease payments.......... 1,150
Less current portion.................................... (460)
------
Long-term portion....................................... $ 690
======
F-13
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
The total minimum rentals to be received in the future under non-
cancelable subleases as of September 30, 1999 was $397,000.
6. Shareholders' Equity
Convertible Preferred Stock
From October 1, 1999, through December 17, 1999, WorldRes issued
2,518,259 shares of Series E preferred stock for net proceeds of $28.7 million.
As of December 17, 1999, WorldRes' Articles of Incorporation provide for
the issuance of up to 16,011,922 shares of preferred stock, 463,865 of which
have been designated as Series A, 1,474,695 as Series B, 1,474,695 as Series B-
1, 3,658,011 as Series C, 3,658,011 as Series C-1, 2,082,645 as Series D, and
3,200,000 as Series E. Each share of preferred stock votes with WorldRes'
common stock on an as-converted basis.
Under the restated and amended investor's rights agreement, each share
Series A, B, B-1 C, C-1 D, and E preferred stock is automatically converted
into shares of common stock, at specified conversion price, upon the earlier
of:
. The closing of an underwritten public offering of common stock with
gross proceeds to WorldRes in excess of $20,000,000; or
. The consent of holders of not less than 60% of the then outstanding
shares of preferred stock, voting as single class, including consent of
the holders of at least a majority of Series E preferred stock.
For all classes of shares of preferred stock, the conversion price per
share is the original issue price adjusted for subsequent dilutive issuances
and stock splits. In addition, if WorldRes files a registration statement on
Form S-1 with the Securities and Exchange Commission in connection with its
initial public offering of common stock with a low end of the proposed range of
price to the public less than $23 per share, then the conversion price for the
Series E preferred stock is required to be adjusted to 50% of the low end of
that range. However, the conversion price can not be lower than $7.50 per
share. In accordance with Emerging Issues Task Force Abstract No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, the proceeds from the Series E
financing will be allocated between this contingent conversion feature and
preferred stock upon resolution of the contingency. WorldRes has estimated the
value of this contingent feature at approximately $2.6 million.
In the event of liquidation, dissolution, acquisition, or sale of all or
substantially all assets of WorldRes, the investors rights agreement provides
for the following rights:
. The holders of Series E preferred stock are entitled to receive $11.62
per share plus declared but unpaid dividends, prior to any distribution
of assets of WorldRes to the holders of Series A, B, B-1, C, C-1 and D
preferred stock and common stock;
. Thereafter, the holders of Series A, B, B-1, C, C-1 and D preferred
stock are entitled to receive $1.50, $3.38, $3.38, $3.70, $3.70, and
$6.05 per share, respectively, plus declared but unpaid dividends with
equal priority on a pro rata basis; and
. After completion of distributions stated above, any remaining assets are
required to be distributed to the holders of Series A, B, B-1, C, C-1,
D, and E preferred stock (assuming conversion to common stock) and
holders of common stock, with equal priority and pro rata basis.
However, after holders of
F-14
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
Series A, B, B-1, C, C-1, D, and E preferred stock have received in
aggregate $4.50, $10.14, $10.14, $11.10, $11.10, $18.15 and $34.86 per
share, they are not entitled to participate in any further distribution
of assets.
Series A, B, B-1, C, C-1, D and E preferred shareholders are entitled to
receive noncumulative annual dividends at a rate of 10% per annum. Dividends
will only be paid if, when, and as declared by the board of directors out of
legally available funds. No dividends have been declared as of December 31,
1999. WorldRes has reserved 9,676,098 shares of common stock for issuance upon
conversion of its Series A, B, B-1, C, C-1, D, and E preferred stock.
Stock Warrants
The following is a summary of warrants outstanding as of September 30,
1999:
Fiscal Year Number Number Number Exercise Fiscal Year
Of Grant Issued Outstanding Exercisable Price Of Expiration
----------- ------- ----------- ----------- -------- -------------
Series A preferred
stock warrants......... 1996 26,666 26,666 26,666 $1.50 2001
Series B preferred
stock warrants......... 1996 51,623 51,623 51,623 $3.38 2000
and through
1997 2005
Series C preferred
stock warrants......... 1998 449,237 439,063 439,063 $3.70 2001
and through through
1999 $4.63 2002
Series D preferred
stock warrants......... 1999 3,306 3,306 3,306 $6.05 2000
The above stated warrants were issued in connection with certain
equipment and bridge loans and issuances of preferred stock. No amounts
reflecting the value of these warrants, using the Black-Scholes option pricing
model, have been recorded as these amounts were not significant.
As of September 30, 1999, WorldRes has reserved 26,666 shares of Series
A preferred stock, 51,623 shares of Series B preferred stock, 439,063 shares
of Series C preferred stock, and 3,306 shares of Series D preferred stock for
issuance upon exercise of stock warrants.
In December 1999, WorldRes entered into a distribution agreement with
Sabre Inc. This agreement provides for development by Sabre of an electronic
interface which will enable distribution of airline tickets sales and car
rental bookings through our network. In connection with this agreement,
WorldRes issued warrants to Sabre to purchase an aggregate of 80,000 shares of
its common stock at an exercise price of $1 per share. These warrants
automatically vest and become exercisable to purchase 13,333 shares on July 1,
2000, 13,333 on January 1, 2001 and 13,334 on July 1, 2001, provided that the
distribution agreement is not terminated. The remaining 40,000 warrants vest
and become exercisable if Sabre meets stated volume targets for reservations
processed using our network. The term of these warrants generally expire after
45 days following the date when they vest and become exercisable, or within 20
days of the termination of the agreement, whichever is earlier.
F-15
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
It is probable that warrants on 13,333 shares that automatically vest in
July 2000, and warrants on 6,667 shares that vest based on the initial
reservation target in July 2000 will be earned. Using the Black-Scholes option
pricing model, and assuming a term of 6 months, volatility of 75%, and an
interest rate of 6%,
the value of these warrants was estimated at $166,800. These warrants will be
revalued up to the date of their vesting. The value of these warrants is being
expensed ratably over their six month vesting period.
The remaining shares under the warrants will be valued and a charge will
be taken in a similar manner when it becomes probable that the warrants will be
earned.
