Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS OF ASHFORD.COM, INC.
Page
----
Fiscal Year Ended March 31, 2001
Report of Independent Public Accountants F-1
Ashford.com, Inc. Consolidated Balance Sheets F-2
Ashford.com, Inc. Consolidated Statements of Operations F-3
Ashford.com, Inc. Consolidated Statements of Stockholders' Equity F-4
Ashford.com, Inc. Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Nine Months Ended December 31, 2001
Ashford.com, Inc. Consolidated Balance Sheets F-22
Ashford.com, Inc. Consolidated Statements of Operations F-23
Ashford.com, Inc. Consolidated Statements of Cash Flows F-24
Notes to Consolidated Financial Statements F-25
Report of Independent Public Accountants
To the Board of Directors
of Ashford.com, Inc.:
We have audited the accompanying consolidated balance sheets of
Ashford.com, Inc. and subsidiaries (the Company), a Delaware corporation, as of
March 31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended March 31, 2001 and the period from inception (March 6, 1998) through March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ashford.com,
Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2001 and the period from inception (March 6, 1998) through March 31,
1999, in conformity with accounting principles generally accepted in the United
States.
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 significant losses from
operations since its inception, losses are expected to continue through fiscal
2002 and its financial resources are limited. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Arthur Andersen LLP
Houston, Texas
June 13, 2001
F-1
Ashford.com, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
March 31, March 31,
2001 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 7,095 $ 46,474
Restricted cash 1,500 120
Accounts receivable, net of allowance for doubtful accounts of $231 and $25, respectively 2,559 4,527
Merchandise inventory 24,066 24,205
Prepaid and other 1,535 79,793
---------- ---------
Total current assets 36,755 155,119
Property and equipment, net of accumulated depreciation of $5,894 and $1,159, respectively 8,441 7,837
Purchased intangibles, net of accumulated amortization of $10,483 and $2,141, respectively 10,162 11,365
Other assets 908 3,287
---------- ---------
Total assets $ 56,266 $ 177,608
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 8,189 $ 6,221
Revolving credit facility 4,705 --
Other long-term liabilities 104 117
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued and outstanding
at March 31, 2001 and 2000 -- --
Common stock, $.001 par value, 100,000,000 shares authorized, 48,691,917 and 44,956,224 shares
issued at March 31, 2001 and 2000, respectively 49 45
Treasury stock, at cost, 770,893 and no shares outstanding at March 31, 2001 and 2000,
respectively -- --
Additional paid-in capital 259,365 260,563
Subscriptions receivable (1,156) (780)
Deferred compensation (4,983) (15,232)
Accumulated deficit (210,007) (73,326)
---------- ---------
Total stockholders' equity 43,268 171,270
---------- ---------
Total liabilities and stockholders' equity $ 56,266 $ 177,608
========== =========
The accompanying notes are an integral part of these financial
statements.
F-2
Ashford.com, Inc.
Consolidated Statements of Operations
(In Thousands, Except Share Amounts)
Period from
Inception
(March 6, 1998)
Year Ended Year Ended through
March 31, March 31, March 31,
2001 2000 1999
---------- --------- -------------
Net sales $ 67,195 $ 39,931 $ 5,938
Cost of sales 56,348 33,487 5,110
---------- --------- -------------
Gross profit 10,847 6,444 828
Operating expenses:
Marketing and sales (includes non-cash amortization of $79,735, $27,525 and
$0, respectively) 105,895 60,806 1,013
General and administrative (includes non-cash amortization of $2,633, $3,003
and $0, respectively) 27,929 17,093 1,019
Restructuring charge 662 -- --
Impairment loss 1,094 -- --
Depreciation and amortization 13,460 3,277 67
---------- --------- -------------
Total operating expenses 149,040 81,176 2,099
---------- --------- -------------
Loss from operations (138,193) (74,732) (1,271)
Interest income 1,644 2,677 13
Interest expense (132) (7) (6)
---------- --------- -------------
Net loss $ (136,681) $ (72,062) $ (1,264)
========== ========= =============
Net loss per share, basic and diluted $ (2.99) $ (2.65) $ (0.12)
========== ========= =============
Shares used to compute net loss per share
Basic and diluted 45,725 27,197 10,397
The accompanying notes are an integral part of these financial statements.
F-3
Ashford.com, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands)
Treasury
Preferred Stock Common Stock Stock
--------------- -------------- ----------
Additional Total
Par Par Paid-In Subscription Deferred Accumulated Stockholders'
Shares Value Shares Value Shares Cost Capital Receivable Compensation Deficit Equity
------ ----- ------ ------- ------ ---- ---------- ------------ ------------ ----------- -------------
Balance at Inception,
March 6, 1998 -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock for cash upon
formation on March
6, 1998 -- -- 6,313 6 -- -- (5) -- -- -- 1
Issuance of common
stock for services
in April 1998 -- -- 4,375 4 -- -- 50 -- -- -- 54
Issuance of Series A
preferred stock in
exchange for cash
and conversion of
note payable on
December 4, 1998 9,500 9 -- -- -- -- 3,991 -- -- -- 4,000
Deferred compensation
related to grants
of options to
purchase common
stock -- -- -- -- -- -- 431 -- (431) -- --
Amortization of
deferred
compensation -- -- -- -- -- -- -- -- 17 -- 17
Net loss -- -- -- -- -- -- -- -- -- (1,264) (1,264)
------- ---- ------ ----- ---- ---- ------ -------- ---------- --------- ----------
Balance at March 31,
1999 9,500 9 10,688 10 -- -- 4,467 -- (414) (1,264) 2,808
Deferred compensation
related to grants
of options to
purchase common
stock -- -- -- -- -- -- 19,123 -- (19,123) -- --
Issuance of Series B
preferred stock in
exchange for cash
and conversion of
note payable on
April 17, 1999 7,149 7 -- -- -- -- 30,083 -- -- -- 30,090
Officer exercise of
options to purchase
common stock
pursuant to note
receivable -- -- 1,852 2 -- -- 778 (780) -- -- --
Issuance of Series C
preferred stock in
exchange for cash
on July 8, 1999 1,425 2 -- -- -- -- 16,302 -- -- -- 16,304
Conversion of
preferred stock
into common stock
in connection with
initial public
offering on
September 22, 1999 (18,074) (18) 18,074 18 -- -- -- -- -- -- --
Issuance of common
stock in exchange
for cash in
connection with
initial public
offering on
September 22, 1999,
net of offering
expenses of
$1.9 million -- -- 6,250 6 -- -- 73,642 -- -- -- 73,648
Issuance of warrants
in connection with
execution of
distribution and
marketing agreements -- -- -- -- -- -- 4,182 -- -- -- 4,182
The accompanying notes are an itegral part of these financial statements.
F-4
Ashford.com, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(In Thousands)
Preferred Treasury
Stock Common Stock Stock
-------------- -------------- ----------- Total
Additional Stock-
Par Par Paid-In Subscription Deferred Accumulated holders'
Shares Value Shares Value Shares Cost Capital Receivable Compensation Deficit Equity
------ ----- ------ ------ ------ ---- ---------- ------------ ------------ ----------- ---------
Issuance of common stock
in connection with Internet
domain and other intangible
asset purchases -- $ -- 685 $ 1 -- $ -- $ 7,374 $ -- $ -- $ -- $ 7,375
Issuance of common stock for
cash and marketing
agreement -- -- 7,407 8 -- -- 104,612 -- -- -- 104,620
Amortization of deferred
compensation -- -- -- -- -- -- -- -- 4,305 -- 4,305
Net loss -- -- -- -- -- -- -- -- -- (72,062) (72,062)
------ ------ ------- ------ ------ ---- --------- ---------- ---------- --------- --------
Balance at March 31, 2000 -- -- 44,956 45 -- -- 260,563 (780) (15,232) (73,326) 171,270
Director exercise of options
to purchase common stock
pursuant to note receivable -- -- 143 -- -- -- 376 (376) -- -- --
Issuance of warrants in
connection with execution
of distribution and
marketing agreements -- -- -- -- -- -- 118 -- -- -- 118
Issuance of warrants in
connection with purchases
of fixed assets -- -- -- -- -- -- 914 -- -- -- 914
Issuance of common stock in
connection with Internet
domain and other intangible
asset purchases -- -- 3,004 3 -- -- 4,238 -- -- -- 4,241
Issuance of common stock in
connection with employee
stock purchase plan -- -- 79 -- -- -- 191 -- -- -- 191
Exercise of common stock
options -- -- 510 1 -- -- 161 -- -- -- 162
Common stock reacquired for
cash -- -- -- -- 771 -- -- -- -- -- --
Recapture of deferred
compensation, net -- -- -- -- -- -- (7,196) -- 7,196 -- --
Amortization of deferred
compensation -- -- -- -- -- -- -- -- 3,053 -- 3,053
Net loss -- -- -- -- -- -- -- -- -- (136,681) (136,681)
------ ------ ------- ------ ------ ---- --------- ---------- --------- --------- --------
Balance at March 31, 2001 -- $ -- 48,692 $ 49 771 $ -- $ 259,365 $ (1,156) $ (4,983) $(210,007) $ 43,268
------ ------ ------- ------ ------ ---- --------- ---------- --------- --------- --------
The accompanying notes are an integral part of these financial statements.
