0001012870-01-502221.txt : 20011010
0001012870-01-502221.hdr.sgml : 20011010
ACCESSION NUMBER: 0001012870-01-502221
CONFORMED SUBMISSION TYPE: S-4
PUBLIC DOCUMENT COUNT: 6
FILED AS OF DATE: 20011009
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GLOBAL SPORTS INC
CENTRAL INDEX KEY: 0000828750
STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021]
IRS NUMBER: 042958132
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0101
FILING VALUES:
FORM TYPE: S-4
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-71262
FILM NUMBER: 1755260
BUSINESS ADDRESS:
STREET 1: 1075 FIRST AVE
STREET 2: RTE 3 INDUSTRIAL PARK
CITY: KING OF PRUSSIA
STATE: PA
ZIP: 19406
BUSINESS PHONE: 6102653229
MAIL ADDRESS:
STREET 1: 1075 FIRST AVE
CITY: KING OF PRUSSIA
STATE: PA
ZIP: 19406
S-4
1
ds4.txt
FORM S-4
As filed with the Securities and Exchange Commission on October 9, 2001
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------
GLOBAL SPORTS, INC.
(Exact name of registrant as specified in its charter)
-----------------
Delaware 5941 04-2958132
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
-----------------
1075 First Avenue
King of Prussia, PA 19406-1309
(610) 265-3229
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------
Arthur H. Miller
Executive Vice President and General Counsel
GLOBAL SPORTS, INC.
1075 First Avenue
King of Prussia, PA 19406-1309
(610) 265-3229
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
Copies to:
David A. Lipkin, Esq. Anthony M. Allen, Esq.
Jaimee R. King, Esq. Catherine L. Dawson, Esq.
COOLEY GODWARD LLP GUNDERSON DETTMER STOUGH VILLENEUVE
Five Palo Alto Square FRANKLIN & HACHIGIAN, LLP
3000 El Camino Real 2700 Via Fortuna, Suite 300
Palo Alto, CA 94306-2155 Austin, TX 78746-7996
Telephone (650) 843-5000 Telephone (512) 732-8400
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and upon
consummation of the merger described herein.
-----------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
-----------------
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Amount of
Securities to be Registered Registered(1) Share(2) Offering Price(2) Registration Fee(2)
---------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per share 511,914 $11.195 $5,730,877.23 $1,432.72
---------------------------------------------------------------------------------------------------------------
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(1) This Registration Statement relates to common stock, par value $0.01 per
share, of Global Sports, Inc. issuable to holders of common stock, par
value $0.001 per share, of Ashford.com, Inc. in the proposed merger of Ruby
Acquisition Corp., a wholly owned subsidiary of Global Sports, Inc., with
and into Ashford.com, Inc. The amount of Global Sports, Inc. common stock
to be registered has been determined by multiplying the exchange ratio
(0.0076 of a share of Global Sports, Inc. common stock for each share of
Ashford.com, Inc. common stock) by 67,357,142 shares, the maximum aggregate
number of shares of Ashford.com, Inc. common stock that would be
outstanding prior to the merger, assuming the exercise of all outstanding
Ashford.com, Inc. options and warrants (whether or not currently
exercisable).
(2) The registration fee was calculated pursuant to Rule 457(f) as 0.00025
multiplied by $11.195 (the average of the high and low prices of Global
Sports, Inc. common stock on the Nasdaq National Market on October 2,
2001), multiplied by 511,914 shares.
-----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
under the Securities Act of 1933, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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[LOGO] Ashford.com
To the Stockholders of Ashford.com, Inc.:
You are cordially invited to attend a special meeting of Ashford
stockholders, to be held on [ ], 2001 at [ a.m.], local time at the
Renaissance Hotel, 6 Greenway Plaza East, Suite 1809, Houston, Texas 77046.
At the special meeting of Ashford stockholders, you will be asked to
consider and vote upon a proposal to adopt a merger agreement among Ashford,
Global Sports, Inc. and Ruby Acquisition Corp., a wholly owned subsidiary of
Global Sports. If the merger agreement is adopted by the stockholders of
Ashford and the other conditions to the transaction are satisfied or waived,
Ruby Acquisition Corp. will merge with and into Ashford, Ashford will become a
wholly owned subsidiary of Global Sports and each outstanding share of Ashford
common stock will be converted into the right to receive a combination of cash
in the amount of $0.125 and 0.0076 of a share of Global Sports common stock,
with cash in lieu of any fractional shares. Global Sports common stock is
listed on the Nasdaq National Market under the symbol "GSPT," and closed at $
per share on [ ], 2001.
Immediately after the merger, based on the respective numbers of shares of
common stock of Global Sports and Ashford outstanding on [ ], 2001,
former stockholders of Ashford will own approximately [ ]% of the outstanding
shares of Global Sports common stock.
You may vote at the special meeting if you owned shares of Ashford common
stock as of the close of business on [ ], 2001, the record date for the
special meeting of Ashford stockholders.
After careful consideration, Ashford's board of directors has determined
that the proposed transaction with Global Sports is in the best interests of
the stockholders of Ashford and that the merger agreement and the merger are
advisable and fair to Ashford and its stockholders. Therefore, Ashford's board
of directors recommends that Ashford stockholders vote FOR adoption of the
merger agreement.
The prospectus/proxy statement attached to this letter provides you with
detailed information about Global Sports, Ashford and the proposed merger. In
addition, you may obtain other information about Global Sports and Ashford from
documents filed with the Securities and Exchange Commission. We encourage you
to read the entire prospectus/proxy statement carefully. In particular, you
should carefully consider the discussion in the section entitled "Risk Factors"
beginning on page 16.
Your vote is very important. Whether or not you plan to attend the special
meeting, if you are a holder of Ashford common stock, please take the time to
vote by completing and mailing the enclosed proxy card to us as described in
the instructions accompanying the enclosed proxy card.
David Gow
Chief Executive Officer
Ashford.com, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the Global Sports
common stock to be issued in the merger or determined whether the
prospectus/proxy statement is accurate or adequate. Any representation to the
contrary is a criminal offense.
The prospectus/proxy statement is dated [ ], 2001, and is first being
mailed to Ashford stockholders on or about [ ], 2001.
The prospectus/proxy statement does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by the
prospectus/proxy statement, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction.
[LOGO] Ashford.com
3800 Buffalo Speedway, Suite 400
Houston, TX 77098
(713) 369-1300
NOTICE OF SPECIAL MEETING OF ASHFORD STOCKHOLDERS TO BE HELD ON [ ], 2001
To the Stockholders of Ashford.com, Inc.:
A special meeting of stockholders of Ashford.com, Inc., a Delaware
corporation, will be held on [ ], 2001 at [ a.m.], local time, at the
Renaissance Hotel, 6 Greenway Plaza East, Suite 1809, Houston, Texas 77046, for
the purpose of considering and voting upon a proposal to adopt the Agreement
and Plan of Merger and Reorganization dated as of September 13, 2001, by and
among Global Sports, Inc., a Delaware corporation, Ruby Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Global Sports, and
Ashford, pursuant to which, among other things, Ruby Acquisition Corp. will
merge with and into Ashford, Ashford will survive the merger as a wholly owned
subsidiary of Global Sports and holders of outstanding shares of Ashford common
stock will become entitled to receive a combination of $0.125 in cash and
0.0076 of a share of Global Sports common stock for each share of Ashford
common stock they hold.
Ashford's board of directors has fixed [ ], 2001 as the record date
for the determination of stockholders entitled to notice of, and to vote at,
the special meeting of Ashford stockholders and any adjournment or postponement
thereof. Only holders of record of shares of Ashford common stock at the close
of business on the record date are entitled to notice of, and to vote at, the
special meeting of Ashford stockholders. At the close of business on the record
date, Ashford had outstanding and entitled to vote [ ] shares of common
stock. Ashford stockholders are not entitled to appraisal rights in connection
with the merger.
Ashford's board of directors has determined that the merger agreement and
the merger are advisable and fair to, and in the best interests of, Ashford and
its stockholders and recommends that you vote FOR adoption of the merger
agreement.
YOUR VOTE IS IMPORTANT. The affirmative vote of the holders of a majority of
the outstanding shares of Ashford common stock as of the record date is
required for adoption of the merger agreement. Even if you plan to attend the
special meeting in person, we request that you sign and return the enclosed
proxy card as described in the prospectus/proxy statement and in accordance
with the instructions accompanying the proxy card, thus ensuring that your
shares will be represented at the special meeting. If you sign, date and mail
your proxy card without indicating how you wish to vote, your proxy will be
counted as a vote FOR adoption of the merger agreement. If you fail to return
your proxy card, it will have the same effect as voting AGAINST the adoption of
the merger agreement. If you do attend the special meeting of Ashford
stockholders and wish to vote in person, you may withdraw your proxy and vote
in person.
By Order of the Board of Directors,
[signature]
David Gow
Chief Executive Officer
Ashford.com, Inc.
Houston, Texas
[ ], 2001
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER................................................. iv
SUMMARY................................................................................ 1
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND DATA................................... 6
GLOBAL SPORTS, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION............. 8
ASHFORD.COM, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION............... 10
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION.......................................................................... 12
COMPARATIVE PER SHARE DATA............................................................. 14
RISK FACTORS........................................................................... 16
Risks Relating to the Merger........................................................ 16
Risks Relating to Global Sports..................................................... 18
Risks Relating to Ashford........................................................... 30
THE SPECIAL MEETING OF ASHFORD STOCKHOLDERS............................................ 41
General............................................................................. 41
Date, Time and Place................................................................ 41
Matters to be Considered at the Special Meeting of Ashford Stockholders............. 41
Record Date......................................................................... 41
Voting of Proxies................................................................... 41
Votes Required...................................................................... 42
Quorum; Abstentions and Broker Non-Votes............................................ 42
Solicitation of Proxies and Expenses................................................ 42
Other Matters....................................................................... 42
Stockholder Proposals for the Ashford 2002 Annual Meeting........................... 43
Board Recommendation................................................................ 43
THE MERGER............................................................................. 44
General............................................................................. 44
General Description of the Merger................................................... 44
Background of the Merger............................................................ 44
Reasons for the Merger.............................................................. 46
Global Sports' Reasons for the Merger............................................... 46
Ashford's Reasons for the Merger and Recommendation of Ashford's Board of Directors. 48
Opinion of Ashford's Financial Advisor.............................................. 50
Interests of Ashford's Officers and Directors in the Merger......................... 56
Material Federal Income Tax Consequences............................................ 58
Accounting Treatment................................................................ 59
Regulatory Approvals................................................................ 59
Restrictions on Resales by Affiliates............................................... 60
Absence of Appraisal Rights......................................................... 60
CERTAIN TERMS OF THE MERGER AGREEMENT.................................................. 61
The Merger.......................................................................... 61
Effective Time of the Merger........................................................ 61
Manner and Basis of Converting Shares............................................... 61
Ashford Stock Options and Warrants.................................................. 62
Ashford Employee Stock Purchase Plan................................................ 62
Representations and Warranties...................................................... 62
Covenants; Conduct of Business Prior to the Merger.................................. 62
Limitation on Ashford's Ability to Consider Other Acquisition Proposals............. 66
Conditions to the Merger............................................................ 68
i
Termination of the Merger Agreement.......................................................... 71
Expenses and Termination Fee................................................................. 72
Amendment.................................................................................... 73
VOTING AGREEMENTS............................................................................... 74
INFORMATION RELATING TO GLOBAL SPORTS........................................................... 75
Prior Filings................................................................................ 75
Recent Developments.......................................................................... 75
INFORMATION RELATING TO ASHFORD................................................................. 76
Forward-Looking Statements................................................................... 76
Overview of Ashford.......................................................................... 76
Industry Overview............................................................................ 76
Business Strategy............................................................................ 79
The Ashford.com Online Retail Store.......................................................... 80
Ashford's Store Departments.................................................................. 80
Merchandising................................................................................ 81
Marketing and Promotion...................................................................... 82
Fulfillment Operations....................................................................... 82
Customer Service............................................................................. 83
Operations and Technology.................................................................... 83
Government Regulation........................................................................ 84
Competition.................................................................................. 85
Intellectual Property........................................................................ 86
Employees.................................................................................... 86
Properties................................................................................... 86
Legal Proceedings............................................................................ 86
ASHFORD.COM, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION........................ 87
ASHFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 89
Overview..................................................................................... 89
Results of Operations........................................................................ 90
Liquidity and Capital Resources.............................................................. 94
Recent Accounting Pronouncements............................................................. 96
Quantitative and Qualitative Disclosures About Market Risk................................... 97
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF ASHFORD...................................... 98
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................................... 100
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION........................... 104
COMPARISON OF STOCKHOLDERS' RIGHTS.............................................................. 106
Authorized Capital Stock..................................................................... 106
Number of Directors.......................................................................... 106
Changes in the Number of Directors........................................................... 106
Election of Directors........................................................................ 106
Special Meeting of Stockholders.............................................................. 107
Action by Written Consent of Stockholders.................................................... 107
Amendments to Bylaws......................................................................... 107
Issuance of Additional Stock................................................................. 108
LEGAL MATTERS................................................................................... 109
EXPERTS......................................................................................... 109
WHERE YOU CAN FIND MORE INFORMATION............................................................. 109
ii
INDEX TO FINANCIAL STATEMENTS OF ASHFORD.COM, INC.................... F-1
ANNEXES:
Annex A Agreement and Plan of Merger and Reorganization........... A-1
Annex B Form of Voting Agreement.................................. B-1
Annex C Opinion of U.S. Bancorp Piper Jaffray Inc................. C-1
This document incorporates important business and financial information
about Global Sports, Inc. from documents filed with the Securities and Exchange
Commission that have not been included in or delivered with this document. This
information is available at the Internet web site that the Securities and
Exchange Commission maintains at http://www.sec.gov, as well as from other
sources. See "Where You Can Find More Information," on page 109 of this
prospectus/proxy statement.
You may also request copies of these documents from Global Sports, Inc.,
without charge, upon written or telephoned request to Global Sports, Inc.,
Attention: Investor Relations, 1075 First Avenue, King of Prussia, PA 19406,
telephone number (610) 265-3229. In order to receive timely delivery of the
documents, you must make your request no later than [ ], 2001.