Stock Plans
Under the 1995 Stock Plan, which was adopted in November 1995, and 1999
Executive Stock Plan, which was adopted in May 1999, options may be granted for
common stock pursuant to actions by the board of directors or a committee
appointed by the board, to employees, including officers and directors, and
consultants. Options granted are either incentive stock options or nonstatutory
stock options and become exercisable ratably generally over four years or a
term specified in each option agreement. Incentive stock options and
nonstatutory options granted under the plans are at prices not less than 100%
and 85%, respectively, of the fair value on the date of the grant, as
determined by the board of directors, and become exercisable upon vesting.
Options granted under the plans expire over periods specified for each grant,
not to exceed 10 years. Common stock reserved for future issuance under the
plans at September 30, 1999 was 2,653,805.
A summary of activity under the option plans is as follows:
Weighted-
Options Average
Outstanding Exercise Price
----------- --------------
Balance at September 30, 1996.................. 292,900 $0.14
Options granted.............................. 207,693 $0.35
Options exercised............................ (58,144) $0.19
Options forfeited............................ (123,649) $0.14
---------
Balance at September 30, 1997.................. 318,800 $0.27
Options granted.............................. 653,300 $0.72
Options exercised............................ (13,423) $0.28
Options forfeited............................ (39,134) $0.38
---------
Balance at September 30, 1998.................. 919,543 $0.59
Options granted.............................. 1,956,207 $4.40
Options exercised............................ (893,628) $2.29
Options forfeited............................ (81,335) $0.98
---------
Balance at September 30, 1999.................. 1,900,787 $3.69
Options granted (unaudited).................. 177,983 $6.08
Options exercised (unaudited)................ (16,295) $0.46
Options forfeited (unaudited )............... (12,169) $5.02
---------
Balance at December 31, 1999 (unaudited) ...... 2,050,306 $3.91
=========
F-16
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
The following table summarizes information about stocks options
outstanding as of December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------- -----------------------------
Weighted-
Options Average Options
Exercise Outstanding at Remaining Weighted- Exercisable at Weighted-
Price December 31, Contractual Average December 31, Average
Range 1999 Life Exercise Price 1999 Exercise Price
-------- -------------- ----------- -------------- -------------- --------------
$0.15-
$1.00 522,002 7.1 $ 0.61 237,364 $ 0.54
$1.00-
$4.00 517,320 8.7 $ 3.14 95,361 $ 2.63
$4.01-
$6.00 1,007,584 8.5 $ 6.00 91,728 $ 6.00
$6.01-
$10.00 3,400 9.8 $10.00 3,400 $10.00
--------- -------
2,050,306 8.2 $ 3.91 427,853 $ 2.25
========= =======
At September 30, 1999, 744,476 and 8,542 common stock options were
available for grant under the 1995 Stock Plan and 1999 Executive Stock Plan.
Stock Compensation
WorldRes recorded deferred compensation of approximately $4.9 million
during fiscal 1999. These amounts represent the difference between the exercise
price and the deemed fair value of WorldRes' common stock during the period in
which such stock options were granted. WorldRes recorded amortization of
deferred compensation expense of approximately $742,000 during this period. At
September 30, 1999, WorldRes had a total of approximately $4.1 million
remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
Pro Forma Information--Disclosures of the effect of stock based compensation
Pro forma information regarding net loss and net loss per share is
required by FAS 123, and has been determined as if WorldRes had accounted for
its employee stock options under the fair value method as specified by that
statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes pricing method with the following weighted-average
assumptions: no dividends and volatility, an expected life of four years, and a
risk-free interest rate of approximately 6% for fiscal years 1997, 1998 and
1999.
The option valuation models were developed for use in the estimation of
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected life of the option.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-17
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to pro forma expense over the options' vesting periods.
Pro forma information follows:
Fiscal Years Ended
September 30,
--------------------------
1997 1998 1999
------- ------- --------
(In thousands, except
per share amounts)
--------------------------
Pro forma net loss................................. $(4,356) $(6,165) $(13,603)
Pro forma basic and diluted net loss per share..... $(10.78) $(10.83) $ (19.46)
The weighted-average grant date fair value of options granted, which is
the value assigned to the options under FAS 123, was $0.07, $0.15, and $0.94
for options granted in fiscal 1997, 1998, and 1999, respectively.
The pro forma impact of options on the net loss for the years ended
September 30, 1997, 1998, and 1999 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
additional years of stock option grants.
7. Employee Benefit Plan
During 1997, WorldRes established a 401(k) tax-deferred savings plan,
whereby eligible employees may contribute a percentage of their eligible
compensation but not greater than 15% of their earnings. Company contributions
are discretionary; no such Company contributions have been made since inception
of the plan.
8. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the years ended September
30, 1999, 1998 and 1997.
As of September 30, 1999, WorldRes had a federal net operating loss
carryforward of approximately $24,500,000. WorldRes also had federal research
and development credit carryforwards of approximately $400,000. The net
operating loss and credit carryforwards will expire at various dates beginning
in 2011 through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-18
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1999 and for the three months ended December
31, 1999 and 1998 are unaudited)
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of the deferred
tax assets and liabilities for federal and state income taxes were as follows
(in thousands):
September 30,
----------------
1998 1999
------- -------
Deferred tax assets:
Net operating loss carryforwards......................... $ 4,700 $ 9,000
Research credits......................................... 200 400
Capitalized research and development..................... 100 200
Other.................................................... -- 100
------- -------
Total deferred tax assets................................ 5,000 9,700
Valuation allowance for deferred tax assets.............. (5,000) (8,300)
------- -------
Net deferred tax assets.................................. -- 1,400
Deferred tax liabilities:
Other intangibles........................................ -- (1,400)
------- -------
$ -- $ --
======= =======
Statement of Financial Accounting Standards No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. WorldRes has considered its historical operating performance
and cumulative net losses to date, and has provided a full valuation allowance
against its net deferred tax assets.
The net valuation allowance increased by $3,300,000 during the year
ended September 30, 1999.
9. Events Subsequent to December 31, 1999 (unaudited)
Equipment Loans
In February and March 2000, WorldRes obtained equipment loan facilities
totaling $3.5 million from two financial institutions. By March 31, 2000, $2.4
million of these facilities had been utilized. These equipment loans bear
interest at the U.S. Treasury note rate plus 2.5% per annum and are due and
payable in 36 equal monthly principal and interest payments through March
2003.
In connection with these equipment loans, WorldRes issued fully vested,
non-forfeitable and immediately exercisable warrants to purchase 14,682 shares
of common stock at $7.40 per share. These warrants expire in March 2010.