F-5
Ashford.com, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Period from
Inception
Year Ended Year Ended (March 6, 1998)
March 31, March 31, through
2001 2000 March 31, 1999
------------ ------------ ----------------
Cash flows from operating activities:
Net loss $ (136,681) $ (72,062) $ (1,264)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 95,828 33,805 67
Impairment loss 1,094 -- --
Compensation expense related to issuance of common stock -- -- 52
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 1,968 (4,391) (136)
Merchandise inventory 762 (20,635) (3,273)
Prepaid and other 1,780 (8,911) (453)
Other assets (354) (201) --
Accounts payable and accrued liabilities 3,054 3,733 1,300
------------ ----------- -----------
Net cash used in operating activities (32,549) (68,662) (3,707)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (6,859) (6,853) (302)
Internet domain and other intangible asset purchases (3,306) (7,936) --
Restricted cash (1,380) (20) (100)
------------ ----------- -----------
Net cash used in investing activities (11,545) (14,809) (402)
------------ ----------- -----------
Cash flows from financing activities:
Net proceeds from initial public offering -- 73,648 --
Proceeds from issuance of common stock 353 10,000 2
Issuance of Series A preferred stock -- -- 3,245
Issuance of Series B preferred stock -- 29,100 --
Issuance of Series C preferred stock -- 16,304 --
Debt issuance costs (343) -- --
Proceeds from revolving credit facility 4,705 -- --
Proceeds from notes payable -- -- 1,755
------------ ----------- -----------
Net cash provided by financing activities 4,715 129,052 5,002
------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents (39,379) 45,581 893
Cash and cash equivalents:
Beginning of period 46,474 893 --
------------ ----------- -----------
End of period $ 7,095 $ 46,474 $ 893
============ =========== ===========
Supplemental disclosure of noncash investing and financing activities:
Issuance of preferred stock upon conversion of note payable, including accrued
interest $ -- $ -- $ 755
Issuance of common stock in connection with marketing agreement -- 94,620 --
Issuance of common stock in connection with Internet domain and other
intangible asset purchases 4,241 7,375 --
Issuance of warrants in connection with purchases of fixed assets 914 -- --
Issuance of warrants in connection with execution of distribution and
marketing agreements 118 4,182 --
The accompanying notes are an integral part of these financial statements.
F-6
Ashford.com, Inc.
Notes to Consolidated Financial Statements
March 31, 2001
1. Operations and Organization of Business
Background
Ashford.com, Inc. (the Company), formerly NewWatch Company, is a Delaware
corporation which was incorporated on March 6, 1998 (Inception), and commenced
operations in April 1998. The Company is engaged in the distribution of luxury
and premium products including new and vintage watches, diamonds, jewelry,
fragrances, leather accessories, sunglasses and writing instruments, primarily
through online retail sales and corporate sales.
The Company has suffered significant losses from operations since its
inception. Management is implementing a strategy to significantly reduce costs
and improve operating efficiencies (see Note 4). Management believes that the
Company's current cash balances, including those obtained from the merger with
Guild, com, Inc., an online art retailer, and borrowing capacity will be
sufficient to meet anticipated needs for at least the next 12 months, assuming
it executes according to its restructured operating plans. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. Accordingly, there is substantial doubt as to the Company's ability
to continue as a going concern. If current cash and cash that may be generated
from future operations are insufficient to satisfy the Company's liquidity
requirements, management may seek to sell additional equity or debt securities
or to obtain additional credit facilities from lenders. There can be no
assurance that financing will be available in amounts or on the terms acceptable
to the Company, if at all. The Company's ability to raise cash through the sales
of additional equity or convertible debt securities may be difficult depending
on market conditions and other factors, and if available could result in
additional dilution to the Company's stockholders. In addition, management will,
from time to time, consider the acquisition of or investment in complementary
businesses, products, services and technologies, which might impact the
Company's liquidity requirements or cause the Company to issue additional equity
or debt securities.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances have
been eliminated.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company's
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenue is generally recognized on sales of merchandise held for sale when
the product is sold and shipped, net of coupons, discounts and estimated
returns. Amounts billed for shipping are included in revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short-term, highly
liquid investments with original maturities of three months or less.
Restricted Cash
Restricted cash in the amounts of $1.5 million and $120,000 at March 31,
2001 and 2000, respectively, were pledged as collateral against potential credit
card chargebacks. The increase in restricted cash is consistent with the
Company's increased sales levels.
F-7
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, restricted cash
and accounts receivable. Cash, cash equivalents and restricted cash are
deposited with high credit, quality financial institutions. Concentration of
credit risk with respect to accounts receivable are limited due to the Company's
large number of customers and their dispersion substantially throughout the
United States. A substantial portion of the Company's net sales is derived from
customer credit cards. As a result, the related accounts receivable from these
sales are collected within a few days of processing the credit card
transactions. Credit is also extended to a select group of customers based upon
an evaluation of the customer's financial condition and collateral is generally
not required. The Company maintains an allowance for doubtful accounts
receivable based upon expected collectibility. Credit losses have not been
significant to date.
During the years ended March 31, 2001 and 2000 and for the period from
Inception through March 31, 1999, no single customer accounted for more than 10%
of net revenues.
Fair Value of Financial Instruments
The Company's financial instruments, including cash, cash equivalents,
restricted cash, accounts receivable and accounts payable are carried at cost,
which approximates their fair value because of the short-term nature of these
instruments.
Merchandise Inventory
Inventory consists of merchandise held for sale, and is stated at the lower
of cost or market. The Company uses the average cost method of determining the
cost of its inventory and evaluates the market value of its inventory quarterly
based on known market prices available directly from manufacturers and key
suppliers. Inventory balances are reviewed monthly for slow moving inventories.
Based on changes in business conditions and expected future cash flows, the
Company recorded cost of sales of approximately $1.8 million during the fourth
fiscal quarter of 2001 relating to inventory valuation charges.
Purchased Intangibles
Purchased intangibles include Internet domain names, related trademarks and
other identifiable intangible assets purchased by the Company and are presented
net of related accumulated amortization. As a result of rapid technological and
industry changes occurring in the Internet industry, purchased intangibles are
amortized over estimated useful lives of two years.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future estimated
undiscounted cash flows attributable to such assets. The carrying value of
intangible assets and other long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances, both internally and externally, that
may suggest impairment. See discussion of impairment of long-lived assets in
Note 3.
Fulfillment Costs
Included in marketing and sales expense are fulfillment costs, which
consist of the cost of operating and staffing warehousing and distribution
centers. Such costs include those attributable to receiving, inspecting and
warehousing inventories and picking, packaging and preparing customers' orders
for shipment.
Advertising Costs
The Company recognizes advertising expenses in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 93-7,
"Reporting on Advertising Costs." As such, the Company expenses the cost of
communicating advertising in the period in which the advertising takes place.
Internet advertising expenses are recognized based on the terms of the
individual agreements, but generally on a straight-line basis over the term of
the contract. No direct-response advertising has been incurred. During the years
ended March 31, 2001 and 2000 and for the period from Inception through March
31, 1999, the Company incurred advertising expense of approximately $11.9
million, $23.7 million, and $694,000, respectively.
F-8
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Technology, Content and Web Site Development Costs
Technology and content costs consist principally of payroll and related
expenses for development, systems and telecommunications operations personnel
and consultants. Technology and content costs are generally expensed as
incurred, except for certain costs relating to Web site development the
development of internal-use software.
Costs incurred in connection with developing or obtaining software for
internal use are capitalized in accordance with SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Costs
associated with developing the Company's Web site are accounted for in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-2, "Accounting
for Web Site Development Costs," which requires certain Web site development
costs to be capitalized. Capitalized Web site development costs at March 31,
2001 and 2000, primarily relate to external direct costs incurred in developing
and obtaining software utilized on the Company's Web site.
Start-up Costs
In accordance with SOP 98-5, the Company has expensed all start-up costs,
including organization costs, as incurred.
Warranty
The Company guarantees its watches to be genuine, in new condition and free
from defects for a period of at least two years. If the Company is an authorized
agent or service center for the manufacturer, it will extend the original
manufacturer's warranty for a period of two years. The Company estimates future
warranty costs not covered by the original manufacturer's warranty. Warranty
expense is accrued at the date revenue is recognized on the sale of merchandise
held for sale. The Company has not incurred significant warranty claims to date.
As discussed in Note 12, the Company recorded a $400,000 expense to settle a
lawsuit related to watches it sold.
Income Taxes
The Company is a C Corporation for U.S. federal income tax purposes and
uses the liability method in accounting for income taxes. Under this method,
deferred taxes are recorded based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse. A valuation allowance has been established where necessary to reduce
deferred tax assets to the amount more likely than not expected to be realized
in future tax returns.
Comprehensive Income
The Company has adopted the provisions of SFAS 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from nonowner sources. To date, the Company has not engaged in transactions that
are required to be reported in comprehensive income.
Segment Information
The Company complies with SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company identifies its operating
segments based on business activities and management responsibility. The Company
operates in a single business segment: the retail sale of luxury products in the
United States.
Stock-Based Compensation
SFAS 123, "Accounting for Stock-Based Compensation," establishes a fair
value-based method of accounting for stock-based compensation plans. SFAS 123
allows the Company to adopt one of two methods for accounting for stock options.
The Company has elected the method that requires disclosure only of stock-based
compensation. Because of this election, the Company accounts for its employee
stock-based compensation plans under Accounting Principles Board (APB) Opinion
No. 25 and the related interpretations. Accordingly, deferred compensation is
recorded for stock-based compensation grants based on the excess of the
estimated fair value of the common stock on the measurement date over the
exercise price. The deferred compensation is amortized over the vesting period
of each unit of stock-based compensation grant. If the exercise price of the
stock-based compensation grants is equal to the estimated fair value of the
Company's stock on the date of grant, no compensation expense is recorded.