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: As an Ashford stockholder, what will I receive in the merger? (see page 44)
A: You will receive a combination of $0.125 in cash and 0.0076 of a share of
Global Sports common stock, the combination of which is collectively
referred to in this prospectus/proxy statement as the "merger
consideration," for each share of Ashford common stock that you own, except
that you will receive a cash payment in lieu of any fractional share of
Global Sports common stock you would otherwise be entitled to receive. For
example, if you own 1,000 shares of Ashford common stock at the time the
merger is completed, you will receive in exchange for your Ashford shares
$125 in cash, seven shares of Global Sports common stock and a cash payment
equal to the value of 0.6 of a share of Global Sports common stock, based on
the closing price of Global Sports common stock on the Nasdaq National
Market on the date the merger is completed.
The 0.0076 of a share of Global Sports common stock that you will have the
right to receive in the merger in exchange for each of your shares of
Ashford common stock is a fixed ratio and will not be adjusted based upon
changes in the value of Ashford or Global Sports common stock. As a result,
the value of the Global Sports shares you will receive in the merger, and
thus the value of the aggregate merger consideration you will receive in the
merger, will not be known before the completion of the merger and will go up
or down as the market price of Global Sports common stock goes up or down.
You are encouraged to obtain current market quotations of Ashford and Global
Sports common stock.
Q: What do I need to do now? (see page 41)
A: You should read this prospectus/proxy statement carefully, including its
annexes, and consider how the merger will affect you. You should then mail
your signed proxy card in the enclosed return envelope as soon as possible
as described in this prospectus/proxy statement, so that your shares can be
voted at the special meeting of Ashford stockholders.
Q: What happens if I do not return a proxy card? (see page 42)
A: The failure to return your proxy card or vote in person will have the same
effect as voting AGAINST adoption of the merger agreement.
Q: What happens if I return a signed and dated proxy card but do not indicate
how to vote my proxy? (see page 41)
A: If you do not include instructions on how to vote your properly signed and
dated proxy, your shares will be voted FOR adoption of the merger agreement.
Q: May I vote in person? (see page 41)
A: Yes. You may attend the special meeting of Ashford stockholders and vote
your shares in person, rather than signing, dating and returning your proxy
card.
Q: May I change my vote after I have mailed my signed and dated proxy card?
(see page 41)
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting of Ashford stockholders. You can do this in one of three
ways. First, you can send a written, dated notice stating that you would
like to revoke your proxy. Second, you can complete, date and submit a new
proxy card. Third, you can attend the special meeting and vote in person.
Your attendance alone will not revoke your proxy. If you have instructed a
broker to vote your shares, you must follow directions received from your
broker to change those instructions.
iv
Q: If my shares are held in "street name" by my broker, will my broker
automatically vote my shares for me? (see page 42)
A: No. Your broker will not be able to vote your shares without instructions
from you. You should instruct your broker to vote your shares, following the
procedure provided by your broker. The failure to provide such voting
instructions to your broker will have the same effect as voting AGAINST
adoption of the merger agreement.
Q: What does Ashford's board of directors recommend? (see page 43)
A: Ashford's board of directors has approved the merger agreement and the
merger and recommends that you vote FOR adoption of the merger agreement.
Q: Should I send in my Ashford stock certificates now? (see page 61)
A: No. If you are an Ashford stockholder, after the merger is completed, you
will receive written instructions for exchanging the certificates
representing your shares of Ashford common stock for the cash consideration,
certificates representing shares of Global Sports common stock and a cash
payment in lieu of any fractional share of Global Sports common stock you
would otherwise be entitled to receive.
Q: When do the parties expect to complete the merger? (see page 61)
A: The parties are working towards completing the merger as quickly as possible
and hope to do so promptly after the special meeting of Ashford
stockholders.
Q: Will the merger trigger the recognition of gain or loss for federal income
tax purposes? (see page 58)
A: Yes. You will generally recognize capital gain or loss, measured by the
amount of cash you receive in the merger plus the fair market value, as of
the effective date of the merger, of the shares of Global Sports common
stock you receive in the merger, less your adjusted tax basis in your shares
of Ashford common stock exchanged. This gain or loss will be long term
capital gain or loss if you have held your Ashford shares more than one year
on the effective date of the merger.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your
own tax advisor for a full understanding of the tax consequences of the
merger to you.
Q: Will my rights as an Ashford stockholder change as a result of the merger?
(see page 106)
A: Yes. While your stockholder rights will continue to be governed by Delaware
law, you will become a Global Sports stockholder as a result of the merger
and will have rights after the completion of the merger that are governed by
Global Sports' certificate of incorporation and bylaws.
Q: Who can help answer my additional questions?
A: Ashford stockholders who would like additional copies, without charge, of
this prospectus/proxy statement or have additional questions about the
merger, including the procedures for voting their shares of Ashford common
stock, should contact:
Investor Relations
Ashford.com, Inc.
3800 Buffalo Speedway, Suite 400
Houston, Texas 77098
(713) 369-1300
v
SUMMARY
This summary highlights selected information from this prospectus/proxy
statement, and you should read carefully this entire prospectus/proxy statement
and the documents referred to in this prospectus/proxy statement for a more
complete description of the terms of the merger and related transactions. The
merger agreement is attached as Annex A to this prospectus/proxy statement and
additional documents relating to the transaction are also attached to this
prospectus/proxy statement. You are encouraged to read the merger agreement as
it is the legal document that governs the merger, as well as these additional
documents. This section includes page references in parentheses to direct you
to a more complete description of the topics presented in this summary.
Forward-Looking Information
Certain of the information relating to Global Sports and Ashford contained
in this prospectus/proxy statement is forward-looking in nature. All statements
included in this prospectus/proxy statement or made by management of Global
Sports or Ashford other than statements of historical fact regarding Global
Sports or Ashford are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. Examples of forward-looking statements include statements
regarding Global Sports' or Ashford's future financial results, operating
results, business strategies, projected costs, competitive positions and plans
and objectives of management for future operations. In some cases, you can
identify forward-looking statements by terminology, such as "may," "will,"
"should," "would," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
including those discussed in the Risk Factors section of this prospectus/proxy
statement. These and many other factors could affect the future financial and
operating results of Global Sports or Ashford. These factors could cause actual
results to differ materially from expectations based on forward-looking
statements made in this prospectus/proxy statement or elsewhere by or on behalf
of Global Sports or Ashford.
The Companies
Global Sports, Inc. (Page 75)
1075 First Avenue
King of Prussia, PA 19406
(610) 265-3229
Global Sports is a leading outsource solution provider for e-commerce that
develops and operates e-commerce businesses for retailers, media companies and
professional sports organizations. Global Sports enables its partners to
capitalize on their existing assets in order to exploit online opportunities in
their respective industries. Global Sports' scalable business model takes
advantage of its proprietary technology and product database, customer service
capabilities, fulfillment capabilities, relationships with vendors and
centralized inventory management. Global Sports enables its partners to remain
focused on their core businesses and to avoid making substantial investments in
e-commerce infrastructure and personnel. Depending on the specific needs of the
partner, Global Sports can undertake either a complete outsourcing of a
partner's online activities or a more customized "back-end" operation. Global
Sports benefits from the traffic generated by its partners' established brand
franchises, extensive advertising, retail traffic and vendor relationships to
achieve operational efficiencies, lower customer acquisition costs and
economies of scale. Global Sports maintains a site on the Internet at
www.globalsports.com. Information found at Global Sports' Web site is not a
part of this prospectus/proxy statement. Global Sports was incorporated in the
State of Delaware in 1986. All references to "Global Sports" in this
prospectus/proxy statement include its subsidiaries.
1
Ashford.com, Inc. (Page 76)
3800 Buffalo Speedway, Suite 400
Houston, TX 77098
(713) 369-1300
Ashford is a Web-based retailer focused on luxury and premium products,
including new and vintage watches, clocks, diamonds, jewelry, leather goods,
writing instruments, fragrances and sunglasses, altogether offering more than
12,000 products from over 300 leading luxury brands. Since late 1999, Ashford
has rapidly expanded its primary product focus from offering only new watches
to offering 11 different product categories. Ashford's strategy has been to add
complementary products to create a portfolio that combines items purchased
frequently, such as leather goods and sunglasses, with higher-priced items
purchased less frequently, such as watches and diamonds. In March 2000, Ashford
launched its corporate gifts business, which offers an additional 800 luxury
products in new categories such as crystal, silver and pewter that are targeted
to the corporate market. By combining its expertise in luxury products and its
commitment to excellent customer service with the benefits of Internet
retailing, Ashford is able to deliver a unique shopping experience to
consumers. Ashford believes that its current luxury and premium product
offerings are well suited for online commerce given brand recognition,
generally high average sales prices and relatively low average distribution and
shipping costs. Ashford is a Delaware corporation initially incorporated as a
Texas corporation in March 1998 under the name "NewWatch Corporation." It
changed its name to Ashford.com, Inc. and reincorporated in Delaware in July
1999. Ashford maintains a site on the Internet at www.ashford.com. Information
found at Ashford's Web site is not a part of this prospectus/proxy statement.
Merger Structure; Merger Consideration (Page 61)
If the merger is completed, a subsidiary of Global Sports will merge into
Ashford and Ashford will become a wholly owned subsidiary of Global Sports.
Upon completion of the merger, you will become entitled to receive a
combination of $0.125 in cash and 0.0076 of a share of Global Sports common
stock, the combination of which is collectively referred to in this
prospectus/proxy statement as the "merger consideration," in exchange for each
share of Ashford common stock that you own at the time of the completion of the
merger, except that you will receive cash in lieu of any fractional share of
Global Sports common stock you would otherwise be entitled to receive.
The cash and fraction of a share of Global Sports common stock constituting
the merger consideration are fixed. Regardless of fluctuations in the market
prices of Global Sports or Ashford common stock, such amounts will not change
between now and the date that the merger is completed, but the value of the
merger consideration will fluctuate as the value of Global Sports common stock
fluctuates. Neither Ashford nor Global Sports has the right to terminate the
merger agreement or renegotiate the merger consideration solely as a result of
market price fluctuations. You are encouraged to obtain current market
quotations of Global Sports and Ashford common stock.
Comparative Per Share Market Price Information (Page 6)
Global Sports common stock is listed on the Nasdaq National Market under the
symbol "GSPT." Ashford common stock is listed on the Nasdaq National Market
under the symbol "ASFD." On September 10, 2001, the last full trading day prior
to the public announcement of the proposed merger, Global Sports common stock
closed at $16.51 per share, and Ashford common stock closed at $0.17 per share.
On [ ], 2001, the last full trading day prior to the printing of this
prospectus/proxy statement, Global Sports common stock closed at $[ ] per
share, and Ashford common stock closed at $[ ] per share. Immediately
following the completion of the merger, Ashford common stock will cease to be
listed on the Nasdaq National Market.
2
Tax Matters (Page 58)
The merger will be taxable for U.S. federal income tax purposes. Generally,
this means that each Ashford stockholder will recognize taxable gain or loss
equal to the cash the stockholder receives in the merger plus the fair market
value, as of the effective date of the merger, of the shares of Global Sports
common stock the stockholder receives in the merger, less the stockholder's
adjusted tax basis in the stockholder's shares of Ashford common stock.
Reasons for the Merger (Page 46)
Global Sports (Page 46)
Global Sports' primary reasons for seeking to complete the merger with
Ashford are the beliefs of the board of directors and management of Global
Sports that the merger could result in a number of benefits to Global Sports,
including the following:
. Ashford's merchandising and fulfillment expertise in the luxury products
category could serve as a platform for Global Sports to extend its
outsource business model into the luxury products category;
. Ashford's sales force, merchandising expertise and clientele in the
corporate gift category could serve as a platform for Global Sports to
extend its outsource business model to the corporate gift category; and
. the merger could enable Global Sports to expand its business and realize
greater operational efficiencies, including higher purchase volumes for
online marketing and greater economies of scale in its customer service
center and technology operations.
Ashford (Page 48)
Ashford's board of directors believes that the merger could be beneficial to
Ashford and its stockholders for the following reasons, as well as the access
to greater resources and the opportunity for Ashford stockholders to
participate in the broader scope of consumer groups served by Global Sports
after the merger and the potential growth of Global Sports after the merger:
. the merger would provide Ashford stockholders with cash and shares of
Global Sports common stock at an implied premium over the closing price
for Ashford common stock on the last trading day prior to the time the
merger agreement was entered into;
. the potential synergies created from combining the procurement,
distribution and other strengths developed by Global Sports with the
brand, consumer relationships, luxury goods inventory and other strengths
built by Ashford; and
. the availability following the merger of Global Sports' greater resources
to establish and support Ashford's products and sales.
Recommendation to Ashford Stockholders (Page 43)
Ashford's board of directors has unanimously approved the merger agreement
and the merger and has determined that the merger agreement and the merger are
advisable and fair to, and in the best interests of, Ashford and its
stockholders, and recommends that Ashford stockholders vote FOR the adoption of
the merger agreement.
3
Opinion of Ashford's Financial Advisor (Page 50)
In connection with the merger, Ashford's board of directors received an
opinion from U.S. Bancorp Piper Jaffray Inc. as to the fairness, from a
financial point of view, to the holders of Ashford common stock (other than
Global Sports) of the merger consideration provided for in the merger
agreement. The full text of U.S. Bancorp Piper Jaffray Inc.'s written opinion
dated September 12, 2001 is attached as Annex C to this prospectus/proxy
statement. You are encouraged to read this opinion carefully in its entirety
for a description of the assumptions made, matters considered and limitations
on the review undertaken. U.S. Bancorp Piper Jaffray Inc.'s opinion is
addressed to Ashford's board of directors and relates only to the fairness of
the merger consideration from a financial point of view as of the date of the
opinion. The opinion does not address any other aspect of the proposed merger
and does not constitute a recommendation to any stockholder as to any matters
relating to the proposed merger.
The Special Meeting of Ashford Stockholders (Page 41)
Time, Date and Place. A special meeting of Ashford stockholders will be held
on [ ], 2001, at [ a.m.], local time, at the Renaissance Hotel, 6 Greenway
Plaza East, Suite 1809, Houston, Texas 77046, to vote on a proposal to adopt
the merger agreement.