WorldRes has valued these warrants using the Black-Scholes pricing method and
the following assumptions: volatility of 75%, interest rate of 6%, dividend
yield of 0% and a life equal to the term of the warrants (10 years) at
approximately $130,000, which will be recorded as a debt discount and will be
amortized to interest expense over the 36 month term of the loans.
Reincorporation and Amendment to the Articles of Incorporation
In March 2000, WorldRes' board of directors authorized the
reincorporation of WorldRes in the state of Delaware. This reincorporation is
to be effective upon shareholder approval which is anticipated to occur prior
to WorldRes' initial public offering. Upon reincorporation, WorldRes will be
authorized to issue
F-19
WORLDRES.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information as of December 31, 1999 and for the three months ended December 31,
1999 and 1998 are unaudited)
50,000,000 shares of common stock, $0.001 par value and 2,000,000 shares of
preferred stock, $0.001 par value. The Board of Directors will also have the
authority to designate the rights, preferences, privileges and restrictions of
the preferred stock, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of WorldRes without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may also
adversely affect the voting power of the holders of common stock. In certain
circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. WorldRes currently
has no plans to issue any shares of preferred stock.
Directors' Stock Option Plan
The 2000 Directors' Stock Option Plan (the Directors' Plan) was adopted
by the board of directors in April 2000. We will have it submitted for approval
to our stockholders prior to completion of this offering. A total of 300,000
shares of common stock have been reserved for issuance under the Directors'
Plan.
The Directors' Plan provides that each person who is a non-employee
director on the completion of this offering will receive an automatic initial
grant of an option to purchase 10,000 shares of common stock and each person
who becomes a non-employee director after the completion of this offering will
receive an automatic initial grant of an option to purchase 20,000 shares of
common stock upon appointment or
election. The Directors' Plan also provides for annual grants, on the date of
each annual meeting of our stockholders, to each non-employee director who has
served on our board of directors for at least six months. The annual grant to
non-employee directors is an option to purchase 5,000 shares of common stock.
The initial options granted under the plan will vest at the rate of 50% of the
total number of shares subject to the options on each of the first two
anniversaries of the date of grant of the initial options. The annual options
granted under the plan will vest at the rate of 100% of the number of shares
subject to the options on the first anniversary of the date of grant of the
annual options.
In the event that an asset sale or merger transaction results in a change
in the ownership of more than 50% of the total combined voting power of
WorldRes outstanding securities, all outstanding options shall become
immediately exercisable prior to the closing of that transaction.
We have not issued any options under the Directors' Plan to date.
Issuance of Series E Preferred Stock
In April 2000, WorldRes completed an additional closing of its Series E
convertible preferred stock financing, raising approximately $5 million by
issuing 430,293 shares in connection with this closing. The rights, preferences
and privileges of the holder of these shares are identical to those of the
holders of Series E convertible preferred stock issued in 1999.
F-20
WORLDRES.COM
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION
OVERVIEW
Effective August 10, 1999, WorldRes acquired all of the outstanding
capital stock of Goldreyer Incorporated (a Texas corporation d.b.a
BedandBreakfast.com) ("BedandBreakfast.com"), which designs, develops, markets,
and operates complete online databases of bed-and-breakfast inns, primarily
across the United States and Canada. The acquisition has been accounted for
using the purchase method of accounting and accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The fair value of intangible assets was determined using a combination of
methods, including market approach for the relationships with bed-and-breakfast
inns, cost estimates for acquired workforce, and a variation of income approach
for tradename and covenants not to compete. WorldRes issued 1,462,106 shares of
its common stock with an estimated fair value of approximately $7.8 million.
WorldRes also assumed net liabilities of approximately $400,000 and incurred
other acquisition-related expenses of approximately $100,000 consisting
primarily of legal and other professional fees. Of these amounts $5.7 million
was accounted for as purchase and allocated to intangible assets, which will be
amortized over their estimated useful lives of 24 to 30 months. The remaining
$2.6 million was allocated to defined stock compensation as this consideration
is contingent upon continued employment of certain shareholders of
BedandBreakfast.com with WorldRes for four years. This deferred stock
compensation will be amortized over four years using a graded vesting method.
Prior to the acquisition, the fiscal years of WorldRes and
BedandBreakfast.com ended on September 30 and December 31, respectively. The
following unaudited pro forma condensed combined statements of operation gives
effect to this acquisition as if it had occurred on October 1, 1998. The
statement of operations has been prepared by combining the results of
operations of BedandBreakfast.com for the period from October 1, 1998 to August
10, 1999 (date of acquisition) with the results of operations of WorldRes for
the year ended September 30, 1999.
The unaudited pro forma condensed combined consolidated financial
information is not necessarily indicative of the operating results that would
have been achieved had the transaction been in effect as of the beginning of
the period presented and should not be construed as being representative of
future operating results. The historical financial statements of the WorldRes
and BedandBreakfast.com are included elsewhere in this prospectus and the
unaudited pro forma financial information presented herein should be read in
conjunction with those financial statements and related notes.
F-21
WORLDRES.COM
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
FISCAL YEAR 1999
(In thousands, except per share data)
BedandBreakfast
WorldRes.com .com
Fiscal Year Ended October 1, 1998
September 30, to August 10, Pro Forma
1999 1999 Adjustment Total
----------------- --------------- ---------- --------
Net revenue:
Reservation........... $ 1,322 $ -- $ -- $ 1,322
Other................. 406 314 -- 720
-------- ------- ------- --------
Total net revenue... 1,728 314 -- 2,042
-------- ------- ------- --------
Cost of revenue:
Reservation........... 191 -- -- 191
Other................. 41 -- -- 41
-------- ------- ------- --------
Total cost of
revenue............ 232 -- -- 232
-------- ------- ------- --------
Gross profit............ 1,496 314 -- 1,810
Operating expenses:
Technology and
development.......... 3,178 563 -- 3,741
Sales and marketing... 8,588 1,086 -- 9,674
General and
administrative....... 2,204 733 -- 2,937
Deferred stock
compensation and
warrant expense...... 742 -- 1,257 1,999
Amortization of
goodwill and other
intangibles.......... 386 -- 2,390 2,776
-------- ------- ------- --------
Total operating
expenses............... 15,098 2,382 3,647 21,127
-------- ------- ------- --------
Loss from operations.... (13,602) (2,068) (3,647) (19,317)
Interest and other
income, net............ 268 -- -- 268
Interest expense........ (155) (6) -- (161)
-------- ------- ------- --------
Net loss................ $(13,489) $(2,074) $(3,647) $(19,210)
======== ======= ======= ========
Basic and diluted net
loss per share, actual
and pro forma.......... $(18.03) $ (9.58)
======== ========
Shares used in
calculating basic and
diluted net loss per
share, actual and pro
forma.................. 748 2,005
======== ========
The pro forma adjustments in the unaudited pro forma condensed combined
consolidated financial statement of operations reflect amortization of goodwill
and other intangibles associated with the purchase of BedandBreakfast.com over
the estimated useful lives of the assets acquired, and amortization of deferred
stock compensation over a four year vesting period using a graded vesting
method.