F-9
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Shares associated with stock options, warrants,
convertible preferred stock and contingently issuable common stock are not
included because they are antidilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of outstanding preferred stock into shares of the Company's common
stock effective upon the closing of the Company's initial public offering as if
such conversion occurred on the dates of original issuance (See Note 9).
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share (in thousands, except per share
amounts):
Period from
Year Ended Year Ended Inception through
March 31, 2001 March 31, 2000 March 31, 1999
-------------- -------------- ------------------
Numerator--
Net loss $ (136,681) $ (72,062) $ (1,264)
============== ============== ==================
Denominator--
Weighted average common shares 45,725 27,197 10,397
============== ============== ==================
Denominator for basic and diluted calculation 45,725 27,197 10,397
Weighted average effect of pro forma securities--
Series A preferred stock -- 4,503 2,867
Series B preferred stock -- 3,075 --
Series C preferred stock -- 296 --
-------------- -------------- ------------------
Denominator for pro forma basic and diluted calculation 45,725 35,071 13,264
============== ============== ==================
Net loss per share--
Basic and diluted $ (2.99) $ (2.65) $ (0.12)
============== ============== ==================
Pro forma basic and diluted $ (2.99) $ (2.05) $ (0.10)
============== ============== ==================
Reclassification of Prior Period Balances
Certain prior period balances have been reclassified for consistent
presentation.
Recent Accounting Pronouncements
The FASB issued an Exposure Draft, Business Combinations and Intangible
Assets, containing tentative decisions about requiring the use of a
nonamortization approach to account for purchased goodwill. Under the
nonamortization approach, goodwill would be tested for impairment, rather than
being amortized to earnings. Under the Exposure Draft, the Company's purchased
intangibles would continue to be amortized consistent with its current policy.
Upon adoption of the principles in this Exposure Draft, the Company would record
any goodwill as income or expense.
In March 2000, the FASB issued Financial Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." FIN 44
clarifies the application of APB 25 for certain issues, such as the definition
of an employee for purposes of applying APB 25, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award and the accounting for an exchange of stock compensation awards in a
business combination. Adoption of FIN 44 did not change the Company's existing
accounting policies or disclosures.
F-10
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
In May 2000, the EITF issued EITF 00-14, "Accounting for Certain Sales
Incentives," which provides guidance on the accounting for certain sales
incentives offered by companies to their customers such as discounts, coupons,
rebates and products or services. EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction. The
accompanying financial statements include the reclassification of free product
and service incentives delivered to customers at the time of sale, from
marketing and sales expense to cost of sales, related to the adoption of EITF
00-14. All periods presented have been reclassified for consistent presentation.
In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." This consensus requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue. The Company
historically has classified shipping charges to customers as revenue. In
September 2000, the EITF concluded that the classification of shipping and
handling costs should be disclosed pursuant to Accounting Principles Board (APB)
Opinion No. 22, "Disclosure of Accounting Policies." If shipping and handling
costs are significant and are not included in cost of sales, companies should
disclose both the amount of such costs and which line item on the income
statement includes that amount. Shipping and handling costs cannot be netted
against sales. The Company classifies inbound and outbound shipping costs as
costs of sales. The Company generally does not impose separate handling charges
on customers. However, during fiscal year 2001, the Company began charging for
shipping costs. The Company began charging for packaging costs during fiscal
2002. Costs attributable to receiving, inspecting and warehousing inventories
and picking, packaging and preparing customers' orders for shipment are
classified as marketing and sales expense and totaled $3.8 million, $1.9 million
and $65,000 during the years ended March 31, 2001 and 2000 and the period from
Inception through March 31, 1999, respectively.
3. Impairment of Long-Lived Assets
During the fourth quarter ended March 31, 2001, the Company determined that
the carrying value of certain assets exceeded its net realizable value. In
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the Company recorded an impairment
loss of $1.1 million during the fourth quarter ended March 31, 2001.
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company discontinued the use of several third party software
contracts and wrote down fixed assets of approximately $0.6 million. The Company
also decided not to further pursue the utilization of certain marketing and
distribution arrangements and wrote down intangible assets associated with these
arrangements of approximately $0.5 million.
4. Restructuring and Related Charges
During the fourth quarter ended March 31, 2001, in connection with
management's plan to reduce costs and improve operating efficiencies, the
Company recorded restructuring charges of approximately $0.7 million, consisting
of approximately $0.5 million for headcount reductions and approximately $0.2
million for contract cancellations. Headcount reductions consisted of
approximately 40 employees, or about 17% of the Company's workforce, across all
areas of the Company.
Total cash outlays associated with the restructuring were $0.6 million. The
remaining $0.1 million of restructuring costs is expected to be paid through
December 31, 2001.
The restructuring accrual consists of the following:
Severance and Contract
Benefits Cancellations Total
----------------- --------------- --------
Provision for fiscal year 2001 $ 502 $ 160 $ 662
Amount paid in fiscal year 2001 472 80 552
----------------- --------------- --------
Balance at March 31, 2001 $ 30 $ 80 $ 110
================= =============== ========
During May 2001, the Company initiated a review of its lines of business,
cost structure and general activities. The objective of this review was to
identify opportunities for improved financial performance and liquidity
management. Specific initiatives resulting from this review include reducing the
scope of product offerings, decreasing the Company's investment in inventory and
eliminating certain operating costs, including costs associated with personnel.
In connection with this review, the Company expects to record charges during the
quarter ending June 2001 attributed to the following matters.
F-11
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Reduction of Personnel
In connection with the May 2001 review, the Company entered into severance
agreements with 41 employees. The Company expects to record a charge of $80,000
during the quarter ending June 2001 in connection with these headcount
reductions.
Disposition of Online Watch Retailer
In February 2001, the Company entered into a merger agreement with E.S.T.,
Inc., an online watch retailer, that was doing business as The Watch Network. In
connection with the agreement, the Company paid an aggregate purchase price of
$2.3 million representing the assumption of liabilities and direct acquisition
costs of approximately $650,000, and 1,991,000 shares of the Company's common
stock. The agreement further provided that the Company issue up to an additional
5,500,000 shares of its common stock to The Watch Network upon resolution of
certain authorized dealer relationship contingencies and in connection with The
Watch Network meeting certain gross profit targets as set forth in the
agreement. Further, certain key members of The Watch Network's management
entered into separate employment agreements with the Company which provide for
employment for eighteen months following the merger and representation on the
board of directors of the Company. Principal assets acquired include inventory,
supplier relationships and intellectual property.
During June 2001, as a result of certain business difficulties that arose
in the relationship between the Company and the former principles of The Watch
Network and to resolve litigation between them, the parties began negotiating a
dissolution of that relationship. The Watch Network tentatively agreed to a
settlement whereby The Watch Network and certain of its management will receive
aggregate consideration of approximately $0.8 million representing $0.2 million
of inventory, $0.1 million of severance pay and 1,500,000 shares of the
Company's common stock to settle all potential future claims and obligations.
The Company expects to record a charge of approximately $2.4 million in
connection with this settlement.
Outsourcing of Online Art Operations
In May 2001, the Company closed a merger agreement with Guild.com, Inc. an
online art retailer. In connection with the agreement, the Company issued
approximately 7.1 million shares of the Company's common stock and options and
warrants to purchase approximately 1.6 million shares of the Company's common
stock, in exchange for all of the fully diluted shares of Guild.com's capital
stock. The purchase price was approximately $4.3 million, consisting of $3.3
million of the Company's common stock, $0.7 million of options and warrants to
purchase shares of the Company's common stock and $0.3 million of business
combination costs. The principle assets received include $7.3 million of cash,
an Internet domain name and related trademarks and other tangible and intangible
assets related to Internet retail operations. The total value of net tangible
assets acquired exceeded the $4.3 million purchase price.
In connection with the May 2001 review, the Company concluded that the
operating cost structure of Guild.com was inconsistent with the level of sales
activity and overall Company objectives. In June 2001, the prior management of
Guild.com made a proposal to the Company, which the Company has agreed to
accept, to assume the prospective operations of Guild.com as a separately
capitalized entity. Pursuant to this agreement, the Company will contribute
assets of approximately $0.5 million, including $0.4 million of cash, an
Internet domain name and related trademarks and other intangible assets in
return for 5% ownership interest in the new entity. In addition, the Company and
the new entity will enter into a revenue sharing agreement whereby the Company
will offer the new entity's product on its Web site in return for half of the
gross profit from sales generated by the Company's Web site. The Company will
not assume any future operating costs or obligations. Further, substantially all
Company employees previously employed by Guild.com will become employees of the
new entity or will be terminated.
Sale of Asset
In connection with the May 2001 review, during June 2001, the Company sold
two Internet domain names and related trademarks related to a product
information Internet site in exchange for $0.4 million cash. The Company expects
to record a loss on sale of approximately $0.5 million during the quarter ending
June 2001.
5. Other Significant Acquisitions
In August 1999, the Company entered into an option agreement to purchase
two Internet domain names and related trademarks (the "Purchased Assets") from a
product information Internet site (the "Option Agreement"). In connection with
the Option Agreement, the Company paid $300,000 in cash upon execution of the
Option Agreement for the exclusive right to acquire the Purchased Assets. In
October 1999, the Company exercised its option to acquire the Purchased Assets.