Record Date and Voting Power. You are entitled to vote at the special
meeting of Ashford stockholders if you owned shares of Ashford common stock at
the close of business on [ ], 2001, the record date for the special meeting.
You will have one vote at the special meeting for each share of Ashford common
stock you owned at the close of business on the record date. At the close of
business on the record date, there were [ ] outstanding shares of Ashford
common stock.
Ashford Required Vote. The adoption of the merger agreement requires the
affirmative vote of a majority of the shares of Ashford common stock
outstanding at the close of business on the record date.
Share Ownership of Management. At the close of business on the record date,
the directors and executive officers of Ashford and their affiliates owned
approximately [ ]% of the shares entitled to vote at the special meeting of
Ashford stockholders. A number of the directors and officers of Ashford,
together with affiliated entities, have agreed to vote their shares, which
represent approximately [ ] shares, equaling [ %] of the shares entitled
to vote at the special meeting, in favor of adoption of the merger agreement.
Interests of Ashford's Officers and Directors in the Merger (Page 56)
When considering the recommendation by Ashford's board of directors that
Ashford stockholders vote for the adoption of the merger agreement, you should
be aware that a number of Ashford's directors may have interests in the merger
that are different from, or in addition to, those of other Ashford stockholders
generally. Among other things, Global Sports has agreed to continue for a
number of years following the completion of the merger certain insurance and
indemnification arrangements in favor of the current officers and directors of
Ashford.
Conditions to the Merger (Page 68)
The obligation of each of Global Sports and Ashford to complete the merger
is subject to the satisfaction of a number of conditions, including the
condition that Ashford stockholders adopt the merger agreement. Either Global
Sports or Ashford may choose to waive the conditions to its obligation to
complete the merger, as long as the law allows it to do so.
4
Termination of the Merger Agreement (Page 71)
Each of Global Sports and Ashford is entitled to terminate the merger
agreement under designated circumstances. If the merger agreement is
terminated, Ashford may become obligated to pay to Global Sports a fee equal to
$750,000, plus expenses.
Limitation on Ashford's Ability to Consider Other Acquisition Proposals (Page
66)
Ashford has agreed not to discuss or negotiate a business combination or
other similar transaction with another party while the merger is pending unless
the other party has made an unsolicited, bona fide written offer to Ashford to
purchase, by merger, tender offer or otherwise, all or substantially all of the
outstanding shares of Ashford common stock or all or substantially all of the
assets of Ashford on terms that Ashford's board of directors determines to be
more favorable to its stockholders than the terms of the merger agreement with
Global Sports. The offer will not be deemed to be a superior offer if any
financing required to complete the transaction is not reasonably capable of
being obtained by the other party.
Expenses and Termination Fee (Page 72)
The merger agreement provides that regardless of whether the merger is
completed, all expenses incurred by the parties shall be borne by the party
incurring such expenses, except in certain circumstances where the expenses are
to be shared. The merger agreement requires, however, that Ashford pay Global
Sports an amount equal to the aggregate amount of all fees and expenses that
have been paid or that may become payable by or on behalf of Global Sports in
connection with the preparation and negotiation of the merger agreement and
otherwise in connection with the merger, under certain circumstances where the
merger agreement is terminated because the merger is not completed by March 31,
2002, because Ashford stockholders fail to adopt the merger agreement, or as a
result of one or more "triggering events" described in the merger agreement.
In addition, the merger agreement requires that Ashford pay Global Sports a
termination fee of $750,000, if:
. Ashford or Global Sports terminates the merger agreement because the
merger is not completed by March 31, 2002, or because Ashford stockholders
fail to adopt the merger agreement, provided in either case that, between
the date of the merger agreement and the time of the termination of the
merger agreement, another acquisition proposal has been disclosed,
announced, commenced, submitted or made, and Ashford consummates or is
subject to another acquisition transaction within one year of the
termination of the merger agreement or Ashford or any of its
representatives signs a definitive agreement or letter of intent within
one year of the termination of the merger agreement providing for another
acquisition transaction; or
. the merger agreement is terminated by Global Sports as a result of one or
more "triggering events" described in the merger agreement.
Accounting Treatment (Page 59)
The merger will be accounted for as a "purchase" for financial reporting
purposes.
Regulatory Approvals (Page 59)
Global Sports and Ashford believe that the merger is not subject to the
reporting obligations, statutory waiting periods or other approvals of any
governmental agency.
Absence of Appraisal Rights (Page 60)
Ashford stockholders will not have appraisal rights in connection with the
merger.
5
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND DATA
On June 16, 1998, Global Sports common stock was approved for inclusion on
The Nasdaq SmallCap Market and on May 3, 1999, Global Sports common stock was
approved for inclusion on the Nasdaq National Market where it is currently
included for quotation under the symbol "GSPT." Since September 22, 1999,
Ashford common stock has been listed on the Nasdaq National Market under the
symbol "ASFD." The table below sets forth the high and low sales prices per
share of Global Sports common stock as reported on The Nasdaq SmallCap Market
for the periods presented from January 1, 1999 to April 30, 1999. For the
periods presented from and after May 3, 1999 (September 22, 1999 for Ashford),
the table below sets forth the high and low sales prices per share of Global
Sports common stock and Ashford common stock as reported on the Nasdaq National
Market. The prices shown do not include retail markups, markdowns or
commissions.
Global Sports Ashford
Common Stock Common Stock
-------------- -------------
Low High Low High
------ ------ ----- ------
Year Ended December 31, 1999
First quarter....................................... $ 7.00 $17.38 N/A N/A
Second quarter (April 1 - April 30)................. 12.88 19.94 N/A N/A
Second quarter (May 3 - June 30).................... 12.00 36.88 N/A N/A
Third quarter (for Ashford from September 22, 1999). 14.50 25.13 $9.13 $19.50
Fourth quarter...................................... 12.00 25.25 9.25 35.00
Year Ended December 31, 2000
First quarter....................................... 12.25 23.88 4.00 14.63
Second quarter...................................... 4.31 18.25 2.50 6.63
Third quarter....................................... 6.25 9.63 2.56 4.44
Fourth quarter...................................... 3.53 11.13 0.14 3.34
Year Ending December 31, 2001
First quarter....................................... 2.38 6.38 0.31 1.19
Second quarter...................................... 3.00 8.45 0.20 0.75
Third quarter....................................... 7.45 19.88 0.06 0.32
Fourth quarter (through [ ], 2001)................ [ ] [ ] [ ] [ ]
As of the record date, there were approximately [ ] record holders of
Global Sports common stock, and there were approximately [ ] record holders
of Ashford common stock. Neither Global Sports nor Ashford has ever paid cash
dividends on its common stock. Following the merger, Global Sports intends to
retain earnings, if any, to support the development of its business and does
not anticipate paying cash dividends for the foreseeable future. Following
completion of the merger, Global Sports common stock will continue to be listed
on the Nasdaq National Market, and there will be no further market for Ashford
common stock.
The following table sets forth the per share closing sale prices of Global
Sports common stock and Ashford common stock as reported on the Nasdaq National
Market and the estimated equivalent per share price, as explained below, of
Ashford common stock on September 10, 2001, the last full trading day before
the public announcement of the proposed merger, and on [ ], 2001, the
last full trading day before the printing of this prospectus/proxy statement:
Estimated Equivalent
Global Sports Ashford Ashford
Common Stock Common Stock Per Share Price
------------- ------------ --------------------
September 10, 2001 $16.51 $0.17 $0.25
[ ], 2001... $ [ ] $ [ ] $ [ ]
6
The estimated equivalent per share closing price of Ashford common stock
equals the exchange ratio of 0.0076 multiplied by the closing price of a share
of Global Sports common stock on the applicable date, plus the cash component
of the merger consideration. If the merger had occurred on [ ], 2001, Ashford
stockholders would have had the right to receive cash in the amount of $0.125
and a fraction of a share of Global Sports common stock worth $[ ] for each
share of Ashford common stock they owned. The actual value of the fraction of a
share of Global Sports common stock that Ashford stockholders will have the
right to receive if the merger is completed may be different from this price
because the per share price of Global Sports common stock on the Nasdaq
National Market fluctuates continuously.
7
GLOBAL SPORTS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information should
be read in conjunction with Global Sports' financial statements and the related
notes thereto and the sections entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" from Global Sports' Annual
Report on Form 10-K for the fiscal year ended December 30, 2000 and Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, which are incorporated
by reference in this prospectus/proxy statement. The information as of December
31, 1996, 1997 and 1998, January 1, 2000, and December 30, 2000 and for the
years then ended has been derived from Global Sports' audited financial
statements, which have been incorporated by reference in this prospectus/proxy
statement. The information as of June 30, 2001, and for the six-month periods
ended July 1, 2000 and June 30, 2001, has been derived from Global Sports'
unaudited financial statements, which have been incorporated by reference in
this prospectus/proxy statement and which have been prepared on the same basis
as the audited financial statements and, in the opinion of management of Global
Sports, include all adjustments, consisting only of normal recurring
adjustments and accruals, necessary for a fair presentation of the financial
condition at such date and the results of operations for such periods.
Historical results are not necessarily indicative of the results to be obtained
in the future.
For all years prior to 1999, Global Sports' fiscal year ended on December
31. Effective for fiscal 1999, Global Sports changed its fiscal year end from
the last day of December to the Saturday nearest the last day of December.
Accordingly, fiscal 1999 ended on January 1, 2000, fiscal 2000 ended on
December 30, 2000 and fiscal 2001 will end on December 29, 2001. References to
fiscal 1999, fiscal 2000 and fiscal 2001 refer to the fiscal years ended
January 1, 2000 and December 30, 2000, and the fiscal year ending December 29,
2001.
Year Ended December 31, Year Ended Six Months Ended
------------------------- ---------------------- ------------------
January 1, December 30, July 1, June
1996 1997 1998 2000 2000 2000 30,2001
------- ------- ------- ---------- ------------ -------- --------
(unaudited)
(in thousands, except per share data)
Statement of Operations Data:
Net revenues.............................. $ -- $ -- $ -- $ 5,511 $ 42,808 $ 13,469 $ 33,168
Cost of revenues.......................... -- -- -- 3,817 29,567 9,456 22,846
------- ------- ------- -------- -------- -------- --------
Gross profit.............................. -- -- -- 1,694 13,241 4,013 10,322
Operation Expenses:
Sales and marketing....................... -- -- -- 11,609 37,730 19,312 14,234
Product development....................... -- -- -- 6,933 7,292 3,502 4,454
General and administrative................ 2,532 2,032 2,736 8,914 8,730 4,238 5,117
Stock-based compensation.................. -- -- 150 2,655 4,983 3,787 1,370
Depreciation and amortization............. 321 357 567 728 8,074 3,332 3,170
------- ------- ------- -------- -------- -------- --------
Total operating expenses............... 2,853 2,389 3,453 30,839 66,809 34,171 28,345
------- ------- ------- -------- -------- -------- --------
Other (income) expenses:
Interest expense.......................... 1,152 2,013 2,367 313 407 89 (330)
Interest income........................... -- -- -- (774) (1,815) (607) (1,839)
Other, net................................ -- -- -- (2) -- -- (300)
------- ------- ------- -------- -------- -------- --------
1,152 2,013 2,367 (463) (1,408) (518) (1,809)
Loss from continuing operations before income
taxes....................................... (4,005) (4,402) (5,820) (28,682) (52,160) (29,640) (16,214)
Benefit from income taxes.................... -- -- 1,979 2,222 -- -- --
------- ------- ------- -------- -------- -------- --------
Loss from continuing operations.............. (4,005) (4,402) (3,841) (26,460) (52,160) (29,640) (16,214)
Discontinued operations:
Income from discontinued operations....... 3,261 247 9,665 550 -- -- --
Loss on disposition of discontinued
operations............................... -- -- -- (17,337) (5,850) (4,983) --
------- ------- ------- -------- -------- -------- --------
Net income (loss)...................... $ (744) $(4,155) $ 5,824 $(43,247) $(58,010) $(34,623) $(16,214)
======= ======= ======= ======== ======== ======== ========
8
Year Ended Six Months Ended
Year Ended December 31, ---------------------- ----------------
------------------------ January 1, December 30, July 1, June 30,
1996 1997 1998 2000 2000 2000 2001
------ ------- ------- ---------- ------------ ------- --------
(unaudited)
(in thousands, except per share data)
Earnings (losses) per share-basic and diluted(1):
Loss from continuing operations.................... $(1.56) $ (1.47) $ (0.34) $ (1.78) $ (2.37) $ (1.51) $ (0.51)
Income from discontinued operations................ 1.27 .08 .85 .04 -- -- --
Loss on disposition of discontinued operations..... -- -- -- (1.17) (0.27) (0.25) --
------ ------- ------- ------- ------- ------- -------
Net income (loss)................................ $(0.29) $ (1.39) $ 0.51 $ (2.91) $ (2.64) $ (1.76) $ (0.51)
====== ======= ======= ======= ======= ======= =======
Weighted average common shares outstanding(1):
Basic and diluted............................. 2,568 2,996 11,379 14,874 22,028 19,649 31,964
====== ======= ======= ======= ======= ======= =======
Number of common shares outstanding(1)........... 2,832 10,418 11,925 18,475 31,925 21,702 32,093
====== ======= ======= ======= ======= ======= =======
December 31,
------------------------ January 1, December 30, June 30,
1996 1997 1998 2000 2000 2001
------- ------- ------- ---------- ------------ -----------
(unaudited)
(in thousands)
Balance Sheet Data:
Net assets of discontinued operations...................... $11,797 $24,129 $41,128 $18,381 $ -- $ --
Total assets............................................... 16,435 28,043 45,053 82,736 160,173 124,514
Total long-term debt....................................... 5,905 20,975 20,993 2,040 5,750 5,559
Working capital............................................ 2,022 19,748 34,846 40,557 80,805 66,778
Stockholders' equity (deficiency).......................... (552) 2,157 17,094 59,309 116,300 101,866
--------
(1) Shares and per share amounts give effect to the December 15, 1997 1-for-20
reverse stock split as if it had occurred for all periods presented.