F-22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Goldreyer Incorporated:
We have audited the accompanying balance sheets of GOLDREYER INCORPORATED
(a Texas corporation d.b.a. BedandBreakfast.com) as of December 31, 1997 and
1998, and the related statements of operations, stockholders' equity (net
capital deficiency) and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide 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 Goldreyer
Incorporated (d.b.a. BedandBreakfast.com) as of December 31, 1997 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. On
June 18, 1999, the Company entered into an agreement whereby it would be
acquired by WorldRes, Inc. as discussed in Note 1.
/s/ Arthur Andersen LLP
Denver, Colorado,
July 9, 1999.
F-23
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
BALANCE SHEETS
December 31,
------------------------
1997 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents.......................... $ 357,741 $ 25,145
Accounts receivable................................ 1,060 50
Other current assets............................... 4,722 27,764
----------- -----------
Total current assets............................. 363,523 52,959
Property and equipment, net.......................... 115,749 105,190
----------- -----------
Total assets..................................... $ 479,272 $ 158,149
=========== ===========
Liabilities and stockholders' equity (net capital
deficiency)
Current liabilities:
Line of credit..................................... $ -- $ 300,000
Accounts payable................................... 22,756 63,947
Other current liabilities.......................... 37,602 52,042
Executive compensation payable..................... 232,221 454,723
Deferred revenue................................... 68,897 68,087
Related-party notes payable........................ 105,626 105,626
----------- -----------
Total liabilities................................ 467,102 1,044,425
----------- -----------
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Common stock, $0.01 par value; 2,000,000 shares
authorized;
751,058 and 824,634 shares, respectively, issued
and outstanding................................... 7,510 8,246
Additional paid-in capital......................... 2,099,250 2,853,349
Deferred compensation.............................. (458,383) (125,190)
Accumulated deficit................................ (1,636,207) (3,622,681)
----------- -----------
Total stockholders' equity (net capital
deficiency)..................................... 12,170 (886,276)
----------- -----------
Total liabilities and stockholders' equity (net
capital deficiency) ................................ $ 479,272 $ 158,149
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-24
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
STATEMENT OF OPERATIONS
Years Ended December 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
Revenue:
Membership dues......................... $ -- $ 16,462 $ 129,788
Advertising............................. -- 8,940 8,044
Other................................... 5,415 6,446 --
--------- ----------- -----------
Total revenue......................... 5,415 31,848 137,832
Operating expenses:
General and administrative.............. 98,256 762,313 1,528,081
Technology and development.............. 134,493 190,758 405,899
Sales and marketing..................... 92,730 221,928 186,240
--------- ----------- -----------
Total operating expenses.............. 325,479 1,174,999 2,120,220
--------- ----------- -----------
Loss from operations...................... (320,064) (1,143,151) (1,982,388)
Other income (expense):
Interest and other income............... 1,357 -- 8,561
Interest expense........................ (4,839) (15,730) (12,647)
--------- ----------- -----------
Net loss.................................. $(323,546) $(1,158,881) $(1,986,474)
========= =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-25
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
For The Years Ended December 31, 1996, 1997 and 1998
Total
Stockholders'
Common Stock Additional Stock Treasury Stock Equity
-------------- Paid-In Subscription ------------------ Deferred Accumulated (Net Capital
Shares Amount Capital Receivable Shares Amount Compensation Deficit Deficiency)
------- ------ ---------- ------------ ------- --------- ------------ ----------- -------------
Balance at December
31, 1995............ 300,000 $3,000 $ 288,415 $(50,000) -- $ -- $ -- $ (153,780) $ 87,635
Payment of
subscription
receivable......... -- -- -- 50,000 -- -- -- -- 50,000
Receipt of shares
for treasury....... -- -- 50,000 -- (6,250) (50,000) -- -- --
Issuance of shares
from treasury in
November 1996 for
cash and
subscription
receivable......... -- -- -- (25,000) 6,250 50,000 -- -- 25,000
Net loss............ -- -- -- -- -- -- -- (323,546) (323,546)
------- ------ ---------- -------- ------- --------- --------- ----------- -----------
Balance at December
31, 1996............ 300,000 3,000 338,415 (25,000) -- -- -- (477,326) (160,911)
Payment of
subscription
receivable......... -- -- -- 25,000 -- -- -- -- 25,000
Issuance of common
stock in May 1997
for cash $8.00 to
$10.00 per share... 10,550 105 92,895 -- -- -- -- -- 93,000
Issuance of common
stock in July 1997
for cash of $4.17
per share.......... 120,044 1,200 498,800 -- -- -- -- -- 500,000
Issuance of common
stock in July 1997
for compensation at
$4.17 per share.... 161,234 1,612 670,733 -- -- -- (672,345) -- --
Issuance of common
stock in September
1997 for cash of
$5.11 per share.... 97,764 978 499,022 -- -- -- -- -- 500,000
Stock splits
effected through
the form of a
dividend........... 61,466 615 (615) -- -- -- -- -- --
Amortization of
deferred
compensation....... -- -- -- -- -- -- 213,962 -- 213,962
Net loss............ -- -- -- -- -- -- -- (1,158,881) (1,158,881)
------- ------ ---------- -------- ------- --------- --------- ----------- -----------
Balance at December
31, 1997............ 751,058 7,510 2,099,250 -- -- -- (458,383) (1,636,207) 12,170
Issuance of common
stock in January
1998 for employee
compensation at
$9.95 per share.... 3,261 33 32,414 -- -- -- (32,447) -- --
Issuance of common
stock in March 1998
for cash of $7.42
to $12.37 per
share.............. 54,562 546 534,017 -- -- -- -- -- 534,563
Issuance of common
stock in July 1998
for compensation at
$9.59 per share.... 4,343 43 41,626 -- -- -- (41,669) -- --
Issuance of common
stock in October
1998 for
compensation at
$7.51 per share.... 600 6 4,502 -- -- -- (4,508) -- --
Forfeiture of
unvested shares in
December 1998...... -- -- -- -- (38,586) (160,903) 160,903 -- --
Issuance of common
stock in December
1998 for
compensation at
$6.13 per share.... 6,550 65 115,490 -- 38,586 160,903 (2,756) -- 273,702
Issuance of common
stock in December
1998 for services
provided........... 4,260 43 26,050 -- -- -- -- -- 26,093
Amortization of
deferred
compensation....... -- -- -- -- -- -- 253,670 -- 253,670
Net loss............ -- -- -- -- -- -- -- (1,986,474) (1,986,474)
------- ------ ---------- -------- ------- --------- --------- ----------- -----------
Balance at December
31, 1998............ 824,634 $8,246 $2,853,349 $ -- -- $ -- $(125,190) $(3,622,681) $ (886,276)