The Company paid an aggregate purchase price of $4.3 million representing
$940,000 of cash (including the aforementioned payment in connection with the
Option Agreement) and 332,500 shares of the Company's common stock.
F-12
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
In September 1999, the Company entered into an asset purchase agreement to
purchase an Internet domain name and related trademarks from a luxury goods
retailer. In connection with this agreement, the Company paid $1.6 million in
cash upon execution for the domain name, related trademarks and non-competition
covenants. The asset purchase agreement further provided that the Company pay an
additional $20,000 of cash consideration for each authorized dealer relationship
successfully transitioned to the Company by the luxury goods retailer, not to
exceed $160,000, all of which was paid as of March 31, 2000.
In January 2000, the Company entered into a merger agreement with an online
fragrance retailer. In connection with the agreement, the Company paid an
aggregate purchase price of $7.5 million representing $3.7 of cash, including
the assumption of certain liabilities, and 330,354 shares of the Company's
common stock. The principal assets received include an Internet domain name and
related trademarks, inventory and other tangible and intangible assets related
to Internet retail operations. The agreement further provided that the Company
issue up to an additional 736,514 shares of its common stock to the Internet
retailer upon the resolution of certain authorized dealer relationship
contingencies as set forth in the agreement. In August 2000, the Company issued
658,998 shares of its common stock in connection with the resolution of the
authorized dealer relationship contingencies. The fair market value of the
shares issued totaled approximately $1.8 million. This acquisition was accounted
for using the purchase method of accounting. The purchase price was allocated in
accordance with APB 16, "Business Combinations," as follows (in thousands):
Property and equipment $ 780
Intangible assets 7,962
Net working capital items 613
----------
Total purchase price $ 9,355
==========
Property and equipment relate primarily to computer equipment and software
costs. Intangible assets resulting from the acquisition relate to an Internet
domain name, related trademarks, customer lists and direct brand relationships
and is being amortized using the straight-line method over an expected useful
life of 2 years.
The following unaudited pro forma data is presented to show pro forma
revenues, net loss and basic and diluted net loss per share as if the
acquisition of the online fragrance retailer had occurred as of the Company's
Inception.
Period from
Year Ended Inception through
March 31, 2000 March 31, 1999
-------------- -----------------
Revenues $ 40,177 $ 5,952
============== =================
Net loss $ (77,603) $ (1,372)
============== =================
Basic and diluted net loss per share $ (2.82) $ (0.12)
============== =================
In October 2000, the Company entered into an asset purchase agreement with
a retailer principally engaged in the business of selling customized gifts to
clients in the investment banking industry. The agreement provided for an
aggregate purchase price of approximately $3.3 million representing $1.9 million
of cash paid at closing, 392,037 shares of the Company's common stock and an
additional $600,000 to be paid in cash over the following twelve months.
Principal assets acquired include a customer base, supplier relationships and
intellectual property.
F-13
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
6. Property and Equipment
Property and equipment is stated at cost. Depreciation is computed based on
the straight-line method over the estimated useful lives of the respective
assets. Repair and maintenance costs are charged to expense as incurred.
Property and equipment consists of the following (in thousands):
Estimated March 31, March 31,
Useful Life 2001 2000
-------------- --------- ----------
Software and Web site development costs 2 years $ 8,200 $ 4,290
Computer and office equipment 3 to 5 years 4,653 3,978
Machinery and equipment 5 years 331 134
Leasehold improvements 3 to 5 years 1,151 594
-------- ---------
14,335 8,996
Less--Accumulated depreciation (5,894) (1,159)
-------- ---------
Property and equipment, net $ 8,441 $ 7,837
======== =========
Depreciation expense totaled approximately $5.3 million, $1.1 million and
$49,000 during the years ended March 31, 2001 and 2000 and the period from
Inception through March 31, 1999, respectively.
7. Note Payable
In March 1999, the Company received $1.0 million cash from a stockholder in
exchange for a note payable bearing interest at an annual rate of 6%. The note
payable had a maturity date of June 1999. The note payable was converted into
preferred stock in April 1999 (see Note 9). In management's opinion, the terms
of this note and its subsequent conversion were at arms length.
8. Revolving Credit Facility
During September 2000, the Company executed a three-year revolving credit
facility with a maximum available credit of $25 million with Congress Financial
Corporation, a unit of First Union National Bank. The credit facility is to be
used for working capital needs and is secured by the Company's assets.
Availability under the credit facility is determined pursuant to a borrowing
base as defined in the agreement, and was $6.9 million on March 31, 2001.
Amounts outstanding under the credit facility bear interest at the prime rate or
LIBOR plus 250 basis points (8.50% at March 31, 2001), as elected by the
Company. Approximately $4.7 million was outstanding under the revolving credit
facility as of March 31, 2001. In addition to the amount outstanding at March
31, 2001, $250,000 was reserved against the issuance of a standby letter of
credit.
9. Stockholders' Equity
Preferred Stock
In December 1998, the Company entered into a stock purchase agreement with
an investor whereby the Company issued 9,500,000 shares of Series A convertible
preferred stock in exchange for approximately $3,245,000 in cash and conversion
of a $755,000 note payable, including accrued interest.
In April 1999, the Company increased the number of authorized shares of its
convertible preferred stock to 17,100,000 with a par value of $.001 per share.
In addition, 7,600,000 shares of the Company's preferred stock was designated as
Series B preferred stock. Also in April 1999, the Company entered into a stock
purchase agreement with five investors whereby 7,148,750 shares of the Company's
Series B convertible preferred stock was issued in exchange for approximately
$29.1 million in cash and conversion of a $1.0 million note payable, including
accrued interest.
In July 1999, the Company increased the number of authorized shares of its
convertible preferred stock to 19,166,250 shares with a par value of $.001 per
share. In addition, 2,066,250 shares of the Company's convertible preferred
stock was designated as Series C convertible preferred stock. Also in July 1999,
the Company entered into a stock purchase agreement with six investors whereby
1,425,679 shares of the Company's Series C convertible preferred stock were
issued in exchange for approximately $16.3 million in cash.
F-14
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
On September 22, 1999, the Company completed its initial public offering of
6,250,000 shares of its common stock. Net proceeds before expenses to the
Company were approximately $73.6 million. As of the closing date of the
offering, all of the Series A, Series B and Series C convertible preferred stock
was converted into an aggregate of 18,074,429 shares of common stock. Concurrent
with the initial public offering, the Board of Directors were authorized,
without further action by the stockholders, to issue up to 10,000,000 shares of
preferred stock in one or more series and to designate the rights, preferences,
privileges and restrictions of each preferred stock series.
Warrants
In connection with a number of distribution and marketing agreements
entered into with luxury brand owners and representatives during fiscal 2000,
the Company has issued 494,930 warrants which are fully vested and may be
exercised for 494,930 shares of common stock. The warrants are exercisable
through January 2002 at a weighted average exercise price of $8.91 per share.
The agreements are for periods up to twenty-four months and provide the Company
with certain exclusive online distributor rights, allow the Company to utilize
certain trademarks and images in connection with its marketing and advertising
activities and require the Company to fund certain marketing and advertising
activities. The Company has recorded the estimated fair value of the warrants on
the date of grant as deferred marketing expense which is being amortized over
the terms of the related agreements. During the fourth quarter ended March 31,
2001, the Company decided not to further pursue the utilization of certain of
its marketing and distribution agreements recording an impairment charge of $0.5
million. See Note 3 for discussion of related impairment losses. Deferred
marketing expense totaled $0.2 million and $2.4 million at March 31, 2001 and
2000, respectively, and is included in other assets in the accompanying
consolidated balance sheet.
In July 2000, the Company issued a warrant to a company to purchase 100,000
shares of common stock at $2.81 in exchange for software maintenance services
rendered by the company. 50,000 shares were immediately exercisable and the
remaining 50,000 shares vest monthly through December 2001. These warrants
expire on July 1, 2005. In March 2001, the Company issued a warrant to a company
to purchase 75,000 shares of common stock at $0.66 in exchange for a marketing
services agreement. 37,500 shares were immediately exercisable and the remaining
37,500 shares vest on December 31, 2001. These warrants expire in March 2006.
The Company has recorded the estimated fair value of the warrants on the date of
grant as intangible assets which are being amortized over the terms of the
related agreements. The unvested warrants are subject to variable accounting,
with fair value re-measurements at the end of each quarterly reporting period.
Intangible assets associated with these warrants totaled $0.1 million at March
31, 2001 and are included in other assets in the accompanying consolidated
balance sheet.
During fiscal year 2001, the Company issued warrants, which are fully
vested, to a related party to purchase 258,706 shares of common stock at $0.01
in exchange for Web site development services rendered by the related party.
129,353 of the warrants expire in September 2005 and the remaining warrants
expire in December 2005. The Company has recorded the fair value of the services
rendered, which management believes are equivalent to those available and
transacted with unrelated parties, as software and Web site development costs.
Software and Web site development costs associated with these warrants totaled
$0.7 million and are included in fixed assets in the accompanying consolidated
balance sheet.
No warrants were outstanding at March 31, 1999 and none have been exercised
through March 31, 2001.