9
ASHFORD.COM, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial and operating data should be
read in conjunction with Ashford's consolidated financial statements and notes
thereto included elsewhere in this prospectus/proxy statement and the section
of this prospectus/proxy statement entitled "Ashford Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The selected consolidated financial data reflect that prior to March 31,
1998, Ashford had no operations or activities. The following selected
consolidated financial data for the period from inception through March 31,
1999 and the years ended March 31, 2000 and 2001, respectively, were derived
from Ashford's audited consolidated financial statements included elsewhere in
this prospectus/proxy statement. Ashford's independent public accountant's
report on the financial statements for the year ended March 31, 2001 included
an explanatory fourth paragraph expressing substantial doubt as to Ashford's
ability to continue as a going concern. The following selected consolidated
financial data for the three months ended June 30, 2000 and 2001, respectively,
were derived from Ashford's unaudited financial statements included elsewhere
in this prospectus/proxy statement and include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
information when read in conjunction with the audited financial statements and
the notes thereto. Ashford was incorporated in March 1998, and did not commence
operations or activities until April 1998.
Three
Period from Months Ended
Inception ------------------
through Year Ended Year Ended June 30, June 30,
March 31, 1999 March 31, 2000 March 31, 2001 2000 2001
-------------- -------------- -------------- -------- --------
(unaudited)
(in thousands, except per share data)
Statement of Operations Data:
Net sales............................................... $ 5,938 $ 39,931 $ 67,195 $ 13,105 $ 12,106
Cost of sales........................................... 5,110 33,487 56,348 10,666 10,099
------- -------- --------- -------- --------
Gross profit(1)......................................... 828 6,444 10,847 2,439 2,007
Operating expenses:
Marketing and sales (includes non-cash amortization
of $0, $27,525, $79,735, $26,034 and $304,
respectively)....................................... 1,013 60,806 105,895 32,823 3,096
General and administrative (includes non-cash
amortization of $0, $3,003, $2,633, $847 and $272,
respectively)(2).................................... 1,019 17,093 27,929 6,748 5,470
Settlement loss...................................... -- -- -- -- 2,297
Loss on sale of assets............................... -- -- -- -- 620
Restructuring charge................................. -- -- 662 -- 399
Impairment loss...................................... -- -- 1,094 -- --
Depreciation and amortization........................ 67 3,277 13,460 2,654 3,882
------- -------- --------- -------- --------
Total operating expenses.......................... 2,099 81,176 149,040 42,225 15,764
------- -------- --------- -------- --------
Loss from operations.................................... (1,271) (74,732) (138,193) (39,786) (13,757)
Interest income......................................... 13 2,677 1,644 684 87
Interest expense........................................ (6) (7) (132) -- (86)
------- -------- --------- -------- --------
Net loss before discontinued operations................. (1,264) (72,062) (136,681) (39,102) (13,756)
Net loss from discontinued operations................... -- -- -- -- 667
------- -------- --------- -------- --------
Net loss................................................ $(1,264) $(72,062) $(136,681) $(39,102) $(14,423)
======= ======== ========= ======== ========
10
Three
Period from Months Ended
Inception ----------------
through Year Ended Year Ended June 30, June 30,
March 31, 1999 March 31, 2000 March 31, 2001 2000 2001
-------------- -------------- -------------- -------- --------
(unaudited)
(in thousands, except per share data)
Net loss before discontinued operations per share,
basic and diluted.................................... $ (0.12) $ (2.65) $ (2.99) $ (0.87) $ (0.27)
Net loss from discontinued operations per share, basic
and diluted.......................................... $ -- $ -- $ -- $ -- $ (0.01)
Net loss per share, basic and diluted................. $ (0.12) $ (2.65) $ (2.99) $ (0.87) $ (0.28)
Shares used to compute net less per share, basic and
diluted.............................................. 10,397 27,197 45,725 45,099 51,188
March 31,
----------------------- June 30,
1999 2000 2001 2001
------ -------- ------- -------
(unaudited)
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.............. $ 893 $ 46,474 $ 7,095 $ 4,571
Working capital........................ 2,555 148,898 23,861 23,298
Total assets........................... 5,108 177,608 56,266 41,377
Total long-term liabilities............ -- 117 104 97
Total stockholders' equity............. 2,808 171,270 43,268 33,361
--------
(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 year ended March
31, 2001, relating to inventory valuation reserves. See Note 2 of Notes to
Consolidated Financial Statements included elsewhere in this
prospectus/proxy statement.
(2) Includes non-recurring charges of approximately $400,000 during the year
ended March 31, 2001, relating to the pending settlement of litigation. See
Note 12 of Notes to Consolidated Financial Statements included elsewhere in
this prospectus/proxy statement.
11
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma condensed combined financial
information for Global Sports has been derived from the unaudited pro forma
condensed combined financial statements which are included elsewhere in this
prospectus/proxy statement, which give effect to the proposed merger of a
subsidiary of Global Sports and Ashford, as well as Global Sports' acquisition
of Fogdog, Inc. ("Fogdog") which was completed on December 28, 2000, and should
be read in conjunction with the unaudited pro forma condensed combined
financial statements and the related notes. For pro forma purposes, (1) Global
Sports' audited consolidated statement of operations for the year ended
December 30, 2000 has been combined with Fogdog's unaudited consolidated
statement of operations for the period January 1, 2000 through December 27,
2000, and Ashford's audited consolidated statement of operations for the year
ended March 31, 2001 as if the Fogdog acquisition and the Ashford merger had
occurred on January 2, 2000, (2) Global Sports' unaudited consolidated
statement of operations for the six months ended June 30, 2001 has been
combined with Ashford's unaudited statement of operations for the six months
ended June 30, 2001, as if the Ashford merger had occurred on January 2, 2000,
and (3) Global Sports' unaudited consolidated balance sheet as of June 30, 2001
has been combined with Ashford's unaudited consolidated balance sheet as of
June 30, 2001 as if the Ashford merger had occurred on June 30, 2001. The
results of operations of Ashford for the three months ended March 31, 2001,
which included net revenues of $14.3 million and a loss from continuing
operations of $17.0 million, have been included in the results of operations
for the six months ended June 30, 2001 as well as for the fiscal year ended
March 31, 2001. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been completed on
January 2, 2000 or June 30, 2001, respectively, nor is it necessarily
indicative of the future operating results or financial position of Global
Sports following the completion of the Ashford merger.
Six Months
Year Ended Ended
December 30, June 30,
2000 2001
------------ ----------
(in thousands, except per
share data)
Pro Forma Combined Statement of Operations Data:
Net revenues................................................................. $ 137,608 $ 59,602
Cost of revenues............................................................. 110,531 46,431
--------- --------
Gross profit................................................................. 27,077 13,171
Operating expenses:
Sales and marketing....................................................... 94,634 22,209
Product development....................................................... 15,640 6,209
General and administrative................................................ 38,471 15,624
Restructuring charge...................................................... 662 1,061
Impairment loss........................................................... 1,094 1,094
Settlement loss........................................................... -- 2,297
Loss on sale of assets.................................................... -- 620
Stock-based compensation.................................................. 92,900 1,784
Depreciation and amortization............................................. 9,831 3,170
--------- --------
Total operating expenses.............................................. 253,232 54,068
--------- --------
Other (income) expense:
Other income.............................................................. (300)
Interest income, net...................................................... (6,152) (1,533)
--------- --------
Total other (income) expense.......................................... (6,152) (1,833)
--------- --------
Loss from continuing operations.............................................. $(220,003) $(39,064)
========= ========
Loss from continuing operations per share, basic and diluted................. $ (9.81) $ (1.21)
========= ========
Shares used in computing loss from continuing operations per weighted average
shares outstanding, basic and diluted...................................... 22,437 32,373
========= ========
12
June 30, 2001
--------------
(in thousands)
Pro Forma Combined Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 61,607
Working capital.................................. 82,003
Total assets..................................... 144,778
Long-term obligations, less current portion...... 5,656
Accumulated deficit.............................. (108,799)
13
COMPARATIVE PER SHARE DATA
The information below reflects:
. the historical loss from continuing operations of Global Sports for the
fiscal year ended December 30, 2000 and the six months ended June 30, 2001
and the December 30, 2000 and June 30, 2001 book value per share of Global
Sports common stock;
. the historical loss from continuing operations of Ashford for the fiscal
year ended March 31, 2001 and the six months ended June 30, 2001 and the
March 31, 2001 and June 30, 2001 book value per share of Ashford common
stock;
. the unaudited pro forma loss from continuing operations for the fiscal
year ended December 30, 2000 after giving effect to the Fogdog acquisition
and the proposed merger of a subsidiary of Global Sports with Ashford, and
the unaudited pro forma loss from continuing operations for the six months
ended June 30, 2001 and the June 30, 2001 book value per share after
giving effect to the proposed merger of a subsidiary of Global Sports with
Ashford; and
. the unaudited equivalent pro forma loss from continuing operations for the
fiscal year ended December 30, 2000 and the six months ended June 30, 2001
and the June 30, 2001 book value per share attributable to 0.0076 of a
share of Global Sports common stock which will be received for each share
of Ashford common stock.
The following tables should be read in conjunction with the unaudited pro
forma combined financial statements of Global Sports, which are included
elsewhere in this prospectus/proxy statement, the historical consolidated
financial statements and related notes of Global Sports, which are incorporated
by reference in this prospectus/proxy statement and the historical consolidated
financial statements of Ashford and related notes, which are included elsewhere
in this prospectus/proxy statement.
Global Sports Per Share Data
Six Months
Year Ended Ended
December 30, June 30,
2000 2001
------------ ----------
Historical Per Common Share Data
Loss from continuing operations per common share--basic and diluted $(2.37) $(0.51)
Book value per share(1)............................................ $ 3.64 $ 3.17
Ashford Per Share Data
Six Months
Year Ended Ended
March 31, June 30,
2001 2001
---------- ----------
Historical Per Common Share Data
Loss from continuing operations per common share--basic and diluted $(2.99) $(0.63)
Book value per share(1)............................................ $ 0.90 $ 0.63
14
Pro Forma Combined Per Share Data
Six Months
Year Ended Ended
December 30, June 30,
2000 2001
------------ ----------
Pro forma combined loss from continuing operations
per share
Per Global Sports share--basic and diluted.......... $(9.81) $(1.21)
Equivalent per Ashford share-basic and diluted(2)... $(0.07) $(0.01)
June 30,
2001
--------
Pro forma combined book value per share(3)
Per Global Sports share................................ $3.60
Equivalent per Ashford share(2)........................ $0.03
--------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of common shares outstanding at the end of each period
presented.
(2) The Ashford equivalent pro forma combined per share amounts are calculated
by multiplying the Global Sports combined pro forma share amounts by the
exchange ratio of 0.0076.
(3) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares outstanding at
the end of the period.
15
RISK FACTORS
Ashford stockholders should consider the following risk factors in
evaluating whether to vote for the adoption of the merger agreement. These
factors should be considered in conjunction with the other information included
in this prospectus/proxy statement.
Risks Relating to the Merger
If Global Sports does not realize the expected benefits of the merger, Global
Sports' financial results, including earnings per share, could be adversely
affected.
Achieving the benefits of the merger will depend in part on the successful
integration of Ashford's operations, technology, vendors, suppliers and
personnel with those of Global Sports in a timely and efficient manner, and
maintaining Ashford's relationships with key brand manufacturers. Integration
efforts may be difficult and unpredictable because of possible cultural
conflicts and different opinions on technical decisions, strategic plans and
other decisions. Global Sports does not know whether it will be successful in
these integration efforts and cannot give assurance that it will realize the
expected benefits of the merger. If Global Sports cannot successfully integrate
Ashford's operations, technology, vendors, suppliers and personnel, or maintain
Ashford's relationships with key brand manufacturers, it may not realize the
expected benefits of the merger and its business results of operations may be
seriously harmed.
If Global Sports does not successfully integrate the business of Ashford and
realize the expected benefits of the merger, it will have incurred significant
costs, which may harm its business.
Global Sports expects to incur costs and commit significant management time
integrating Ashford's operations, technology, development programs, products
and personnel. These costs may be substantial and may include costs for:
. employee severance;
. integration of operations; and
. fees and expenses of professionals and consultants involved in completing
the integration process.
Integrating the business of Ashford may divert management's attention away from
operations.
Successful integration of Ashford's operations, technology and personnel may
place a significant burden on the management and internal resources of Global
Sports and Ashford. The diversion of management's attention and any
difficulties encountered in the transition and integration process could have a
material adverse effect on the future business, financial condition and
operating results of Global Sports.
Failure to retain key employees could diminish the benefits of the merger.
One of the expected benefits of the merger is the addition of Ashford's key
personnel. Global Sports has not entered into employment agreements with these
individuals and therefore, cannot give assurance that it will be able to retain
key personnel, or that the anticipated benefits of their expertise, experience
and capabilities will be realized.
Because Ashford stockholders will receive a fixed amount of cash and a fixed
number of shares of Global Sports common stock in the merger, if the market
price of Global Sports common stock declines, the value of the merger
consideration received by Ashford stockholders will be reduced.
Upon completion of the merger, each Ashford stockholder will have the right
to receive a combination of $0.125 in cash and 0.0076 of a share of Global
Sports common stock in exchange for each share of Ashford common stock that the
stockholder owns. No fractional shares of Global Sports common stock will be
issued,
16
and Ashford stockholders will receive cash in lieu of any fractional share of
Global Sports common stock that they would otherwise be entitled to receive in
the merger. Each of the components of the merger consideration is fixed and
will not be adjusted based upon changes in the value of Global Sports common
stock or changes in the value of Ashford common stock.
The value of the Global Sports shares that Ashford stockholders will receive
in the merger will not be known until the time of completion of the merger, and
will change as the market price of Global Sports common stock goes up or down
prior to that time. In recent years, and particularly in recent months, the
stock market in general, and the securities of technology and e-commerce
companies in particular, have experienced extreme price and volume
fluctuations. These market fluctuations may adversely affect the market price
of Global Sports common stock. In addition, events or circumstances specific to
Global Sports could cause the price of its common stock to decline. See "Risk
Factors--Risks Relating to Global Sports." The market price of Global Sports
common stock upon and after completion of the merger could be lower than the
market price on the date of the merger agreement, the current market price
and/or the market price on the date of the special meeting of Ashford
stockholders or the date on which an Ashford stockholder votes on the adoption
of the merger agreement. Ashford stockholders should obtain recent market
quotations of Global Sports common stock and Ashford common stock before they
vote on adoption of the merger agreement.