======= ====== ========== ======== ======= ========= ========= =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-26
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
Operating activities
Net loss................................. $(323,546) $(1,158,881) $(1,986,474)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................... 6,476 23,603 53,154
Deferred compensation.................. -- 213,962 253,670
Issuance of common stock for
compensation.......................... -- -- 273,702
Issuance of common stock for services.. -- -- 26,093
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable.......................... -- (1,060) 1,010
Increase in other current assets..... -- (4,722) (23,042)
Increase in accounts payable......... 22,645 111 41,191
Increase in executive compensation
payable............................. -- 232,221 222,502
Increase in other current
liabilities......................... 11,274 26,328 14,440
Increase (decrease) in deferred
revenue............................. -- 68,897 (810)
--------- ----------- -----------
Net cash used in operating activities.... (283,151) (599,541) (1,124,564)
--------- ----------- -----------
Investing activities
Purchases of property and equipment...... (26,943) (115,172) (42,595)
--------- ----------- -----------
Net cash used in investing activities.... (26,943) (115,172) (42,595)
--------- ----------- -----------
Financing activities
Proceeds from borrowings under line of
credit.................................. 100,000 -- 300,000
Repayments of borrowings under line of
credit.................................. -- (100,000) --
Proceeds from notes payable to related
parties................................. 58,537 47,089 --
Proceeds from issuance of common stock... 25,000 1,093,000 534,563
Proceeds from payment of stock
subscriptions receivable................ 50,000 25,000 --
--------- ----------- -----------
Net cash provided by financing
activities.............................. 233,537 1,065,089 834,563
--------- ----------- -----------
Net increase (decrease) in cash.......... (76,557) 350,376 (332,596)
Cash at beginning of year................ 83,922 7,365 357,741
--------- ----------- -----------
Cash at end of year...................... $ 7,365 $ 357,741 $ 25,145
========= =========== ===========
Supplemental disclosure of cash flow information
The Company paid approximately $3,651, $13,881 and $12,647 for interest
for the year ended December 31, 1996, 1997 and 1998, respectively.
See accompanying notes.
F-27
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
1. Business and Organization
Goldreyer Incorporated (the "Company") was organized and incorporated as
an S Corporation in the state of Texas on April 15, 1994, and does business as
BedandBreakfast.com, an online community for innkeepers. The Company designs,
develops, markets and operates complete online databases of bed-and-breakfast
inns, primarily across the United States and Canada over the Internet's World
Wide Web.
The Company is subject to various risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving market for Internet-based products
and services. Such risks and uncertainties include, but are not limited to, its
limited operating history, an evolving technology and the management of rapid
growth. To address these risks, the Company must, among other things, raise
sufficient capital, maintain and increase its customer base, implement and
successfully execute its business and marketing strategy, continue to develop
and upgrade its technology, provide superior customer service and attract,
retain and motivate qualified personnel. There can be no guarantee that the
Company will be successful in addressing such risks.
To date, the Company has not generated net income or cash flow from
operations. Therefore, the Company has been primarily dependent upon private
equity and borrowings from a financial institution to fund its operations.
On June 18, 1999, the Company entered into an agreement for the merger of
the Company with WorldRes, Inc., an on-line provider of travel services. Shares
of the Company's common stock will be exchanged for shares of WorldRes, Inc.
common stock. As a result of the merger, stockholders of the Company's common
stock will own approximately 13% of the combined entity ("Newco"). The merger
had not closed as of July 9, 1999.
The Company has not been profitable since its inception, and its plans
call for significant growth, which will require additional capital. As such,
the Company will be dependent, even as a component of Newco should the merger
with Newco be consummated, on external financing to continue its business plan
execution. There is no guarantee that such external financing will be
forthcoming, which raises substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
After the merger, Newco, including the operations of the Company, plans
to continue significantly increasing its operating expenses in order to
increase its market presence and service capacity, and to expand into new
markets, products and industries. Newco expects that this growth of its
business and capacity will require significant external financing within the
next year. While the Company's management believes that Newco will be able to
obtain such external financing from third parties or from existing
shareholders, there can be no guarantee that it can do so at acceptable terms.
The failure to raise such financing could have a material adverse effect on
Newco.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the
F-28
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
The Company generates revenue primarily from membership fees from
innkeepers.
Membership revenue is generated from contracts, typically for a one-year
period, for the inclusion of the innkeeper's bed-and-breakfast in the Company's
online database. The Company typically receives a membership fee at the
inception of the contract, which it defers and recognizes ratably over the life
of the contract. Amounts received but not yet earned are shown as deferred
revenue in the accompanying balance sheets.
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company has no significant off-balance sheet
concentrations of credit risk, such as foreign exchange contracts, option
contracts or other foreign currency hedging arrangements. The Company maintains
its cash balances in the form of bank demand deposits with financial
institutions that management believes are creditworthy. Accounts receivable are
typically unsecured and are derived from transactions with and from innkeepers
primarily located in the United States and Canada. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential credit
losses.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-
term trade receivables and payables, and a note payable. The carrying values of
the cash equivalents and short-term receivables and payables approximate their
fair values. Based on borrowing rates currently used by the Company for
financing, the carrying value of the notes payable approximates estimated fair
value.
Property and Equipment
Property and equipment are stated at cost and depreciation is provided
using the straight-line method, generally over estimated useful lives of three
to five years.