Restricted Stock
On December 4, 1998, the Company entered into an agreement with its
founding and key management employees whereby the employees agreed to allow
5,957,099 shares of previously issued common stock to be subject to certain
restrictions (Restricted Stock). The restrictions provide the Company with the
right, but not the obligation, to repurchase any unvested shares of Restricted
Stock upon termination of employment. Under this agreement, one holder's
Restricted Stock, representing 1,895,849 shares, vests ratably over a 39-month
service period. Of the other holders' Restricted Stock, 1,015,313 shares vested
on March 6, 1999; the remaining shares vest ratably over a 36-month service
period. Restrictions on 1,203,633, 1,598,305 and 1,268,929 shares lapsed into
unrestricted common stock during fiscal 2001, 2000 and 1999, respectively. The
Company repurchased 770,893 shares during fiscal 2001 which are recorded as
treasury stock in the accompanying consolidated balance sheet. The Company paid
par value for the shares. With the exception of the vesting period, holders of
Restricted Stock retain all the rights of common stockholders including voting,
dividend and liquidation rights. The remaining 1,115,339 shares subject to
restrictions are included in outstanding common stock in the accompanying
balance sheet at March 31, 2001.
Common Stock
The holders of the common stock are entitled to receive dividends when and
as declared by the board of directors. Upon the liquidation, dissolution or
winding up of the Company, all of the remaining assets of the Company available
for distribution after that required for holders of preferred stock shall be
distributed among the holders of common stock pro rata based on the number of
shares held by each. The common stock is not redeemable. The holders of
outstanding common stock are entitled to elect two directors of the Company at
each annual election of directors.
F-15
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
In August 1999, the Company's board of directors declared a stock split of
4.75 shares for every 1 share of common stock or preferred stock then
outstanding. The stock split became effective on September 21, 1999.
Accordingly, the accompanying financial statements and footnotes have been
restated to reflect the stock split, including an assumed increase in authorized
shares of common stock and preferred stock. The par value of the shares of
common stock to be issued in connection with the stock split was credited to
common stock and a like amount charged to additional paid-in capital.
The Company's board of directors is authorized to issue up to 100,000,000
shares of common stock with a par value of $.001 per share.
In December 1999, the Company sold 707,964 shares of its common stock to a
leading online retailer for $10.0 million in cash. The Company also issued an
additional 6,698,664 shares of its common stock to the online retailer in
exchange for par value and advertising placements targeted at the online
retailer's customer base with the intent of delivering new customers to the
Company (the "Advertising Placements"). The fair market value of the shares
issued in connection with the Advertising Placements totaled $94.6 million and
were amortized over the one-year term of the agreement and is fully amortized as
of March 31, 2001. As of March 31, 2000, the net amount related to this
agreement included in prepaid and other current assets in the accompanying
consolidated balance sheet totaled $71.0 million.
Equity Incentive Compensation Plans
In April 1998, the Company adopted an incentive compensation plan (the 1998
Stock Incentive Plan) which provided the ability to grant incentive stock
options, nonqualified stock options and restricted stock. The Company does not
intend to grant any additional options or stock awards under this plan.
In July 1999, the Company adopted an incentive compensation plan (the 1999
Stock Incentive Plan) which provides the ability to award incentive stock
options, nonqualified stock options, restricted stock, stock units and stock
appreciation rights. The aggregate number of awards under the 1999 Stock
Incentive Plan shall not exceed 6,175,000 shares of common stock. The 1999 Stock
Incentive Plan allows for annual increases of the lesser of 5% of the total
number of shares of common stock then outstanding or 1,900,000 shares of common
stock. In February 2000, the Company adopted an incentive compensation plan (the
2000 Non-Officer Stock Plan) which provides the ability to grant up to 2,490,000
incentive stock options to non-officer employees. The maximum number of options
allowed to be granted under the 2000 Non-Officer Stock Plan was increased to
4,090,000 in May 2000. The 1999 Stock Incentive Plan and the 2000 Non-Officer
Stock Plan are administered by the board of directors of the Company, which has
the authority to determine the type, number, vesting requirements and other
features and conditions of such awards.
Generally, the Company grants stock options with exercise prices equal to
the fair market value of the common stock on the date of grant. Options
generally vest over a four-year period and expire ten years from the date of
grant.
The following table summarizes stock option activity under the plans:
Weighted Weighted
Average Average
Number of Exercise Grant Date
Shares Price Fair Value
----------- -------- ------------
Balance at Inception -- --
Options granted 1,258,750 $ 0.05 $ 0.16
Options forfeited (190) $ 0.05
---------- --------
Outstanding at March 31, 1999 1,258,560 $ 0.05
Options granted 7,269,976 $ 4.70 $ 4.02
Options exercised (1,852,500) $ 0.43
Options forfeited (252,644) $ 4.91
---------- --------
Outstanding at March 31, 2000 6,423,392 $ 5.01
Options granted 6,521,637 $ 1.41 $ 1.10
Options exercised (653,008) $ 0.82
Options forfeited (2,441,259) $ 4.39
---------- --------
Outstanding at March 31, 2001 9,850,762 $ 3.06
========== ========
F-16
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
The following table summarizes information regarding stock options
outstanding and exercisable as of March 31, 2001:
Outstanding Options Vested and Exercisable
------------------------------------------------------ ----------------------------------
Weighted Average Weighted Weighted
Number of Remaining Average Number of Average
Exercise Price Shares Contractual Life Exercise Price Shares Exercise Price
-------------------------- ------------ -------------------- ------------------ ------------- ------------------
$ 0.05 955,625 8 $ 0.05 542,466 $ 0.05
$ 0.30 - $ 0.43 3,550,675 10 0.32 813,903 0.33
$ 0.56 35,000 10 0.56 417 0.56
$ 0.88 - $ 1.00 173,000 10 0.95 5,987 0.95
$ 1.50 - $ 2.13 247,000 10 1.54 28,521 1.53
$ 2.44 - $ 3.57 2,360,841 9 2.60 567,793 2.63
$ 3.79 - $ 4.72 107,610 9 4.14 44,213 4.14
$ 5.88 - $ 8.75 1,126,892 9 7.40 376,220 7.59
$ 9.16 - $13.50 1,250,619 9 10.26 545,921 10.45
$14.19 - $14.94 43,500 9 14.90 14,051 14.90
------------ -------------
Total 9,850,762 2,939,492
============ =============
Under APB 25, no compensation expense is recognized when the exercise price
of the Company's employee stock options equals the fair value of the underlying
stock on the date of grant. Deferred compensation has been recorded for those
situations where the exercise price of an option was lower than the deemed fair
value of the underlying common stock. Prior to the Company's initial public
offering, the fair value of the common stock on the date of grant was determined
based upon valuations in relation to preferred stock financings and an
independent appraisal. For the year ended March 31, 2000 and the period from
Inception through March 31, 1999, the Company recorded aggregate deferred
compensation of $19.1 million and $431,500, respectively, which is being
amortized over the vesting period of the underlying options. No deferred
compensation was recorded during the year ended March 31, 2001. For the years
ended March 31, 2001 and 2000 and the period from Inception through March 31,
1999, total amortization of deferred compensation totaled $3.1 million, $4.3
million and $17,500, respectively.
Had compensation expense been determined consistent with the provisions of
SFAS 123, the Company's net loss for the years ended March 31, 2001 and 2000 and
the period from Inception through March 31, 1999, would have been adjusted to
the following pro forma amounts (in thousands, except per share data):
Period from
Year Ended Year Ended Inception through
March 31, 2001 March 31, 2000 March 31, 1999
-------------- -------------- --------------
Net loss--
As reported $ (136,681) $ (72,062) $ (1,264)
Pro forma $ (137,660) $ (71,607) $ (1,255)
Basic and diluted net loss per share--
As reported $ (2.99) $ (2.65) $ (0.12)
Pro forma $ (3.01) $ (2.63) $ (0.12)
Pro forma basic and diluted net loss per share--
As reported $ (2.99) $ (2.05) $ (0.10)
Pro forma $ (3.01) $ (2.04) $ (0.10)
Prior to the Company's initial public offering, the Company computed the
fair value of options granted using the minimum value method. Significant
weighted average assumptions used to estimate fair value of options granted
prior to the Company's initial public offering include a risk-free interest rate
of 5.6 percent, expected lives of 10 years and no expected dividends. Subsequent
to the Company's initial public offering, the Company computed the fair value of
options granted using the Black-Scholes option pricing model. Significant
weighted average assumptions used to estimate fair value of options granted
subsequent to the Company's initial public offering are as follows:
F-17
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Year Ended Year Ended
March 31, 2001 March 31, 2000
---------------- ----------------
Risk-free interest rate 5.9% 6.4%
Expected volatility 123.8% 98.4%
Expected life 3.3 years 3.3 years
Employee Stock Purchase Plan
On July 9, 1999, the Company adopted a compensatory employee stock purchase
plan, effective September 22, 1999, for up to 950,000 shares of common stock.
During February 2001, the maximum number of shares to be issued under the plan
was increased to 1,662,500. Participation is voluntary and substantially all
full-time employees meeting limited eligibility requirements may participate.
Contributions are made through payroll deductions and may not be less than 1% or
more than 15% of the participant's base pay, as defined. The participant's
option to purchase common stock is deemed to be granted on the first day and
exercised on the last day of the fiscal quarter at a price which is the lower of
85% of the market price on the first or last day of the fiscal quarter. During
the year ended March 31, 2001, 79,415 shares of common stock were issued under
the plan. Through March 31, 2000, no shares of common stock had been issued
under the plan.