Failure to complete the merger could adversely affect Ashford's stock price,
future business and operations.
If the merger is not completed for any reason, Ashford may be subject to a
number of material risks, including the following:
. the price of Ashford common stock may decline to the extent that the
market price prior to such termination reflects a market assumption that
the merger will be completed;
. costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed; and
. Ashford may be required under certain circumstances to pay Global Sports a
termination fee of $750,000, plus expenses.
Further, if the merger were terminated and Ashford's board of directors
sought another merger or business combination, there would be no assurance that
it would be able to find a partner willing to pay an equivalent or more
attractive price than the price Global Sports is offering in the merger. In
addition, while the merger agreement is in effect, subject to very narrowly
defined exceptions, Ashford is prohibited from soliciting, initiating,
encouraging or entering into transactions such as a merger, sale of assets or
other business combination with any party other than Global Sports.
Global Sports' or Ashford's partners, vendors, suppliers, including key
brand manufacturers, or customers, in response to the announcement or pendency
of the merger, may delay or defer decisions concerning the relevant company.
Any delay or deferral of those decisions by partners, vendors, suppliers or
customers, or a decision by any of these parties to discontinue its
relationship with Ashford or Global Sports, could have a material adverse
effect on the business of the relevant company. Similarly, current and
prospective Global Sports or Ashford employees may experience uncertainty about
their future roles with Global Sports until Global Sports' plans with regard to
Ashford are announced or fully executed. For example, Ashford and Global Sports
have discussed terminating a significant number of Ashford employees in certain
functional areas if the merger is completed. This may adversely affect Global
Sports' or Ashford's ability to attract and retain key personnel.
The market price of Global Sports common stock may decline as a result of the
merger.
The market price of Global Sports common stock may decline as a result of
the merger if:
. the integration of Ashford's business is unsuccessful;
17
. Global Sports does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial analysts or investors;
or
. the effect of the merger on financial results is not consistent with the
expectations of financial analysts or investors.
Ashford's directors have conflicts of interest that may have influenced them to
recommend the adoption of the merger agreement, and Ashford's officers may have
differing interests in the merger than the interests of Ashford stockholders
generally.
The directors and officers of Ashford participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, the interests of
Ashford stockholders generally, including the following:
. The executive officers of Ashford have outstanding, as of September 30,
2001, stock options to purchase an aggregate of 4,431,250 shares of
Ashford common stock. Vesting of these options accelerates in full upon
completion of the merger.
. The non-employee members of Ashford's board of directors have outstanding,
as of September 30, 2001, stock options to purchase an aggregate of
788,269 shares of Ashford common stock. Vesting of these options
accelerates in full upon completion of the merger.
. Global Sports has agreed to keep in place all rights to indemnification
existing in favor of the directors and officers of Ashford for their acts
and omissions occurring prior to the effective time of the merger, as
provided in Ashford's bylaws and in the indemnification agreements between
Ashford and its directors and officers, for a period of six years from the
effective time of the merger.
. Global Sports has agreed to cause the surviving corporation to maintain
officers' and directors' liability insurance in specified amounts and for
specified periods following the effective time of the merger, covering the
directors and officers of Ashford for their acts and omissions occurring
prior to the effective time of the merger.
For the above reasons, the directors of Ashford could be more likely to vote
to approve the merger agreement and recommend its adoption by Ashford
stockholders, than if they did not hold these interests. Ashford stockholders
should consider whether these interests may have influenced Ashford's directors
to recommend, or Ashford's directors and officers to support, adoption of the
merger agreement.
Risks Relating to Global Sports
Global Sports' future success cannot be predicted based upon its limited
e-commerce operating history.
Although Global Sports commenced operations in 1987, it did not initiate its
e-commerce business until the first quarter of 1999 and did not begin operating
its e-commerce business until the fourth quarter of 1999. Prior to the fourth
quarter of 1999, when it launched the e-commerce businesses it operates for its
partners, 100% of Global Sports' revenues had been generated by its
discontinued operations. The sale of the discontinued operations was completed
in May 2000. Accordingly, 100% of Global Sports' revenues are currently
generated through its e-commerce business. Based on Global Sports' limited
experience with its e-commerce business, it is difficult to predict whether
Global Sports will be successful. Thus, Global Sports' chances of financial and
operational success should be evaluated in light of the risks, uncertainties,
expenses, delays and difficulties associated with operating a business in a
relatively new and unproven market, many of which may be beyond its control.
Global Sports' failure to address these issues could have a material adverse
effect on its business, results of operations and financial condition.
Although Global Sports refers to the retailers, media companies and
professional sports organizations for which it develops and operates e-commerce
businesses as its "partners," Global Sports does not act as an agent or
18
legal representative for any of its partners. Global Sports does not have the
power or authority to legally bind any of its partners. Similarly, its partners
do not have the power or authority to legally bind Global Sports. In addition,
Global Sports does not have the types of liabilities for its partners that a
general partner of a partnership would have.
Global Sports expects increases in its operating expenses and continuing
losses.
Global Sports incurred substantial losses in fiscal 1999, fiscal 2000 and
during the first six months of fiscal 2001, and as of June 30, 2001, it had an
accumulated deficit of $117.4 million. Global Sports has not achieved
profitability from its continuing operations. Global Sports may not obtain
enough customer traffic or a high enough volume of purchases from its partners'
e-commerce businesses to generate sufficient revenues to achieve profitability.
Global Sports could continue to incur operating and net losses. There can be no
assurances that Global Sports will be able to achieve profitability from its
continuing operations.
Global Sports will continue to incur significant operating expenses and
capital expenditures as it:
. enhances its distribution and order fulfillment capabilities;
. further improves its order processing systems and capabilities;
. develops enhanced technologies and features to improve its partners'
e-commerce businesses;
. enhances its customer service capabilities to better serve its customers'
needs;
. increases its general and administrative functions to support its growing
operations; and
. continues its sales and marketing activities.
Because Global Sports will incur many of these expenses before it receives
any revenues from its efforts, its losses will be greater than the losses it
would incur if it developed its business more slowly. In addition, Global
Sports may find that these efforts are more expensive than it currently
anticipates, which would further increase its losses. Also, the timing of these
expenses may contribute to fluctuations in Global Sports' quarterly operating
results.
Prior to the recent expansion of Global Sports' relationship with
Bluelight.com, Global Sports' business had been limited to the sporting goods
industry. Through the proposed acquisition of Ashford, Global Sports intends to
expand its operations into the luxury goods industry. Global Sports may not be
able to successfully expand its operations into new industries.
Until recently, Global Sports' business had been limited to the sporting
goods industry. Through the recent expansion of Global Sports' relationship
with Bluelight.com, Global Sports has begun to expand its operations into other
industries, including electronics and home products. Through the proposed
acquisition of Ashford, Global Sports intends to further expand its business
into the luxury goods industry. In order to successfully expand its business
into these industries, Global Sports must develop and maintain relationships
with manufacturers in these industries and hire and retain skilled personnel to
help manage these areas of its business. Global Sports' failure to successfully
expand its business into these industries could adversely affect its business,
results of operations and financial condition.
Global Sports' success is tied to the success of the retail industry and its
partners for which it operates e-commerce businesses.
Global Sports' future success is substantially dependent upon the success of
the retail industry and its partners for which it operates e-commerce
businesses. From time to time, the retail industry has experienced downturns.
Any downturn in the retail industry could adversely affect Global Sports'
business. In addition, if Global Sports' partners were to have financial
difficulties or seek protection from their creditors, or if Global
19
Sports is unable to replace its partners or obtain new partners, it could
adversely affect Global Sports' business, financial condition and results of
operations.
Global Sports enters into contracts with its partners. If Global Sports does
not maintain good working relationships with its partners or perform as
required under these agreements it could adversely affect Global Sports'
business.
The contracts between Global Sports and its partners establish new and
complex relationships between Global Sports and its partners. Global Sports
spends a significant amount of time and effort to maintain its relationships
with its partners and address the issues that from time to time may arise from
these new and complex relationships. If Global Sports does not maintain a good
working relationship with its partners or perform as required under these
agreements, its partners could seek to terminate the agreements prior to the
end of the term or they could decide not to renew the contracts at the end of
the term. This could adversely affect Global Sports' business, financial
condition and results of operations. Moreover, Global Sports' partners could
decide not to renew these contracts for reasons not related to Global Sports'
performance.
Global Sports' operating results are difficult to predict. If Global Sports
fails to meet the expectations of public market analysts and investors, the
market price of its common stock may decline significantly.
Global Sports' annual and quarterly operating results may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of Global Sports' control. Because Global Sports' operating results may
be volatile and difficult to predict, quarter-to-quarter comparisons of its
operating results may not be a good indication of its future performance. In
some future quarter, Global Sports' operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of Global Sports common stock may decline significantly.
Factors that may harm Global Sports' business or cause its operating results
to fluctuate include the following:
. its inability to retain existing partners or to obtain new partners;
. its inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to the e-commerce businesses operated
by Global Sports or the inability to convert these visitors into
customers;
. its failure to offer an appealing mix of products, including sporting
goods, apparel and footwear;
. its inability to adequately maintain, upgrade and develop its partners'
Web sites, the systems used to process customers' orders and payments or
its computer network;
. the ability of its competitors to offer new or superior e-commerce
businesses, services or products;
. price competition that results in lower profit margins or losses;
. its inability to obtain specific products and brands or unwillingness of
vendors to sell their products to Global Sports;
. unanticipated fluctuations in the amount of consumer spending on various
products that Global Sports sells, which tend to be discretionary spending
items;
. increases in the cost of advertising;
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of Global Sports operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
20
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
. seasonality;
. its inability to manage inventory levels or control inventory theft;
. its inability to manage distribution operations or provide adequate levels
of customer service;
. an increase in the level of Global Sports' product returns;
. government regulations related to use of the Internet for commerce; and
. unfavorable economic conditions specific to the Internet, e-commerce or
the industries in which Global Sports operates.
Seasonal fluctuations in sales could cause wide fluctuations in Global Sports'
quarterly results.
Global Sports expects to experience seasonal fluctuations in its revenues.
These seasonal patterns will cause quarterly fluctuations in its operating
results. In particular, Global Sports expects that its fourth fiscal quarter
will account for a disproportionate percentage of its total annual revenues. In
anticipation of increased sales activity during its fourth fiscal quarter,
Global Sports may hire a significant number of temporary employees to bolster
its permanent staff and significantly increase its inventory levels. For this
reason, if Global Sports' revenues were below seasonal expectations during the
fourth fiscal quarter, its annual operating results could be below the
expectations of securities analysts and investors.
Due to the limited operating history of its e-commerce business, it is
difficult to predict the seasonal pattern of Global Sports' sales and the
impact of this seasonality on its business and financial results. In the
future, Global Sports' seasonal sales patterns may become more pronounced, may
strain its personnel, product distribution and shipment activities and may
cause a shortfall in revenues as compared to expenses in a given period.
Global Sports has been unable to fund its e-commerce operations with the cash
generated from its business. If Global Sports does not generate cash sufficient
to fund its operations, Global Sports may in the future need additional
financing to continue its growth or its growth may be limited.
Because Global Sports has not generated sufficient cash from operations to
date, it has funded its e-commerce operations primarily from the sale of equity
securities. Cash from revenues must increase significantly for Global Sports to
fund anticipated operating expenses internally. If Global Sports' cash flows
are insufficient to fund these expenses, Global Sports may in the future need
to fund its growth through additional debt or equity financings or reduce
costs. Further, Global Sports may not be able to obtain financing on
satisfactory terms. Its inability to finance its growth, either internally or
externally, may limit Global Sports' growth potential and its ability to
execute its business strategy. If Global Sports issues securities to raise
capital, its existing stockholders may experience additional dilution or the
new securities may have rights senior to those of its common stock.
Global Sports must develop and maintain relationships with key brand
manufacturers to obtain a sufficient assortment and quantity of quality
merchandise on acceptable commercial terms. If Global Sports is unable to do
so, it could adversely affect its business, results of operations and financial
condition.
Global Sports primarily purchases the products it offers directly from the
manufacturers of the products. If Global Sports is unable to develop and
maintain relationships with these manufacturers, Global Sports may be unable to
obtain or continue to carry a sufficient assortment and quantity of quality
merchandise on acceptable commercial terms and its business could be adversely
impacted. Global Sports does not have written contracts with most of its
manufacturers. Manufacturers could stop selling products to Global Sports and
may ask it to remove their products or logos from its partners' Web sites. In
some circumstances, Global Sports' partners
21
purchase products directly from manufacturers for sale on their Web sites. If
Global Sports or its partners are unable to obtain products directly from
manufacturers, especially popular brand manufacturers, Global Sports may not be
able to obtain the same or comparable merchandise in a timely manner or on
acceptable commercial terms. For example, Global Sports is currently not
authorized to offer some popular brands of sporting goods, such as Nike,
although Global Sports is authorized to sell the remaining Nike inventory held
by Fogdog, Inc. on the fogdog.com Web site. There can be no assurance that
Global Sports will be able to offer these brands in the future or that Global
Sports will continue to be able to offer brands it currently offers. If Global
Sports is unable to offer a sufficient assortment and quantity of quality
products at acceptable prices, Global Sports may lose sales and market share.
Capacity constraints or system failures could materially and adversely affect
Global Sports' business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that
causes interruption of the availability of Global Sports' partners' Web sites
could result in decreased usage of these Web sites. If these failures are
sustained or repeated, they could reduce the attractiveness of Global Sports'
partners' Web sites to customers, vendors and advertisers. Global Sports'
operations are subject to damage or interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
. computer viruses; and
. other similar events.
Global Sports launched its first partners' e-commerce businesses in the
fourth quarter of fiscal 1999. The limited time during which Global Sports has
been operating these businesses, as well as the inherent unpredictability of
the events described above, makes it difficult to predict whether the
occurrence of any of these events is likely. If any of these events do occur,
they could result in interruptions, delays or cessations in service to users of
Global Sports' partners' Web sites, which could have a material adverse effect
on Global Sports' business, results of operations and financial condition.