The components of property and equipment are as follows:
December 31,
------------------
1997 1998
-------- --------
Computer equipment..................................... $129,397 $168,393
Office furniture and equipment......................... 18,966 22,565
-------- --------
Subtotal............................................... 148,363 190,958
Less--accumulated depreciation......................... (32,614) (85,768)
-------- --------
Net property and equipment............................. $115,749 $105,190
======== ========
F-29
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Technology and Development
Costs incurred in the development of new technology and enhancements to
existing technology and services are charged to expense as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying statements of operations.
Income Taxes
The financial statements do not include a provision or benefit for income
taxes because as an S Corporation, the Company is treated as a pass-through
entity for tax purposes and therefore does not incur federal or state income
taxes. Instead, its taxable income or losses are included in the stockholders'
individual income tax returns.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). 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 non-owner sources. From its inception through December 31,
1998, the Company's comprehensive loss is the same as its net loss.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. In accordance with
the provisions of SFAS No. 131, the Company has determined that it has one
reportable operating segment at December 31, 1998.
Start-up Activities
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." In general, SOP
98-5 requires costs of start-up activities and organization costs to be
expensed as incurred, which the Company has done since its inception. As a
result, the adoption of SOP 98-5 did not have an impact on the Company's
financial position or results of its operations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which provides guidance on accounting for the cost
of such software. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company believes that the adoption
of SOP 98-1 will not have a material impact on the Company's financial
statements.
F-30
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133." As a result, the Company is required to adopt SFAS
133 in the year ended December 31, 2001.
3. Stockholders' Equity
In November 1996, the president of the Company contributed 6,250 shares
back to the Company for no consideration. These shares were immediately
reissued to a third party for $50,000.
Consideration received for the reissuance of these shares consisted of
$25,000 in cash and a $25,000 subscription receivable which was repaid in 1997.
In May 1997, the Company issued 10,550 shares of common stock at prices
ranging from $8.00 to $10.00 per share. Per share prices were determined based
on the level of investment. Proceeds totaled $93,000. In July 1997, the Company
sold 120,044 shares of common stock for $500,000, or $4.17 per share. In
September 1997, the Company sold an additional 97,764 shares of common stock
for $500,000, or $5.11 per share. In March 1998, the Company issued
approximately 27,060 shares of common stock for $334,565, or $12.36 per share.
At the same time, the Company issued 26,963 shares of common stock to two
individuals for $199,998, or $7.42 per share. These shares were issued at a
discount in exchange for equity fundraising services. The Company also issued
539 shares of common stock to a separate individual in exchange for equity
fundraising services in March 1998.
In 1997, the Company effected several stock splits in the form of stock
dividends to the stockholders of the Company. As a result, the Company issued a
total of 61,466 shares of common stock to the Company's shareholders, excluding
certain executives of the Company. The Company did not change the par value of
its common stock in connection with the stock splits. Therefore, $615 has been
re-allocated from additional paid-in capital to the par value of common stock.
The Company has from time to time granted shares of common stock to
executive officers and employees of the Company as compensation. In July 1997,
the Company granted approximately 130,000 shares of restricted stock to an
executive. The shares vest over a 34-month period, retroactive to January 1997.
Based on the fair value of the Company's common stock at the time, the Company
recorded deferred compensation of approximately $547,000 that is being
amortized into compensation expense over the vesting period. In December 1998,
the officer's relationship with the Company was terminated and approximately
39,000 unvested shares were returned to the Treasury of the Company. At that
time, the Company granted these shares out of Treasury to the president of the
Company. The shares vested immediately. The Company recognized approximately
$236,000 of compensation expense in 1998 in connection with this grant.
The Company granted approximately 30,000 shares of common stock to an
officer of the Company in July 1997. The shares vest over a three-year period
from the date of grant. As a result, the Company recorded approximately
$125,000 of deferred compensation. In 1998, the Company granted approximately
50,000 shares of common stock to various employees of the Company.
Approximately $81,000 of deferred compensation has been recognized in
connection with these shares, and approximately $37,000 of compensation expense
was recognized in 1998. All shares issued in connection with these grants of
common stock to the officer and to
F-31
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS--(Continued)
employees vest over a three-year period from the date of grant. Deferred
compensation is being amortized into compensation expense over the related
vesting period.
Amortization of deferred compensation totaled $0, $213,962 and $253,670
for the years ended December 31, 1996, 1997 and 1998, respectively.
In December 1998, the Company issued approximately 4,000 shares of common
stock in exchange for services valued at approximately $26,000.
4. Line Of Credit
The Company has entered into a revolving line of credit agreement with a
bank (the "Agreement") to provide the Company with up to $300,000 in
borrowings at any time during the term of the Agreement. The line of credit
accrues interest at the bank's prime rate (7.75% at December 31, 1998). The
Agreement is personally guaranteed by the father-in-law of the Company's
president. All outstanding amounts, including accrued but unpaid interest, are
due upon maturity of the Agreement. Subsequent to yearend, the Agreement was
amended to provide up to $900,000 in borrowings, and the maturity was extended
from December 1, 1999 to March 25, 2000.
5. Notes Payable to Related Parties
As of December 31, 1996, 1997 and 1998, notes payable to related parties
consisted of the following:
1996 1997 1998
------- -------- --------
Unsecured note payable to related party,
interest payable on a monthly basis at 8.5% per
annum, principal payments due December 31,
1999........................................... $58,537 $105,626 $105,626
======= ======== ========
Interest expense for the years ended December 31, 1996, 1997 and 1998 was
$3,651, $8,442 and $8,978, respectively.
6. Commitments and Contingencies
Operating Lease Obligations
The Company leases certain space and equipment under long-term operating
leases. Aggregate future minimum annual rental commitments under
noncancellable operating leases as of December 31, 1998 are as follow:
Fiscal year ending:
1999............................................................ $102,236
2000............................................................ 88,349
2001............................................................ 44,377
2002............................................................ 11,007
2003............................................................ 2,890
Thereafter...................................................... --
--------
$248,859
========
F-32
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Legal Matters
The Company is exposed to asserted and unasserted claims incurred in the
normal course of business. The Company believes that the ultimate resolution of
any such claims will not have a material impact on the Company's financial
position, results of operations or cash flows.
7. Subsequent Events
On June 18, 1999, the Company entered into an agreement for the merger of
the Company with WorldRes, Inc., an on-line provider of travel services. Shares
of the Company's common stock will be exchanged for shares of WorldRes, Inc.
common stock. As a result of the merger, stockholders of the Company's common
stock will own approximately 13% of the combined entity.