Officer and Director and Employee Loans
In May 1999, the Company entered into a $780,000 full-recourse promissory
note bearing 5% interest with an officer, in connection with the exercise of
options to purchase 1,852,500 shares of common stock. The shares of common stock
purchased were pledged as collateral against the note. In April 2001, the
officer resigned from the Company and the Company agreed to repurchase all of
the shares of common stock from the officer at the price paid by the officer in
exchange for payment in full on the loan, including all principal and related
interest.
In June 2000, the Company entered into a $375,888 full-recourse promissory
note with one of its members of its board of directors in connection with the
exercise of options to purchase 143,250 shares of common stock. The note bears
interest at 6.71% per annum, is secured by a pledge of the shares acquired and
is payable in full by April 2004.
10. Income Taxes
A reconciliation of income tax expense computed at the U.S. statutory rate
to the provision reported in the consolidated statements of operations is as
follows:
Period from
Inception
through
Year Ended Year Ended March 31,
March 31, 2001 March 31, 2000 1999
---------------- ---------------- -------------
Income tax at the statutory rate $ (46,472) $ (24,501) $ (496)
Increase (decrease) resulting from:
Increase in valuation allowance 45,578 23,650 495
Incentive stock options 842 533 --
Non-deductible expenses 52 318 1
---------------- ---------------- -------------
Total $ -- $ -- $ --
================ ================ =============
F-18
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Deferred taxes result from the effect of transactions that are recognized
in different periods for financial and tax reporting purposes. The primary
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
March 31, 2001 March 31, 2000
-------------- --------------
Deferred tax assets--
Net operating loss carryforward $ 61,492 $ 22,075
Amortization of intangibles 4,148 1,045
Non-qualified stock options 1,132 936
Inventory 1,341 --
Property and equipment 821 --
Accruals and reserves 722 162
Other 67 48
-------------- --------------
Total deferred tax assets 69,723 24,266
Deferred tax liabilities--
Difference between book and tax basis of property and equipment -- (121)
-------------- --------------
Total deferred tax liabilities -- (121)
Less--Valuation allowance (69,723) (24,145)
-------------- --------------
Deferred tax assets, net $ -- $ --
-------------- --------------
Due to the uncertainty surrounding the realization of these assets, a
valuation allowance has been provided to fully offset the deferred tax assets.
As of March 31, 2001 and 2000, Ashford.com had net operating loss carryforwards
of approximately $180.9 million and $64.9 million, respectively, which may be
used to offset taxable income in future years. The net operating loss
carryforward will begin to expire in fiscal year 2014. A change in control, as
defined by federal income tax regulations, could significantly limit the
Company's ability to utilize its carryforwards.
11. Related Party Transactions
Certain key members of the Company's management and the board of directors
are stockholders of a company from which the Company purchases computer
equipment, receives consulting services and rented certain office space at
prices and terms that management believes are equivalent to those available to
and transacted with unrelated parties. During two years ended March 31, 2001 and
2000 and the period from Inception, through March 31, 1999, charges for
consulting services and office rent, and payments for Web site development costs
and computer equipment to this related party totaled $3.6 million, $2.5 million
and $172,848, respectively. Payments made during fiscal year 2001 include $2.9
million of cash and 258,706 warrants to purchase the Company's common stock for
$0.01. See Note 9.
In December 1999, the Company entered into a marketing agreement with a
minority interest stockholder for the delivery of new customers at a price and
terms that management believes are equivalent to those available and transacted
with unrelated parties. Total net payments of $0.5 million and $6.0 million were
made during fiscal 2001 and 2000, respectively, pursuant to this agreement.
12. Commitments and Contingencies
Leases
Rent expense for the years ended March 31, 2001 and 2000 and for the period
from Inception through March 31, 1999, was approximately $1.3 million, $853,000
and $47,000, respectively.
F-19
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Future minimum lease payments relating to noncancelable operating leases,
primarily for office space and equipment, are as follows:
For the year ending March 31--
2002 $ 1,291
2003 1,208
2004 93
----------
$ 2,592
----------
401(k) Plan
Effective February 1, 1999, the Company established a defined contribution
401(k) plan. Employees eligible to join the plan are those 21 years of age or
older and have a minimum of 1,000 hours of service within a 12-month period
after their date of hire. Eligible employees may enter the plan on the effective
date and thereafter on any January 1 or July 1. The service requirement is
waived for those employed on the effective date. The Company does not contribute
to the plan.
Employment Agreements
The Company has entered into employment agreements with each of its
employees. Either party may terminate such employment agreement at any time. The
employment agreements provide for employees to receive the compensation and
benefits offered to and accepted by them. The employment agreements also provide
the Company with protection for its trade secrets, intellectual property rights
and other confidential information.
Litigation
During the fourth quarter of fiscal 2001, the Company recorded a charge of
approximately $400,000 relating to the pending settlement of a lawsuit filed
against the Company and certain of its officers during 1999. The final
settlement of this lawsuit is contingent upon court approval; however,
management does not expect a material change in the settlement amount upon
obtaining court approval.
The SEC is conducting an investigation concerning the Company's accounting
and disclosures relating to certain marketing activities during fiscal years
2000 and 2001. The Company has been cooperating with the SEC, and will continue
to do so. The Company's audit committee also has completed an internal review of
certain matters related to the SEC review. The Company does not believe that any
of the accounting issues raised by the SEC will have a material effect on the
Company's financial statements.
The Company is, and from time to time may be, a party to various other
claims and legal proceedings generally incidental to its business. Although the
ultimate disposition of these matters is not presently determinable, management
does not believe that ultimate settlement of any or all of such matters will
have a material adverse effect upon the Company's financial condition or results
of operations.
F-20
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
13. Quarterly Results (Unaudited)
The following tables contain selected unaudited Consolidated Statement of
Operations information for each quarter of fiscal year 2001 and fiscal year
2000. The Company believes that the following information reflects all normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
Year Ended March 31, 2001
------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(in thousands, except per share data)
Net sales $ 14,328 $ 27,750 $ 12,013 $ 13,105
Gross profit(1) 843 5,273 2,293 2,439
Net loss (17,001) (40,022) (40,556) (39,102)
Net loss per share, basic and diluted $ (0.37) $ (0.87) $ (0.89) $ (0.87)
Pro forma net loss per share, basic and diluted $ (0.37) $ (0.87) $ (0.89) $ (0.87)
Shares used to compute net loss per share:
Basic and diluted 46,456 45,758 45,598 45,099
Pro forma basic and diluted(2) 46,456 45,758 45,598 45,099
Year Ended March 31, 2000
------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(in thousands, except per share data)
Net sales $ 11,804 $ 20,104 $ 4,400 $ 3,623
Gross profit(1) 2,174 3,427 225 620
Net income (loss) (41,292) (19,038) (8,553) (3,178)
Net income (loss) per share, basic and diluted $ (0.92) $ (0.51) $ (0.57) $ (0.27)
Pro forma net income (loss) per share, basic and
diluted $ (0.92) $ (0.51) $ (0.27) $ (0.12)
Shares used to compute net income (loss) per share:
Basic and diluted 44,909 37,198 14,920 11,604
Pro forma basic and diluted(2) 44,909 37,198 31,117 26,995
- ----------
(1) Includes the reclassification of certain promotional costs from marketing
and sales to cost of sales related to the adoption of the Emerging Issues
Task Force Issue No. 00-14, "Accounting for Certain Sales Incentives." All
periods presented have been reclassified for consistent presentation. Also
includes a charge of approximately $1.8 million during the fourth quarter
of the year ended March 31, 2001, relating to inventory valuation reserves.
See Note 2.
(2) Includes shares associated with the conversion of preferred stock into
common stock as if the conversion occurred on the dates of original
issuance. See Note 2.
F-21
Ashford.com, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
December 31, March 31,
2001 2001
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 409 $ 7,095
Restricted cash 1,500 1,500
Accounts receivable, net of allowance for doubtful accounts of $ 380
and $231, respectively 3,553 2,559
Merchandise inventory 16,478 24,066
Prepaids and other 1,121 1,535
--------- ---------
Total current assets 23,061 36,755
========= =========
Property and equipment, net of accumulated depreciation of $14,201 and
$5,894, respectively -- 8,441
Purchased intangibles, net of accumulated amortization of $14,441 and
$10,483, respectively -- 10,162
Other assets 516 908
--------- ---------
Total assets $ 23,577 $ 56,266
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 6,228 $ 8,189
Revolving credit facility 787 4,705
Other long-term liabilities 73 104
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued
and outstanding at December 31, 2001 and March 31, 2001, respectively -- --
Common stock, $.001 par value, 100,000,000 shares authorized,
57,400,803 and 48,691,917 shares issued at December 31, 2001 and
March 31, 2001, respectively 57 49
Treasury stock, at cost, 3,066,726 and 770,893 shares at December 31,
2001 and March 31, 2001, respectively (865) --
Additional paid-in capital 261,232 259,365
Subscriptions receivable (376) (1,156)
Deferred compensation (1,326) (4,983)
Accumulated deficit (242,233) (210,007)
--------- ---------
Total stockholders' equity 16,489 43,268
--------- ---------
Total liabilities and stockholders' equity $ 23,577 $ 56,266
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
Ashford.com, Inc.