In addition, Global Sports maintains its computers on which it operates its
partners' Web sites at the facility of a third-party hosting company. Global
Sports cannot control the maintenance and operation of this facility, which is
also susceptible to similar disasters and problems. Global Sports' insurance
policies may not adequately compensate it for any losses that it may incur. Any
system failure that causes an interruption in Global Sports' service or a
decrease in responsiveness could harm its relationships with its customers and
result in reduced revenues.
Global Sports may be unable to protect its proprietary technology or keep up
with that of its competitors.
Global Sports' success depends to a significant degree upon the protection
of its software and other proprietary intellectual property rights. Global
Sports may be unable to deter misappropriation of its proprietary information,
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. In addition, Global Sports' competitors could, without
violating its proprietary rights, develop technologies that are as good as or
better than Global Sports' technology.
Global Sports' failure to protect its software and other proprietary
intellectual property rights or to develop technologies that are as good as its
competitors' could put it at a disadvantage to its competitors. In addition,
the failure of Global Sports' partners to protect their intellectual property
rights, including their domain names, could
22
impair its operations. These failures could have a material adverse effect on
Global Sports' business, results of operations and financial condition.
If Global Sports does not respond to rapid technological changes, its services
could become obsolete and it could lose customers.
Global Sports may face material delays in introducing new services, products
and enhancements. If this happens, Global Sports' customers may forgo the use
of its partners' e-commerce businesses and use those of its competitors. To
remain competitive, Global Sports must continue to enhance and improve the
functionality and features of its partners' e-commerce businesses. The Internet
and the online commerce industry are rapidly changing. If competitors introduce
new products and services using new technologies or if new industry standards
and practices emerge, Global Sports' partners' existing Web sites and its
proprietary technology and systems may become obsolete.
Developing Global Sports' partners' e-commerce businesses and other
proprietary technology entails significant technical and business risks. Global
Sports may use new technologies ineffectively or it may fail to adapt its
partners' Web sites, its order processing systems and its computer network to
meet customer requirements or emerging industry standards.
Global Sports may be subject to intellectual property claims or competition or
trade practices claims that could be costly and could disrupt its business.
Third parties may assert that Global Sports' business or technologies
infringe their intellectual property rights. From time to time, Global Sports
may receive notices from third parties questioning its right to present
specific images or logos on its partners' Web sites, or stating that Global
Sports has infringed their trademarks or copyrights. Global Sports may in the
future receive claims that it is engaging in unfair competition or other
illegal trade practices. Global Sports may be unsuccessful in defending against
these claims, which could result in substantial damages, fines or other
penalties. The resolution of a claim could also require Global Sports to change
how it does business, redesign its partners' Web sites and other systems or
enter into burdensome royalty or licensing agreements. These license or royalty
agreements, if required, may not be available on acceptable terms, if at all,
in the event of a successful claim of infringement. Global Sports' insurance
coverage may not be adequate to cover every claim that third parties could
assert against it. Even unsuccessful claims could result in significant legal
fees and other expenses, diversion of management's time and disruptions in
Global Sports' business. Any of these claims could also harm Global Sports'
reputation.
Global Sports relies on its developing relationships with online services,
search engines, directories and other Web sites and e-commerce businesses to
drive traffic to the e-commerce businesses it operates. If Global Sports is
unable to develop or maintain these relationships, its business, financial
condition and results of operations could be adversely affected.
Global Sports has relationships with online services, search engines,
directories and other Web sites and e-commerce businesses to provide content,
advertising banners and other links that link to its partners' Web sites.
Global Sports expects to rely on these relationships as significant sources of
traffic to its partners' Web sites and to generate new customers. If Global
Sports is unable to develop satisfactory relationships on acceptable terms,
Global Sports' ability to attract new customers could be harmed. Further, many
of the parties with which Global Sports may have online advertising
arrangements could provide advertising services for other marketers of goods
Global Sports provides. As a result, these parties may be reluctant to enter
into or maintain relationships with Global Sports. Failure to achieve
sufficient traffic or generate sufficient revenue from purchases originating
from third-parties may result in termination of these types of relationships.
Without these relationships, Global Sports may not be able to sufficiently
increase its market share and its business, financial condition and results of
operations could be adversely affected.
23
Global Sports' success is dependent upon its executive officers and other key
personnel.
Global Sports' success depends to a significant degree upon the contribution
of its executive officers and other key personnel, particularly Michael G.
Rubin, Chairman, President and Chief Executive Officer. Global Sports has
employment agreements with some of its executive officers and key personnel.
Global Sports cannot be sure, however, that it will be able to retain or
attract executive, managerial and other key personnel. Global Sports has
obtained key person life insurance for Mr. Rubin in the amount of $9.0 million.
Global Sports has not obtained key person life insurance for any of its other
executive officers or key personnel.
Global Sports may be unable to hire and retain the skilled personnel necessary
to develop its business.
Global Sports intends to continue to hire a number of skilled personnel.
Competition for these individuals is intense, and Global Sports may not be able
to attract, assimilate or retain highly qualified personnel in the future.
Global Sports' failure to attract and retain the highly trained personnel that
are integral to its business may limit its growth rate, which would harm its
business.
Global Sports may not be able to compete successfully against current and
future competitors, which could harm its margins and its business.
The e-commerce market is rapidly evolving and extremely competitive.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which could seriously harm Global Sports'
business, financial condition and results of operations. Global Sports competes
with a variety of companies, including:
. e-commerce businesses of specialty retailers and catalogs such as
Footlocker.com and REI.com;
. e-commerce businesses of traditional general merchandise retailers such as
Target.com and WalMart.com;
. e-commerce businesses of specialty manufacturers such as adidas.com and
Nike.com; and
. e-commerce businesses that are associated with full-line sporting goods
stores such as Shopsports.com.
In addition, Global Sports competes with companies that may be able to
provide solutions to companies that wish to establish e-commerce businesses,
including:
. third party providers, such as Amazon.com and USA Networks; and
. third-party fulfillment and customer services providers, such as
Fingerhut, Keystone Internet Services and ClientLogic.
Finally, Global Sports competes with traditional channels of distribution
for its specialty goods, including full-line retailers, specialty retailers,
general merchandise retailers, catalogs and manufacturers' direct stores.
If Global Sports experiences problems in its fulfillment, warehouse and
distribution operations, it could lose customers.
Although Global Sports operates its own fulfillment center, Global Sports
relies upon multiple third parties for the shipment of its products. Global
Sports also relies upon certain vendors to ship products directly to its
customers. As a result, Global Sports is subject to the risks associated with
the ability of these vendors to successfully and timely fulfill and ship
customer orders and to successfully handle its inventory delivery services to
meet its shipping needs. The failure of these vendors to provide these
services, or the termination or interruption of these services, could adversely
affect Global Sports' business, results of operations and financial condition.
24
Sporting goods and apparel are subject to changing consumer preferences. If
Global Sports fails to anticipate these changes, it could experience lower
sales, higher inventory markdowns and lower margins.
Global Sports' success depends, in part, upon its ability to anticipate and
respond to trends in sporting goods merchandise and consumers' participation in
sports. Consumers' tastes in apparel and sporting goods equipment are subject
to frequent and significant changes, due in part to manufacturers' efforts to
incorporate advanced technologies into some types of sporting goods. In
addition, the level of consumer interest in a given sport can fluctuate
dramatically. If Global Sports fails to identify and respond to changes in
sporting goods merchandising and recreational sports participation, its sales
could suffer and it could be required to mark down unsold inventory. This would
depress Global Sports' profit margins. In addition, any failure to keep pace
with changes in consumers' recreational sports habits could result in lost
opportunities which could have an adverse effect on Global Sports' business,
results of operations and financial condition.
High merchandise returns could adversely affect Global Sports' business,
financial condition and results of operations.
Global Sports' policy for allowing its customers to return products is
generally consistent with the policies of each of Global Sports' partners for
which it operates e-commerce businesses. If merchandise returns are
significant, Global Sports' business, financial condition and results of
operations could be adversely affected.
Global Sports may be subject to product liability claims that could be costly
and time-consuming.
Global Sports sells products manufactured by third parties, some of which
may be defective. If any product that Global Sports sells were to cause
physical injury or injury to property, the injured party or parties could bring
claims against Global Sports as the retailer of the product. Global Sports'
insurance coverage may not be adequate to cover every claim that could be
asserted. Similarly, Global Sports could be subject to claims that users of its
partners' Web sites were harmed due to their reliance on its product
information, product selection guides, advice or instructions. If a successful
claim were brought against Global Sports in excess of its insurance coverage,
it could adversely affect Global Sports' business. Even unsuccessful claims
could result in the expenditure of funds and management time and could have a
negative impact on Global Sports' business.
Global Sports may be liable if third parties misappropriate its customers'
personal information.
If third parties are able to penetrate Global Sports' network security or
otherwise misappropriate its customers' personal information or credit card
information or if Global Sports gives third parties improper access to its
customers' personal information or credit card information, Global Sports could
be subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. They could also include claims for other misuses of personal
information, including unauthorized marketing purposes. These claims could
result in litigation. Liability for misappropriation of this information could
adversely affect Global Sports' business. In addition, the Federal Trade
Commission and state agencies have been investigating various Internet
companies regarding their use of personal information. Global Sports could
incur additional expenses if new regulations regarding the use of personal
information are introduced or if government agencies investigate Global Sports'
privacy practices.
Global Sports is controlled by certain principal stockholders.
As of September 1, 2001, Michael G. Rubin, Global Sports' Chairman,
President and Chief Executive Officer, beneficially owned 19.1%, funds
affiliated with SOFTBANK America Inc., or SOFTBANK, beneficially owned 23.4%
and Interactive Technology Holdings, LLC, or ITH, a joint venture company
formed by Comcast Corporation and QVC, Inc., beneficially owned 24.3% of Global
Sports' outstanding common stock. Should they decide to act together, Mr.
Rubin, SOFTBANK and ITH would be in a position to exercise control over most
matters requiring stockholder approval, including the election or removal of
directors, approval of significant
25
corporate transactions and the ability generally to direct Global Sports'
affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK
and ITH acquired their shares of Global Sports common stock provide that
SOFTBANK and ITH each have the right to designate up to two members of Global
Sports' board of directors. This concentration of ownership and SOFTBANK's and
ITH's right to designate members to Global Sports' board of directors may have
the effect of delaying or preventing a change in control of Global Sports,
including transactions in which stockholders might otherwise receive a premium
over current market prices for their shares.
From time to time, Global Sports may acquire or invest in other companies.
There are risks associated with potential acquisitions and investments. As a
result, Global Sports may not achieve the expected benefits of potential
acquisitions.
If Global Sports is presented with appropriate opportunities, it may make
investments in complementary companies, products or technologies or it may
purchase other companies. Global Sports may not realize the anticipated
benefits of any investment or acquisition. Global Sports may not be able to
successfully assimilate the additional personnel, operations, acquired
technology and products into its business. Any acquisition may further strain
its existing financial and managerial controls and reporting systems and
procedures. In addition, key personnel of the acquired company may decide not
to work for Global Sports. These difficulties could disrupt Global Sports'
ongoing business, distract its management and employees or increase its
expenses. Further, the physical expansion in facilities that would occur as a
result of any acquisition may result in disruptions that seriously impair
Global Sports' business. Finally, Global Sports may have to incur debt or issue
equity securities to pay for any acquisitions or investments, the issuance of
which could be dilutive to its stockholders.
Global Sports may expand its business internationally, causing its business to
become increasingly susceptible to numerous international business risks and
challenges that could affect its profitability.
Global Sports believes that the current globalization of the economy
requires businesses to consider pursuing international expansion. In the
future, Global Sports may expand into international markets. International
sales are subject to inherent risks and challenges that could adversely affect
Global Sports' profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major manufacturers may require that Global Sports'
international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent Global Sports generates international sales in the future, any
negative impact on its international business could negatively impact its
business, operating results and financial condition as a whole. In particular,
gains and losses on the conversion of foreign payments into United States
dollars may contribute to fluctuations in Global Sports' results of operations
and fluctuating exchange rates could cause reduced gross revenues and/or gross
margins from non-dollar-denominated international sales.
26
Global Sports' success is tied to the continued growth in the use of the
Internet and the adequacy of the Internet infrastructure.
Global Sports' future success is substantially dependent upon continued
growth in the use of the Internet. The number of users and advertisers on the
Internet may not increase and commerce over the Internet may not become more
accepted and widespread for a number of reasons, including:
. actual or perceived lack of security of information or privacy protection;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of
cost-effective, high-speed service;
. possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an increase
in the number or requirements of users. In addition, there have been outages
and delays on the Internet as a result of damage to the current infrastructure.
The amount of traffic on Global Sports' partners' Web sites could be materially
affected if there are outages or delays in the future. The use of the Internet
may also decline if there are delays in the development or adoption of
modifications by third parties that are required to support increased levels of
activity on the Internet. If any of the foregoing occurs, or if the Internet
does not become a viable commercial medium, Global Sports' business, results of
operations and financial condition could be materially adversely affected. In
addition, Global Sports may be required to spend significant capital to adapt
its operations to any new or emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the Web
sites which Global Sports operates obsolete.
The technology of the Internet and e-commerce is evolving rapidly for many
reasons, including:
. customers frequently changing their requirements and preferences;
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
These changes could render the Web sites that Global Sports operates
obsolete. Global Sports' ability to attract customers could be seriously
impaired if it does not accomplish the following tasks:
. continually enhance and improve its partners' Web sites;
. identify, select and obtain leading technologies useful in its business;
and
. respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
Customers may be unwilling to use the Internet to purchase goods.
Global Sports' long-term future depends heavily upon the general public's
willingness to use the Internet as a means to purchase goods. The failure of
the Internet to develop into an effective commercial tool would seriously
damage Global Sports' future operations. E-commerce is a relatively new
concept, and large numbers
27
of customers may not begin or continue to use the Internet to purchase goods.
The demand for and acceptance of products sold over the Internet are highly
uncertain, and most e-commerce businesses have a short track record. If
consumers are unwilling to use the Internet to conduct business, Global Sports'
business may not develop profitably. The Internet may not succeed as a medium
of commerce because of delays in developing elements of the needed Internet
infrastructure, such as a reliable network, high-speed modems, high-speed
communication lines and other enabling technologies.
The security risks of e-commerce may discourage customers from purchasing goods
from Global Sports.