As discussed in Note 4, the Company's line-of-credit is personally
guaranteed by the father-in-law of the Company's President. Subsequent to
December 31, 1998, the line-of-credit was amended to allow for borrowings up to
$900,000. As consideration for his continued and extended personal guarantee,
the Company agreed to award him approximately 0.24% of the Company per $100,000
guaranteed.
Subsequent to December 31, 1998, the father of the Chief Financial
Officer loaned the Company $50,000. In return, the Company agreed to award him
approximately 0.24% of the Company per $100,000 loaned.
F-33
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the periods from January 1 to August 10,
1998 and 1999 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) BedandBreakfast.com considers necessary for fair
presentation of financial position at such date and the operating results and
cash flows for those periods. Results for the periods from January 1 to August
10, 1998 and 1999 are not necessarily indicative of results to be expected for
future periods. This financial information has been prepared solely for the
purpose of preparing pro forma combined interim financial information and
should be read in conjunction with audited financial statements of
BedandBreakfast.com, both included elsewhere in this prospectus.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
January 1 to
August 10,
--------------
1998 1999
----- -------
Revenue:
Membership dues.............................................. $ 63 $ 193
Advertising.................................................. -- 62
Other........................................................ -- 7
----- -------
Total revenue.............................................. 63 262
Operating expenses:
General and administrative................................... 848 841
Technology and development................................... 176 497
Sales and marketing.......................................... 5 226
----- -------
Total operating expenses................................... 1,029 1,564
----- -------
Loss from operations........................................... (966) (1,302)
Other income (expense):
Interest and other income.................................... 7 --
----- -------
Net loss....................................................... $(959) $(1,302)
===== =======
F-34
GOLDREYER INCORPORATED
(d.b.a. BedandBreakfast.com)
UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
January 1 to
August 10,
--------------
1998 1999
----- -------
Operating activities
Net loss...................................................... $(959) $(1,302)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation................................................ 31 36
Deferred compensation....................................... 72 125
Issuance of common stock for compensation................... 74 303
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................ 1 (30)
Increase in other current assets.......................... (3) (2)
Increase in accounts payable.............................. 38 39
Increase (decrease) in executive compensation payable..... 148 (455)
Increase in other current liabilities..................... 18 41
Increase in deferred revenue.............................. 6 138
----- -------
Net cash used in operating activities......................... (574) (1,107)
----- -------
Investing activities
Purchases of property and equipment........................... (37) (39)
----- -------
Net cash used in investing activities......................... (37) (39)
----- -------
Financing activities
Repayment of borrowings under line of credit.................. -- (300)
Repayment of notes payable to related parties................. -- (105)
Proceeds from issuance of common stock........................ 535 --
Proceeds from notes payable................................... -- 1,535
----- -------
Net cash provided by financing activities..................... 535 1,130
----- -------
Net decrease in cash.......................................... (76) (16)
Cash at beginning of year..................................... 357 25
----- -------
Cash at end of year........................................... $ 281 $ 9
===== =======
F-35
[Inside Back Cover]
[Color Artwork]
Description of graphics and text on inside back cover: WorldRes.com logo with
lines going up to logos representing various travel web sites that are
available on our network.
[Description graphics series of screen shots of web pages on our Places to Stay
web site]
[WORLDRES.COM LOGO]
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 WorldRes.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq National
Market listing fee.
Amount
to be Paid
----------
SEC registration fee................................................. $18,216
NASD filing fee...................................................... 7,400
Nasdaq National Market listing fee...................................
Printing and engraving expenses......................................
Legal fees and expenses.............................................. 550,000
Accounting fees and expenses.........................................
Blue Sky qualification fees and expenses............................. 10,000
Transfer Agent and Registrar fees....................................
Miscellaneous fees and expenses......................................
-------
Total.............................................................. *
=======
- --------
* to be filed by amendment
Item 14. Indemnification of Directors and Officers
The Delaware General Corporation Law authorizes a court to award, or a
corporation's Board of Directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act").
WorldRes.com's Bylaws provide that WorldRes.com shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including
circumstances in which indemnification is otherwise discretionary under
Delaware law. WorldRes.com has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require WorldRes.com, among
other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers and
directors (other than liabilities arising from willful misconduct of culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain officers' and
directors' insurance if available on reasonable terms. Article XIV of the
Registrant's Amended and Restated Articles of Incorporation (Exhibit 3.2
hereto) provides for indemnification of its directors and officers to the
maximum extent permitted by the Delaware General Corporation Law and
Section, 6.1 & 6.2 of Article VI of WorldRes.com's Bylaws (Exhibit 3.4 hereto)
provides for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by the Delaware General Corporation Law.
In addition, WorldRes.com has entered into Indemnification Agreements (Exhibit
10. hereto) with its directors and officers. Reference is also made to
Section of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of WorldRes.com against certain
liabilities.
II-1
Item 15. Recent Sales of Unregistered Securities
Since October 1, 1996, WorldRes.com has sold and issued the following
securities:
1. In late 1996 early 1997 we issued warrants to purchase a total of
51,623 shares of Series B preferred stock in connection with several Note and
Warrant Purchase Agreements.
2. In January 1997, we issued 1,422,481 shares of Series B preferred
stock to the Series B investors for an aggregate cash consideration of
$4,807,985.78.
3. In October 1997, in connection with a 1997 bridge financing, we issued
warrants to purchase 60,720 shares of Series C preferred stock at an exercise
price of $3.70 per share for an aggregate cash consideration of $224.69.
4. In December 1997, we issued 1,764,479 shares of Series C preferred
stock to an initial round of Series C investors for an aggregate consideration
of $6,528,572.30, comprised of converting $1,010,404.70 outstanding principal
amounts payable under convertible promissory notes in connection with the 1997
bridge financing and $5,518,167.60 in cash.
5. In March 1998, in connection with the December 1997 Series C
financing, we issued warrants to purchase 211,499 shares of Series C preferred
stock at an exercise price of $4.63 per share for an aggregate consideration of
$2,114.99.
6. In March 1998, we issued 519,171 shares of Series C preferred stock
and warrants to purchase 62,229 shares of Series C preferred stock at an
exercise price of $4.63 per share to a second round of Series C investors for
an aggregate consideration of $1,921,554.99, comprised of converting
$112,998.00 outstanding principal amounts payable under convertible promissory
notes in connection with the 1997 bridge financing and $1,808,556.99 in cash.