Consolidated Statements of Operations
(In Thousands, Except Share Amounts)
(Unaudited)
Nine months ended
December 31,
------------
2001 2000
---- ----
Net sales $ 35,336 $ 52,868
Cost of sales 27,219 42,863
--------- ---------
Gross profit 8,117 10,005
Operating expenses:
Marketing and sales (includes amortization of
$705, and $79,735, respectively) 6,902 100,629
General and administrative (includes amortization
of $588, and $2,613, respectively) 14,820 20,929
Restructuring charge 409 --
Settlement loss 2,297 --
Loss on sale of assets 620 --
Depreciation and amortization 16,245 9,616
--------- ---------
Total operating expenses 41,293 131,174
--------- ---------
Loss from operations (33,176) (121,169)
Interest income (expense), net (196) 1,489
--------- ---------
Net loss before disposal of segment (33,372) (119,680)
Net loss from discontinued operations (667) --
Net gain from disposal of segment 1,813 --
--------- ---------
Net loss $ (32,226) $(119,680)
========= =========
Net loss before disposal of segment per share,
basic and diluted $ (0.63) $ (2.63)
Net gain from disposal of segment and from
discontinued operations per share, basic and
diluted $ 0.02 --
Net loss per share, basic and diluted $ (0.61) $ (2.63)
Shares used to compute net loss per share,
basic and diluted 52,947 45,484
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
Ashford.com, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine months ended
December 31, 2001,
------------------
2001 2000
---- ----
Cash Flows From Operating Activities:
Net loss $ (32,226) $ (119,680)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 17,538 91,964
Restructuring charge related to issuance of options to purchase common stock 221 ---
Settlement loss 2,297 ---
Loss on sale of assets 620 ---
Net gain from disposal of segment (1,813) ---
Changes in assets and liabilities:
Accounts receivable (994) (214)
Merchandise inventory 7,588 (2,688)
Prepaids and other 414 140
Other assets (499) (355)
Accounts payable and accrued liabilities (3,497) 6,819
--------- ----------
Net cash used in operating activities (10,351) (24,014)
Cash Flows From Investing Activities:
Purchases of property and equipment (107) (5,862)
Proceeds from sale of equipment and intangible assets 420 ---
Net proceeds from acquisition of a business 7,270 ---
Internet domain and other intangible asset purchases --- (2,082)
Restricted cash --- (1,650)
--------- ----------
Net cash provided by (used in) investing activities 7,583 (9,594)
Cash Flows From Financing Activities:
Proceeds from revolving credit facility 25,691 ---
Payments on revolving credit facility (29,609) ---
Proceeds from related party 230 ---
Payments to related party (230) ---
Proceeds from exercise of stock options --- 156
Net proceeds from the issuance of common stock --- 108
Debt issuance costs --- (233)
--------- ----------
Net cash provided by (used in) financing activities (3,918) 31
--------- ----------
Net decrease in cash and cash equivalents (6,686) (33,577)
Cash and Cash Equivalents:
Beginning of period 7,095 46,474
--------- ----------
End of period $ 409 $ 12,897
========= ==========
Supplemental Disclosure of Noncash Investing
and Financing Activities:
Purchase of common stock in connection with employment and consultant agreements $ 865 ---
Issuance of common stock in connection with settlement 350 ---
Issuance of common stock in connection with Internet
domain and other intangible asset purchases --- $ 2,539
Issuance of warrants in connection with purchases of fixed assets --- 914
The accompanying notes are an integral part of these consolidated
financial statements.
F-24
Ashford.com, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies Unaudited Interim Financial
Information
The accompanying unaudited consolidated financial statements have been
prepared by Ashford.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, and
disclosures necessary for a fair presentation of these financial statements have
been included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended March 31, 2001. Results for the nine months ended
December 31, 2001, are not necessarily indicative of the results that may be
expected for any future quarter or for the year ending March 31, 2002.
Definitive Merger Agreement
On September 14, 2001, we announced that we had entered into a
definitive merger agreement with Global Sports, Inc. whereby Global will acquire
all of the outstanding shares of our common stock. Under the terms of the merger
agreement, upon consummation of the merger, our shareholders will receive 0.0076
of a share of Global common stock and $0.125 cash for each share of our common
stock. Global expects to issue approximately 430,000 shares of common stock and
pay approximately $7.1 million of cash in exchange for all of the outstanding
shares of our common stock. Closing of the proposed transaction is subject to
the satisfaction of certain customary closing conditions, including approval of
our stockholders.
Our consolidated financial statements have been prepared on the
historical cost basis of accounting in accordance with generally accepted
accounting principles in the United States, which may be greater or less than
the fair value of assets and liabilities as determined by Global Sports, Inc.
Following the signing of the definitive merger agreement, we evaluated the
realizability of our long-lived assets pursuant to SFAS No. 121, Accounting for
the Impairment of Long-Lived Assests to Be Disposed Of, which requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future estimated undiscounted cash flows attributable
to such assets. As a result, we recorded an impairment as depreciation and
amortization expense of approximately $8.9 million during the quarter ended
September 30, 2001.
On February 11, 2002, Global Sports, Inc.'s registration statement on
Form S-4 concerning the definitive merger agreement was declared effective by
the Securities and Exchange Commission. A special meeting of our stockholders
has been scheduled for March 14, 2002 to consider and vote upon a proposal to
adopt the definitive merger agreement. Assuming the proposal is accepted by our
stockholders, we expect this transaction to be closed shortly following the
special meeting.
Liquidity
We have suffered significant losses from operations since its
inception. Management continues to implement a strategy to significantly reduce
costs and improve operating efficiencies. We have incurred expenses in
connection with our definitive merger agreement with Global Sports, Inc. since
September 14, 2001. Further, we have incurred additional operating losses during
the same period. As a result, our liquidity position has deteriorated. Assuming
that the pending acquisition by Global Sports, Inc. is not completed, management
believes that a revised restructuring plan will be required and that the
resulting cash balances and borrowing capacity will be sufficient to meet
anticipated needs for at least the next twelve months. Any such plan would
likely include further cost reductions, including costs associated with
personnel, further consideration of our existing lines of business and further
reductions in our investment in inventory. Any projections of future cash needs
and cash flows are subject to substantial uncertainty. Accordingly, there is
substantial doubt as to our ability to continue as a going concern. If current
cash and cash that may be generated from future operations are insufficient to
satisfy our liquidity requirements, management may seek to sell additional
equity or debt securities or to obtain additional credit facilities from
lenders. There can be no assurance that financing will be available in amounts
or on terms acceptable to us, if at all. Our ability to raise cash through the
sales of additional equity or convertible debt securities may be difficult
depending on market conditions and other factors, and if available could result
in additional dilution to our stockholders. In addition, management will, from
time to time, consider the acquisition of or investment in complementary
businesses, products, services and technologies, which might impact our
liquidity requirements or cause us to issue additional equity or debt
securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification of Prior Period Balances
F-25
Certain prior period balances have been reclassified for consistent
presentation.
Net Loss Per Share
Net loss per share is computed using the weighted average number of
common shares outstanding. Shares associated with stock options and warrants are
not included because they are antidilutive.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective beginning April
2002. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
relating to the disposal of a segment of a business of Accounting Principles
Board Opinion No. 30. We do not anticipate that the adoption of SFAS No. 144
will have a material impact on our financial position.
In July 2001, the FASB issued Statements No. 141, Business Combinations
and No. 142, Goodwill and Other Intangible Assets requiring the nonamortization
approach to account for purchased goodwill. Under the nonamortization approach,
goodwill would be tested for impairment based on fair values, rather than
amortized to earnings. These standards are effective beginning in April 2002.
Upon adoption, these standards will not have a significant effect on our
financial statements as the related assets were expensed as of September 30,
2001.
In July 2000, the EITF reached a consensus on EITF 00-10, "Accounting
for Shipping and Handling Fees and Costs." This consensus requires that all
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represent revenue and should be classified as such. We
historically have classified shipping charges to customers as revenue. In
September 2000, the EITF concluded that the classification of shipping and
handling costs should be disclosed pursuant to Accounting Principles Board (APB)
Opinion No. 22, "Disclosure of Accounting Policies." If shipping and handling
costs are significant and are not included in cost of sales, companies should
disclose both the amount of such costs and which line item on the income
statement includes that amount. Shipping and handling costs cannot be netted
against sales. We classify inbound and outbound shipping costs as costs of
sales. We generally do not impose separate handling charges on customers.
However, during fiscal year 2001, we began charging for shipping costs. We began
charging for packaging costs during fiscal 2002. Costs attributable to
receiving, inspecting and warehousing inventories and picking, packaging and
preparing customers' orders for shipment are classified as marketing and sales
expense and totaled $1.9 million and $2.5 million during the nine months ended
December 31, 2001 and 2000, respectively.
In May 2000, the EITF issued EITF 00-14 "Accounting for Certain Sales
Incentives," which provides guidance on the accounting for certain sales
incentives offered by companies to their customers such as discounts, coupons,
rebates and products or services. EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of a single exchange transaction. The
accompanying financial statements include the reclassification of free product
and service incentives delivered to customers at the time of sale, from
marketing and sales expense to cost of sales, related to the adoption of EITF
00-14. All periods presented have been reclassified for consistent presentation.
2. Restructuring and Related Charges
During the fourth quarter ended March 31, 2001, in connection with
management's plan to reduce costs and improve operating efficiencies, we
recorded restructuring charges of approximately $0.7 million, consisting of
approximately $0.5 million for headcount reductions and approximately $0.2
million for contract cancellations. Headcount reductions consisted of
approximately 40 employees, or about 17% of our workforce.