In order for the e-commerce market to develop successfully, Global Sports
and other market participants must be able to transmit confidential information
securely over public networks. Third parties may have the technology or
know-how to breach the security of customer transaction data. Any breach could
cause customers to lose confidence in the security of Global Sports' partners'
Web sites and choose not to purchase from those Web sites. If someone is able
to circumvent Global Sports' security measures, he or she could destroy or
steal valuable information or disrupt the operation of Global Sports' partners'
Web sites. Concerns about the security and privacy of transactions over the
Internet could inhibit the growth of the Internet and e-commerce. Global
Sports' security measures may not effectively prohibit others from obtaining
improper access to the information on its partners' Web sites. Any security
breach could expose Global Sports to risks of loss, litigation and liability
and could seriously disrupt its operations.
Credit card fraud could adversely affect Global Sports' business.
Global Sports does not carry insurance against the risk of credit card
fraud, so the failure to adequately control fraudulent credit card transactions
could increase Global Sports' general and administrative expenses. Global
Sports has put in place technology to help it detect the fraudulent use of
credit card information. To date, Global Sports has not suffered material
losses related to credit card fraud. However, Global Sports may in the future
suffer losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the
orders. Under current credit card practices, Global Sports is liable for
fraudulent credit card transactions because it does not obtain a cardholder's
signature.
If one or more states successfully assert that Global Sports should collect
sales or other taxes on the sale of Global Sports' merchandise, its business
could be harmed.
Global Sports does not currently collect sales or other similar taxes for
physical shipments of goods into states other than Kentucky and Pennsylvania.
One or more local, state or foreign jurisdictions may seek to impose sales tax
collection obligations on Global Sports and other out-of-state companies that
engage in online commerce. Global Sports' business could be adversely affected
if one or more states or any foreign country successfully asserts that Global
Sports should collect sales or other taxes on the sale of its merchandise.
Existing or future government regulation could harm Global Sports' business.
Global Sports is subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards conducting business on the Internet.
However, due to the increasing popularity and use of the Internet, many laws
and regulations relating to the Internet are being debated at the state and
federal levels. These laws and regulations could cover issues such as user
privacy, freedom of expression, pricing, fraud, quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy could also harm Global Sports'
business. For example, United States and foreign laws regulate Global Sports'
ability to use customer information and to develop, buy and sell mailing lists.
The vast majority of these laws were adopted prior to the advent of the
Internet, and do not contemplate or address the unique issues raised thereby.
Those laws that do reference the Internet, such as the Digital Millennium
Copyright Act, are only
28
beginning to be interpreted by the courts and their applicability and reach are
therefore uncertain. These current and future laws and regulations could
adversely affect Global Sports' future business, results of operation and
financial condition.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of Global Sports' Internet business or its
marketing efforts.
Global Sports is subject to increasing regulation at the federal and state
levels relating to online privacy and the use of personal user information.
Several states have proposed legislation that would limit the uses of personal
user information gathered online or require online services to establish
privacy policies. The Federal Trade Commission has adopted regulations
regarding the collection and use of personal identifying information obtained
from children under 13. In addition, bills pending in Congress would extend
online privacy protections to adults. Laws and regulations of this kind may
include requirements that Global Sports establish procedures to disclose and
notify users of privacy and security policies, obtain consent from users for
collection and use of information, or provide users with the ability to access,
correct and delete personal information stored by Global Sports. Even in the
absence of those regulations, the Federal Trade Commission has settled several
proceedings resulting in consent decrees in which Internet companies have been
required to establish programs regarding the manner in which personal
information is collected from users and provided to third parties. Global
Sports could become a party to a similar enforcement proceeding. These
regulatory and enforcement efforts could also harm Global Sports' ability to
collect demographic and personal information from users, which could be costly
or adversely affect its marketing efforts.
Global Sports has never paid dividends on its common stock and does not
anticipate paying dividends in the foreseeable future.
Global Sports has never paid cash dividends on its common stock and does not
anticipate that any cash dividends will be declared or paid in the foreseeable
future.
It may be difficult for a third party to acquire Global Sports and this could
depress Global Sports' stock price.
Pursuant to Global Sports' amended and restated certificate of
incorporation, Global Sports has authorized a class of 5,000,000 shares of
preferred stock, which Global Sports' board of directors may issue with terms,
rights, preferences and designations as the board may determine and without any
vote of the stockholders, unless otherwise required by law. Issuing the
preferred stock, depending upon the terms, rights, preferences and designations
set by Global Sports' board, may delay, deter or prevent a change in control of
Global Sports. Issuing additional shares of common stock could result in
dilution of the voting power of the current holders of Global Sports common
stock. In addition, "anti-takeover" provisions of Delaware law may restrict the
ability of the stockholders to approve a merger or business combination or
obtain control of Global Sports.
There are limitations on the liabilities of Global Sports' directors.
Pursuant to Global Sports' amended and restated certificate of incorporation
and under Delaware law, Global Sports' directors are not liable to Global
Sports or its stockholders for monetary damages for breach of fiduciary duty,
except for liability for breach of a director's duty of loyalty, acts or
omissions by a director not in good faith or which involve intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases that are unlawful under Delaware law or any transaction in which a
director has derived an improper personal benefit. In addition, Global Sports
has entered into indemnification agreements with each of its directors. These
agreements, among other things, require Global Sports to indemnify each
director for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by Global Sports or in Global Sports' right, arising out
of the person's services as one of Global Sports' directors.
29
Risks Relating to Ashford
Ashford may be unable to meet its future capital requirements.
If Ashford's current cash and cash that may be generated from future
operations are insufficient to satisfy its liquidity requirements, Ashford may
seek to sell additional equity or debt securities or to obtain additional
credit facilities from lenders. Ashford cannot be certain that financing will
be available to Ashford on favorable terms when required, or at all. If Ashford
raises funds through the issuance of equity, equity-related or debt securities,
the securities may have rights, preferences or privileges senior to those of
the rights of Ashford common stock and its stockholders may experience
dilution. Ashford requires substantial working capital to fund its business.
Since its inception, Ashford has experienced negative cash flow from operations
and expects to experience negative cash flow from operations in the future.
Accordingly, there is substantial doubt as to Ashford's ability to continue as
a going concern. Ashford believes it has sufficient funds for its anticipated
needs for working capital and capital expenditures through at least the end of
the next fiscal year. After that, Ashford may need to raise additional funds.
Ashford's limited operating history makes forecasting difficult. Because most
of Ashford's expenses are fixed based on planned operating results, failure to
accurately forecast revenue could cause net losses in a given quarter to be
greater than expected.
Ashford was incorporated in March 1998 and began selling products on its Web
site in April 1998. Accordingly, Ashford has an extremely limited operating
history upon which to base an evaluation of its business and prospects.
Ashford's business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets such as online commerce. As a result of its limited operating history,
it is difficult to accurately forecast Ashford's net sales and Ashford has
limited meaningful historical financial data upon which to base planned
operating expenses. Ashford bases its current and future expense levels on its
operating plans and estimates of future net sales, and its expenses are to a
large extent fixed. Sales and operating results are difficult to forecast
because they generally depend on the volume and timing of the orders Ashford
receives, which is uncertain. As a result, Ashford may be unable to adjust its
spending in a timely manner to compensate for any unexpected revenue shortfall.
This inability could cause Ashford's net losses in a given quarter to be
greater than expected.
Ashford anticipates future losses and negative cash flow, which may limit or
delay Ashford's ability to become profitable.
Since its formation, Ashford has made significant expenditures on its
technology, Web site development, advertising, hiring of personnel and startup
costs. As a result, Ashford has incurred losses since its inception and expects
to experience negative cash flow during future periods. Ashford expects to
incur additional costs and expenses related to:
. brand development, marketing and other promotional activities;
. the continued maintenance and development of its Web site, the systems and
staff that process customer orders and payments and its computer network;
. the expansion of its product offerings and Web site content; and
. development of relationships with strategic business partners.
Ashford's ability to become profitable depends on its ability to generate
and sustain substantially higher net sales while maintaining reasonable expense
levels, both of which are uncertain. If Ashford does achieve profitability,
Ashford cannot be certain that it would be able to sustain or increase
profitability on a quarterly or annual basis in the future. See "Ashford
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
30
Ashford's operating results are volatile and difficult to predict. If Ashford
fails to meet the expectations of public market analysts and investors, the
market price of Ashford common stock may decline significantly.
Ashford's quarterly operating results have fluctuated in the past, and
Ashford expects both its quarterly and annual operating results to fluctuate
significantly in the future. Because its operating results are volatile and
difficult to predict, Ashford believes that quarter-to-quarter comparisons of
its operating results are not a good indication of its future performance. In
some future quarter, Ashford's operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of Ashford common stock may decline significantly. The following are
material factors that may harm Ashford's business or cause its operating
results to fluctuate:
. its inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases;
. seasonality;
. its inability to manage inventory levels or control inventory theft;
. its inability to manage its fulfillment operations;
. its inability to adequately maintain, upgrade and develop its Web site,
the systems that Ashford uses to process customer orders and payments or
its computer network;
. the ability of its competitors to offer new or enhanced Web sites,
services or products;
. its inability to obtain product lines from its suppliers;
. the availability and pricing of merchandise from vendors; and
. increases in the cost of online or offline advertising.
A number of factors will cause Ashford's gross margins to fluctuate in
future periods, including the mix of corporate sales to traditional retail
sales, the mix of products Ashford sells, inventory management, marketing and
supply decisions, inbound and outbound shipping and handling costs, the level
of product returns and the level of discount pricing and promotional coupon
usage. Any change in one or more of these factors could reduce Ashford's gross
margins in future periods. See "Ashford Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Ashford common stock may be delisted from the Nasdaq National Market.
On April 9, 2001, Ashford received notice from Nasdaq that its common stock
had failed to maintain Nasdaq's minimum bid price closing requirement of $1.00
and that such failure had continued beyond the 90 day probationary period
allowed under the Nasdaq National Marketplace Rules. The letter specified that,
as a result of Ashford's failure to maintain the minimum bid price closing
requirement, its common stock would be delisted at the close of business on
July 18, 2001. However, Ashford appealed the decision, and the delisting was
stayed pending a hearing before the Nasdaq Qualifications Panel.
On September 11, 2001, Ashford received notice from Nasdaq that Ashford did
not comply with the market value of the public float requirement set forth in
the Nasdaq National Marketplace Rules.
On September 27, 2001, Nasdaq announced that in response to the
extraordinary market conditions following the events of September 11, 2001,
Nasdaq was implementing a moratorium on the minimum bid and public float
requirements for continued listing on Nasdaq. These requirements were suspended
until January 2, 2002.
On August 27, 2001 Ashford held its annual meeting, in which its
stockholders approved a 1-for-10 reverse stock split that was to be implemented
on October 15, 2001. As the meeting was held prior to the moratorium
31
announced by Nasdaq, Ashford believed that the reverse stock split was the most
effective means to avoid a delisting of its common stock from Nasdaq.
Ashford's board of directors has delayed implementing the reverse stock
split because of the proposed merger and Nasdaq's recent suspension of the
listing requirements. If the merger does not occur and Ashford's common stock
continues to trade on the Nasdaq National Market, Ashford may have to implement
the reverse stock split if the moratorium is revoked and the listing
requirements are reinstated.
Ashford cannot predict whether the reverse stock split, if ultimately
implemented, would increase the market price for its common stock. The history
of similar stock split combinations for companies in like circumstances is
varied. There is no assurance that the market price per share of Ashford common
stock following the reverse stock split would either exceed or remain in excess
of the $1.00 minimum bid price as required by Nasdaq or that Ashford will
otherwise meet the requirements of Nasdaq for continued inclusion for trading
on Nasdaq. A reverse stock split could negatively impact the value of Ashford's
stock by allowing additional downward pressure on the stock price as its
relative value per share becomes greater following the reverse split. That is
to say, the stock, at its new, higher price, has farther to fall and therefore
more room for investors to short or otherwise trade the value of the stock
downward. Similarly, a delisting may negatively impact the value of the stock
as stocks trading on the over-the-counter market are typically less liquid and
trade with larger variations between the bid and ask price.
The market price of Ashford common stock will also be based on Ashford's
performance and other factors, some of which are unrelated to the number of
shares outstanding. If the reverse stock split is effected and the market price
of Ashford common stock declines, the percentage decline as an absolute number
and as a percentage of Ashford's overall market capitalization may be greater
than would occur in the absence of a reverse stock split. Furthermore,
liquidity of Ashford common stock could be adversely affected by the reduced
number of shares that would be outstanding after the reverse stock split.
Ashford expects to experience seasonal fluctuations in its net sales, which
will cause Ashford's quarterly results to fluctuate and could cause Ashford's
annual results to be below expectations.
Ashford expects to experience significant seasonal fluctuations in its net
sales that will cause quarterly fluctuations in its operating results. In
particular, Ashford realized approximately 40%, 50% and 40% of its net sales
for fiscal 2001, 2000 and 1999, respectively, during the fourth calendar
quarter, primarily due to gift purchases made during the holiday season.
Ashford expects this trend to continue in the future. However, given the
current economic environment and the potential negative impact this environment
may have on luxury goods sales, Ashford cannot be certain that sales during the
fourth calendar quarter of 2001 will meet or exceed sales in prior comparable
quarters.
Due to its limited operating history, it is difficult to predict the
seasonal pattern of Ashford's sales and the impact of seasonality on its
business and financial results. In the future, Ashford's seasonal sales
patterns may become more pronounced, may strain its personnel and warehousing
and order shipment activities and may cause a shortfall in net sales as
compared to expenses in a given period. See "Ashford Management's Discussion
and Analysis of Financial Condition and Results of Operations."
If Ashford is unable to purchase or continue to purchase products directly from
the brand owners, Ashford's net sales could decrease.
A significant portion of Ashford's units sold are purchased directly from
the brand owners. Ashford is negotiating with some of the remaining brand
owners to purchase those brands directly, in all product categories. Ashford
believes that purchasing directly from the brand owners will provide Ashford
with a more predictable supply of products, as well as a lower cost of goods.
As a result, Ashford believes that part of its success is contingent on
attaining or maintaining its ability to buy directly from the brand owners. If
Ashford loses or does not improve its ability to buy directly from the brand
owners, its net sales or margins may decrease.