7. In April 1998, we issued 889,989 shares of Series C preferred stock
and warrants to purchase 106,681 shares of Series C preferred stock at an
exercise price of $4.63 per share to a third round of Series C investors for an
aggregate cash consideration of $3,294,026.11.
8. In September 1998, we issued warrants to purchase a total of 8,108
shares of Series C preferred stock in connection with entering into Master
Equipment Lease No. 300091.
9. In March 1999, we issued 1,983,468 shares of Series D preferred stock
to the Series D investors for an aggregate cash consideration of
$11,999,981.40.
10. In March 1999 we issued warrants to purchase a total of 3,306 shares
of Series D preferred stock to Pentech Financial Services, Inc.
11. In November and December 1999, we issued 2,518,259 shares of Series E
preferred stock to the Series E investors for an aggregate consideration of
$29,262,169.58.
12. In December 2000 we issued warrants to purchase a total of 80,000
shares of common stock to Sabre, Inc.
13. In February 2000 we issued warrants to purchase a total of 37,182
shares of common stock to certain vendors and strategic partners.
14. As of February 29, 2000, we have issued 998,986 shares of common
stock and options to purchase 1,898,653 shares of common stock to a number of
our employees, directors and consultants.
15. In April 2000, we issued 430,293 shares of Series E preferred stock
to Accor for cash consideration of $5,000,004.66
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D of such Securities Act as transactions by an issuer not involving any public
offering. In addition, certain issuances described in Item 14 were deemed
exempt from registration under
II-2
the Securities Act in reliance upon Rule 701 promulgated under the Securities
Act. The recipients of securities in each such transaction 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 and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits.
Number Description
------ -----------
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between the Registrant and
WorldRes.com, a California corporation.
3.1* Amended and Restated Articles of Incorporation of WorldRes.com, a
California corporation.
3.2* Certificate of Incorporation of the Registrant.
3.3* Amended and Restated Certificate of Incorporation of the Registrant,
to be filed prior to the completion of the offering.
3.4* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of the offering.
3.5 Bylaws of WorldRes.com, a California corporation.
3.6* Form of Bylaws of the Registrant, to be effective upon completion of
the offering.
4.1* Specimen Common Stock Certificate
5.1* Opinion of Orrick, Herrington & Sutcliffe LLP regarding the legality
of the common stock being registered.
10.1* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.2* Amended and Restated 1995 Stock Plan.
10.3* 1999 Executive Stock Plan
10.4* 2000 Directors' Stock Option Plan
10.5 Lease Agreement between the Registrant and Mariners Center Limited
Partnership, dated May 21, 1999.
10.6* Fifth Amended and Restated Investor Rights Agreement, dated November
10, 1999, by and among the Registrant and certain holders of the
Registrant's capital stock.
10.7 Warrant to Purchase Shares of Series B Preferred Stock of the
Registrant, dated June 4, 1996, issued to Gregory Jones.
10.8 Warrant to Purchase Shares of Series B Preferred Stock, dated October
30, 1996, issued to Gregory Jones.
10.9 Note and Warrant Purchase Agreement, dated October 10, 1997, between
the Registrant and certain lenders mentioned therein.
10.10 Amended and Restated Series C Preferred Stock and Warrant Purchase
Agreement, dated March 16, 1998, by and between the Registrant and
certain holders of the Registrant's capital stock.
10.11 Series C Preferred Stock Purchase Agreement, dated March 5, 1999,
between the Registrant and E. Stanton McKee, Jr.
10.12 Series D Preferred Stock Purchase Agreement, dated March 18, 1999 by
and among the Registrant and certain holders of the Registrant's
capital stock.
10.13 Series D Preferred Stock Purchase Agreement, dated August 11, 1999, by
and among the Registrant and The Gregory S. Curhan and Randi E. Curhan
Revocable Trust.
10.14* Series D. Preferred Stock Purchase Agreement, dated September 13,
1999, by and among the Registrant and certain holders of the
Registrant's capital stock.
10.15* Series E Preferred Stock Purchase Agreement, dated December 7, 1999,
by and among the Registrant and certain holders of the Registrant's
capital stock.
10.16 Amendment to Series E Preferred Stock Purchase Agreement, dated April
5, 2000 by and among the Registrant and certain holders of the
Registrant's capital stock.
10.17** Multi-Property Participant Agreement, dated April 14, 1998 between the
Registrant and Choice Hotels International.
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10.18 Agreement and Plan of Merger, dated as of June 18, 1999 among the
Registrant, B&B Acquisition Corporation and Goldreyer Incorporated.
10.19* Offer Letter dated January 31, 2000 with Domenic A. Rinaldi.
10.20 Offer Letter dated March 9, 1998 with Paul N. Wyatt
10.21* Offer Letter dated May 1999 with Gregory S. Curhan
10.22* Offer Letter dated June 1999 with Wolfgang Kitza
10.23* Offer Letter dated August 1999 with Eric Goldreyer
10.24* Offer Letter dated December 31, 1999 with Yen Lee.
10.25** Wizcom Host Distribution Agreement between the Registrant and Wizcom
International, Ltd., dated June 6, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit
5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
- --------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 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
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San Mateo,
State of California on April 7, 2000.
WORLDRES.COM
By: /s/ Gregory A. Jones
-----------------------------------
Gregory A. Jones
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Gregory
A. Jones and Gregory S. Curhan, and each of them, as his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this Registration Statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gregory A. Jones President, Chief Executive April 7, 2000
____________________________________ Officer and Director
Gregory A. Jones (Principal Executive
Officer)
/s/ Gregory S. Chrhan Chief Financial Officer April 7, 2000
____________________________________ (Principal Financial and
Gregory S. Curhan Accounting Officer)
/s/ Eric J. Christensen Chairman of the Board of April 7, 2000
____________________________________ Directors
Eric J. Christensen
/s/ Steven L. Eskenazi Director April 7, 2000
____________________________________
Steven L. Eskenazi
/s/ Gregory T. George Director April 7, 2000
____________________________________
Gregory T. George
II-5
Signature Title Date
--------- ----- ----
/s/ E. Stanton McKee Director April 7, 2000
____________________________________
E. Stanton McKee
/s/ Thomas Unterman Director April 7, 2000
____________________________________
Thomas Unterman
II-6