During the first quarter ended June 30, 2001, we initiated a review of
our lines of business, cost structure and general activities. The objective of
this review was to identify opportunities for improved financial performance and
liquidity management. Specific initiatives resulting from this review include
reducing the scope of product offerings, decreasing our investment in inventory
and eliminating certain operating costs, including costs associated with
personnel. In connection with this review, we recorded charges of approximately
$0.5 million for headcount reductions. Headcount reductions consisted of
approximately 46 employees, or about 19% of our workforce.
Total cash outlays during the quarter ended June 30, 2001 were
approximately $0.2 million. The restructuring accrual was reduced by an
additional $0.2 million through the issuance of options to purchase our common
stock. Previously recorded allowances for contract cancellations of
approximately $0.1 million were reversed during the quarter ended June 30, 2001
upon determination that the associated cost would not be incurred.
F-26
The restructuring accrual consists of the following:
Severance
and Contract
Benefits Cancellations Total
--------- ------------- -----
Provision for fiscal year 2001 $ 502 $ 160 $ 662
Amount paid in fiscal year 2001 (472) (80) (552)
-------- ------------ ------
Balance at March 31, 2001 30 80 110
Provision for quarter ended June 30, 2001 479 -- 479
Provision reversed in quarter ended June 30, -- (80) (80)
2001
Amount paid in quarter ended June 30, 2001 (421) -- (421)
-------- ------------ ------
Balance at June 30, 2001 88 -- 88
Provision for quarter ended September 30, 10 -- 10
2001
Amount paid in quarter ended September 30, (86) -- (86)
2001 -------- ------------ ------
Balance at September 30, 2001 12 -- 12
Amount paid in quarter ended December 31, (9) -- (9)
2001 -------- ------------ ------
Balance at December 31, 2001 $ 3 $ -- $ 3
======== ============ ======
3. Revolving Credit Facility
During September 2000, we executed a three-year revolving credit
facility with a maximum available credit of $25 million with Congress Financial
Corporation, a unit of First Union National Bank. The credit facility is to be
used for working capital needs and is secured by our assets. Availability under
the credit facility is determined pursuant to a borrowing base as defined in the
agreement. During the quarter ended September 30, 2001, an independent appraisal
firm completed a periodic appraisal of our inventory as required under the
revolving credit facility. This appraisal resulted in a decrease in our
borrowing base as defined in the revolving credit facility. As a result, total
availability under the credit facility was approximately $5.4 million on
December 31, 2001 ($787,000 outstanding at December 31, 2001). Amounts
outstanding under the credit facility bear interest at the prime rate or LIBOR
plus 250 basis points, as elected by us.
4. Treasury Stock
During May 2001, we repurchased 1,852,500 shares of our common stock
for approximately $0.9 million in connection with certain employment and
consultant agreements. Consideration for this purchase was a subscription
receivable of approximately $0.8 million and accrued interest receivable of
approximately $0.1 million.
5. Other Matters
Disposition of Online Watch Retailer
In February 2001, we entered into a merger agreement with an online
watch retailer. In connection with the agreement, we paid an aggregate purchase
price of $2.3 million representing the assumption of liabilities and direct
acquisition costs of approximately $650,000, and 1,991,000 shares of our common
stock. The agreement further provided that we issue up to an additional
5,500,000 shares of our common stock to the online retailer upon resolution of
certain authorized dealer relationship contingencies and in connection with the
online retailer meeting certain gross profit targets as set forth in the
agreement. Further, certain key members of the online watch retailer's
management entered into separate employment agreements with us which provide for
employment for eighteen months following the merger and representation on our
board of directors. Principal assets acquired include inventory, supplier
relationships and intellectual property.
During June 2001, as a result of certain business difficulties that
arose in the relationship with the former principals of the online watch
retailer and to resolve litigation, we began negotiating a dissolution of that
relationship. The online watch retailer agreed to a settlement whereby the
online watch retailer and certain of it's management will receive aggregate
consideration of approximately $0.8 million representing $0.2 million of
inventory, $0.1 million of severance pay and 1,500,000 shares of our common
stock to settle all potential future claims and obligations. We recorded a
charge of approximately $2.3 million in connection with this settlement during
the quarter ended June 30, 2001. At December 31, 2001, all consideration with
the exception of 76,655 shares of our common stock has been paid.
F-27
Outsourcing Of Online Art Operations
In May 2001, we closed a merger agreement with an online art retailer
that was inintiated in January 2001. In connection with the agreement, we issued
approximately 7.1 million shares of our common stock and options and warrants to
purchase approximately 1.6 million shares of our common stock, in exchange for
all of the fully diluted shares of the online art retailer's capital stock. The
purchase price was approximately $4.3 million, consisting of $3.3 million of our
common stock, $0.7 million of options and warrants to purchase shares of our
common stock and $0.3 million of business combination costs. The principle
assets received include $7.3 million of cash, an Internet domain name and
related trademarks and other tangible and intangible assets related to Internet
retail operations. The total value of net tangible assets acquired exceeded the
$4.3 million purchase price.
In May 2001, we concluded that the operating cost structure of the
online art retailer was inconsistent with the level of sales activity and our
overall objectives. In June 2001, the prior management of the online art
retailer made a proposal, which we accepted, to assume the prospective
operations of the online art retailer as a separately capitalized entity.
Pursuant to this agreement, we contributed assets of approximately $0.5 million,
including $0.4 million of cash, an Internet domain name and related trademarks
and other intangible assets in return for 5% ownership interest in the new
entity. In addition, we entered into a revenue sharing agreement with the new
entity whereby we will offer the new entity's product on its Web site in return
for half of the gross profit from sales of the new entity's products generated
by our Web site. We did not assume any future operating costs or obligations.
Further, substantially all the employees previously employed by the online art
retailer became employees of the new entity or were terminated.
Activity related to art operations during the quarter ended June 30,
2001, was recorded in accordance with APB No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and
EITF 85-36 "Discontinued Operations with Expected Gain and Interim Operating
Losses". Accordingly, losses from the acquisition closing date (May 3, 2001)
through the measurement date (June 13, 2001) were reflected as net loss from
discontinued operations in the financial statements for the quarter ended June
30, 2001. Losses from the measurement date through the separation date (July 31,
2001) were deferred as there was reasonable assurance that a net gain on
disposal will be realized. For the quarter ended June 30, 2001, net loss on
discontinued operations included net sales commissions of approximately $125,000
and operating expenses of approximately $792,000. For the period from the
measurement date through June 30, 2001, net losses of approximately $109,000
representing net sales commissions of approximately $53,000 and operating
expenses of $162,000 were deferred. For the quarter ended September 30, 2001,
net losses of approximately $588,000 representing net sales commissions of
approximately $159,000 and operating expenses of approximately $747,000 were
netted against gain on disposal of discontinued operations. We recognized a net
gain on disposal of discontinued operations of approximately $1.8 million during
the quarter ended September 30, 2001.
Sale of Asset
During June 2001, we sold two Internet domain names and related trademarks
related to a product information Internet site in exchange for $0.4 million
cash. The majority of the cash proceeds were received during the quarter ended
September 2001. We recorded a loss on sale of approximately $0.5 million during
the quarter ended June 2001.
6. Supplemental Information
The following supplemental financial information is presented for
informational purposes only and is not in accordance with generally accepted
accounting principles. We believe that Company performance is best evaluated on
the basis of our ability to generate positive operating cash flows from our core
retail and corporate operations. In prior periods, we have entered into certain
agreements and transactions that, we believe, make analysis of our core
operations more difficult. As such, we believe that this supplemental
information presenting the performance of our core retail and corporate
operations excluding the impact of such agreements and transactions improves the
clarity of our financial statements presented in accordance with generally
accepted accounting principles. We use this basis of presentation internally to
evaluate our financial performance. This information should not be considered as
a substitute for the historical financial information presented in accordance
with generally accepted accounting principles.
F-28
Nine months ended
December 31,
------------
2001 2000
---- ----
Net loss $ (32,226) $ (119,680)
Acquisiton costs (1) 534 --
Restructuring charge (2) 409 --
Settlement loss (2) 2,297 --
Loss on sale of assets (2) 620 --
Depreciation and amortization (3) 17,538 91,964
Net gain from disposal of segment (2) (1,146) --
--------- ----------
Net loss, excluding acquisition costs,
restructuring charge, settlement loss,
loss on sale of assets, depreciation and
amortization, and net gain from disposal
of segment $ (11,974) $ (27,716)
Net loss per share, excluding acquisition
costs, restructuring charge, settlement
loss, loss on sale of assets,
depreciation and amortization, and net
gain from disposal of segment $ (0.23) $ (0.61)
Shares used to compute net loss per share,
basic and diluted 52,947 45,484
(1) Acquisition costs represent non-refundable legal and professional
expenses related to the Global Sports, Inc. merger. Acquisition costs
are reported as general and administrative expenses in the consolidated
statements of operations.
(2) Restructuring charge, settlement loss, loss on sale of assets and net
gain from disposal of segment represent gains or losses we expect to be
non-recurring. Generally, these gains or losses relate to transactions
resulting in significant headcount reductions, contract cancellations
and disposition of certain non-core business activities. See further
discussion at Notes 2 and 5 to the consolidated financial statements.
(3) Depreciation and amortization represent non-cash operating expenses
primarily related to amortization of certain marketing activities,
amortization of deferred compensation, amortization of purchased
intangibles and depreciation of website and tangible assets. Generally,
the transactions underlying these expenses represent the investment
necessary establish Ashford as a meaningful luxury brand on the
Internet and to acquire the necessary infrastructure to support core
retail and corporate operations. We do not believe that similar
expenditures to support the business will be necessary for the
foreseeable future.
F-29