32
Ashford's ability to meet consumer demand is in part dependent upon the
availability of products purchased indirectly from sources other than the brand
owners. If Ashford is unable to obtain popular products through indirect
sources, Ashford's net sales will decline.
Ashford purchases brands indirectly from distributors and other third
parties that Ashford does not purchase directly from the brand owners. The
availability of products purchased indirectly depends on many factors,
including consumer demand, manufacturer production and fashion trends. Since
there are no guarantees that Ashford will be able to obtain a sufficient supply
of products indirectly from third-party distributors and other suppliers,
customer demand may, at times, exceed Ashford's supply of those products. If
this occurs, Ashford could lose customers and its net sales would decline. In
addition, the luxury goods brand owners could establish procedures to limit or
control Ashford's ability to purchase products indirectly and several brand
owners in the U.S. have distinctive legal rights rendering them the only legal
importer of their respective brands into the U.S. In the event Ashford acquires
such products indirectly from distributors and other third parties who may not
have complied with applicable customs laws and regulations, such goods can be
subject to seizure from Ashford's inventory by U.S. Customs, and the importer
may have a civil action for damages against Ashford. As it is often difficult
to ascertain the original circumstances of importation of certain goods offered
to Ashford by its distributors and other third parties, this could impact
Ashford's ability to obtain sufficient quantities of popular luxury goods, such
as watches, and cause customer dissatisfaction.
If Ashford is unable to obtain sufficient quantities of popular luxury and
premium products, Ashford's net sales could decrease.
If Ashford is not able to offer its customers a sufficient supply and
selection of products in a timely manner, Ashford could lose customers and its
net sales could be below expectations. Ashford's success depends on its ability
to purchase products in sufficient quantities at competitive prices,
particularly for the holiday shopping season. As is common in the industry,
Ashford generally does not have long-term or exclusive arrangements with brand
owners, distributors or brokers that guarantee the availability of products for
resale.
In the luxury goods market, a product or fashion style periodically becomes
intensely popular. From time to time, Ashford may have trouble obtaining
sufficient product allocations of particularly popular brands. In addition,
Ashford believes that some of its suppliers may establish their own online
retailing efforts, which may impact Ashford's ability to get sufficient product
allocations from suppliers. In several cases, the brands that Ashford wishes to
carry have delayed establishing a relationship with Ashford until they have
their own Web site up and running. In other cases, the brand owners distribute
only a small amount of product and rely partially on the scarcity of that
product to provide a merchandising mystique. It is unlikely that Ashford will
obtain products for its Web site from brands who follow the scarcity mystique,
and there is no assurance that Ashford will actually obtain relationships
within all sectors that Ashford has planned to offer. Therefore, Ashford does
not have a predictable or guaranteed supply of products.
Because Ashford carries almost all of the products it sells in inventory, if it
is unable to accurately predict and plan for changes in consumer demand, its
net sales and gross margins may decrease.
At June 30, 2001, Ashford held approximately $18.4 million of products in
inventory. The rapidly changing trends in consumer tastes in the market for
luxury and premium products subjects Ashford to significant inventory risks. It
is critical to Ashford's success that it accurately predicts these trends and
does not overstock unpopular products. The demand for specific products can
change between the time the products are ordered and the date of receipt.
Ashford is particularly exposed to this risk because Ashford derives a majority
of its net sales in the fourth calendar quarter of each year. Ashford's failure
to sufficiently stock popular products in advance of the fourth calendar
quarter would harm its operating results for the entire fiscal year. In the
event that one or more products do not achieve widespread consumer acceptance,
Ashford may be required to take significant inventory markdowns, which could
reduce its net sales and gross margins. This risk may be greatest in the first
calendar quarter of each year, after Ashford has significantly increased
inventory levels for the holiday season. Ashford
33
believes that this risk will increase as it begins to offer additional luxury
items due to its lack of experience in purchasing these items. In addition, to
the extent that demand for Ashford's products increases over time, Ashford may
be forced to increase inventory levels. Any increase would subject Ashford to
additional inventory risks.
If Ashford experiences significant inventory theft, its gross profit margin
would decrease.
Although immaterial to date, in the past Ashford has experienced theft of
merchandise shipments in route from its facility to its customers. In the
future, Ashford expects that it may also experience theft of merchandise while
it is being held in Ashford's fulfillment facility. Ashford has worked with its
shipping carriers and has taken steps aimed at preventing theft. If these steps
are inadequate or if security measures fail at Ashford's fulfillment facility,
Ashford could incur significant inventory theft, which could cause gross profit
margins and results of operations to decrease significantly.
Sales of luxury goods are particularly susceptible to general economic
downturns. If general economic conditions deteriorate, Ashford's sales could
suffer.
Purchases of luxury products are typically discretionary for consumers and
may be particularly affected by negative trends in the general economy. The
success of Ashford's operations depends to a significant extent on a number of
factors relating to discretionary consumer spending and affecting disposable
consumer income, such as employment, wages and salaries, business conditions,
interest rates, exchange rates, availability of credit and taxation. In
addition, because the purchase of luxury products is relatively discretionary,
any reduction in disposable income in general, and the current economic climate
in particular, may affect Ashford more significantly than companies in other
industries.
To manage Ashford's growth and expansion, Ashford needs to improve and
implement financial and managerial controls and improve Ashford's reporting
systems and procedures. If Ashford is unable to do so successfully, Ashford may
not be able to manage growth effectively and Ashford's operating results would
be harmed.
Ashford's rapid growth in personnel and operations has placed, and will
continue to place, a significant strain on its management, information systems
and resources. In order to manage this growth effectively, Ashford needs to
continue to improve Ashford's financial and managerial controls and reporting
systems and procedures. Any inability of its management to integrate additional
companies, employees, customer databases, merchandise lines, categories of
merchandise, technology advances, fulfillment systems and customer service into
operations and to eliminate unnecessary duplication, may have a materially
adverse effect on Ashford's business, financial condition and results of
operations.
If Ashford is unable to successfully expand its accounting and financial
reporting systems, its stock price could decline.
Ashford continues to expand its financial and management information systems
to accommodate new data. If Ashford fails to successfully implement and
integrate its new financial reporting and management information systems with
its existing systems, or if Ashford is not able to expand these systems to
accommodate its growth, Ashford may not have adequate, accurate or timely
financial information. Ashford's failure to have adequate, accurate or timely
financial information would hinder its ability to manage its business and
operating results. If Ashford continues to grow rapidly, Ashford will face
additional challenges in upgrading and maintaining its financial and reporting
systems.
Ashford may not be able to compete successfully against current and future
competitors.
Ashford expects competition in the online sale of luxury and premium
products to intensify in the future. Increased competition is likely to result
in price pressure, reduced gross margins and loss of market share, any of
34
which could seriously harm Ashford's net sales and operating results. In
addition, the luxury goods industry is intensely competitive. Ashford currently
or potentially competes with a variety of other companies, including:
. traditional retailers of luxury and premium products;
. brand owners of the products Ashford sells;
. other online retailers of luxury and premium products; and
. catalog retailers.
Many of Ashford's competitors have advantages over it, including longer
operating histories, greater brand recognition and significantly greater
financial, sales and marketing and other resources. In addition, traditional
store-based retailers offer customers benefits that are not obtainable over the
Internet, such as enabling customers to physically inspect a product before
purchase and not incurring costs associated with maintaining a Web site.
If Ashford is unable to build awareness of the Ashford.com brand, it may not be
able to compete effectively against competitors with greater name recognition
and its sales could be adversely affected.
If Ashford is unable to economically achieve or maintain a leading position
in online commerce or to promote and maintain its brand, its business, results
of operations and financial condition could suffer. Ashford believes that the
importance of brand recognition will increase as more companies engage in
commerce over the Internet. Development and awareness of Ashford's brand will
depend largely on its success in increasing its customer base. If the leading
brand owners do not perceive Ashford as an effective marketing and sales
channel for their merchandise, or consumers do not perceive Ashford as offering
a desirable way to purchase merchandise, Ashford may be unsuccessful in
promoting and maintaining its brand.
If Ashford enters new business categories that do not achieve market
acceptance, Ashford's brand and reputation could be damaged and Ashford could
fail to attract new customers.
If Ashford launches or acquires a new department or product category that is
not favorably received by consumers, its brand or reputation could be damaged.
This damage could impair Ashford's ability to attract new customers, which
could cause its net sales to fall below expectations. An expansion of Ashford's
business to include other luxury goods will require significant additional
expenses, and strain Ashford's management, financial and operational resources.
This type of expansion would also subject Ashford to increased inventory risk.
Ashford may choose to expand its operations by developing other new departments
or product categories, promoting new or complementary products, expanding the
breadth and depth of products and services offered or expanding its market
presence through relationships with third parties. In addition, Ashford may
pursue the acquisition of other new or complementary businesses, products or
technologies.
If Ashford's strategy to sell products outside of the United States is not
successful, Ashford's increases in operating expenses may not be offset by
increased sales.
If Ashford is not able to successfully market, sell and distribute its
products in foreign markets, or if certain risks and uncertainties of doing
business in foreign markets prove insurmountable, then these factors could have
a material adverse effect on Ashford's future global operations, and
consequently, on its operating margins. Ashford does not currently have any
overseas fulfillment or distribution facility or arrangement or any Web site
content localized for foreign markets, and Ashford cannot be certain that it
will be able to establish a global presence. In addition, there are certain
risks inherent in doing business on a global level, including:
. regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
35
. difficulties in protecting intellectual property rights;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
If Ashford experiences problems with its third-party shipping services, Ashford
could lose customers.
Ashford relies upon third-party carriers, primarily Federal Express and UPS,
for product shipments, including shipments to and from its warehouse. Ashford
is therefore subject to the risks, including employee strikes and inclement
weather, associated with these carriers' ability to provide delivery services
to meet its shipping needs. In addition, failure to deliver products to
Ashford's customers in a timely manner would damage its reputation and brand.
Ashford's operating results depend on Ashford's internally developed Web site,
network infrastructure and transaction-processing systems. If Ashford does not
successfully maintain Ashford's Web site and the systems that process customer
orders, Ashford could lose customers and net sales could be reduced.
The satisfactory performance, reliability and availability of Ashford's Web
site, transaction-processing systems and network infrastructure are critical to
its operating results, as well as to Ashford's ability to attract and retain
customers and maintain adequate customer service levels. Any system
interruptions that result in the unavailability of Ashford's Web site or
reduced performance of the transaction systems would reduce the volume of sales
and the attractiveness of Ashford's service offerings. This would seriously
harm Ashford's business, operating results and financial condition.
Ashford uses internally developed systems for its Web site and substantially
all aspects of transaction processing, including customer profiling and order
verifications. Ashford has experienced periodic systems interruptions due to
server failure, which it believes will continue to occur from time to time. If
the volume of traffic on Ashford's Web site or the number of purchases made by
customers increases by more than two times its current holiday sales levels,
Ashford will need to further expand and upgrade its technology, transaction
processing systems and network infrastructure. Ashford has experienced and
expects to continue to experience temporary capacity constraints due to sharply
increased traffic during sales or other promotions, which cause unanticipated
system disruptions, slower response times, degradation in levels of customer
service, impaired quality and delays in reporting accurate financial
information.
If Ashford fails to maintain its Web site or toll-free call center in order
to accommodate increased traffic, Ashford may lose customers, which would
reduce its net sales. Furthermore, if Ashford fails to maintain the computer
systems that Ashford uses to process and ship customer orders and process
payments, Ashford may not be able to successfully fulfill customer orders. As a
result, Ashford could lose customers and its net sales could be reduced. In
addition, Ashford's failure to maintain or upgrade its Web site or these
computer systems without system downtime would further reduce its net sales.
Ashford may experience difficulty in improving and maintaining its systems if
its employees or contractors that develop or maintain its computer systems
become unavailable to Ashford. Ashford has experienced periodic systems
interruptions, which Ashford believes will continue to occur, while enhancing
and expanding these computer systems.
Ashford's facilities and systems are vulnerable to natural disasters and other
unexpected problems. The occurrence of a natural disaster or other unexpected
problem could damage Ashford's reputation and brand and reduce Ashford's net
sales.
The occurrence of a natural disaster or unanticipated problems at Ashford's
leased or offsite hosting facilities that house substantially all of its
computer and communications hardware systems could cause
36
interruptions or delays in Ashford's business, destroy data or render Ashford
unable to accept and fulfill customer orders. Any of these interruptions or
delays at these facilities would reduce Ashford's net sales. In addition,
Ashford's systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. Ashford has not established specific procedures for handling
damage or interruptions caused by these events and its business interruption
insurance may not adequately compensate Ashford for losses that may occur. In
addition, the failure by the third-party facility to provide the data
communications capacity required by Ashford, as a result of human error,
natural disaster or other operational disruptions, could interrupt its service.
The occurrence of any or all of these events could damage Ashford's reputation
and brand and impair its business.
Ashford's net sales could decrease if Ashford's online security measures fail.
Ashford's relationships with its customers may be adversely affected if the
security measures that Ashford uses to protect their personal information, such
as credit card numbers, are ineffective. If, as a result, Ashford loses many
customers, its net sales could decrease. Ashford relies on security and
authentication technology that Ashford licenses from third parties. With this
technology, Ashford performs real-time credit card authorization and
verification with its bank. Ashford cannot predict whether events or
developments will result in a compromise or breach of the technology Ashford
uses to protect a customer's personal information. Furthermore, Ashford's
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. Ashford may need to expend significant additional
capital and other resources to protect against a security breach or to
alleviate problems caused by any breaches. Ashford cannot assure that it can
prevent all security breaches.
Ashford's net sales and gross margins would decrease if Ashford experiences
significant credit card fraud.
A failure to adequately control fraudulent credit card transactions would
reduce Ashford's net sales and its gross margins because Ashford does not carry
insurance against this risk. Ashford has developed procedures to help it detect
the fraudulent use of credit card information. Under current credit card
practices, Ashford is liable for fraudulent credit card transactions because it
does not obtain a cardholder's signature.
If Ashford does not respond to rapid technological changes, its services could
become obsolete and Ashford could lose customers.
If Ashford faces material delays in introducing new services, products and
enhancements, its customers may forego the use of its services and use those of
its competitors. To remain competitive, Ashford must continue to enhance and
improve the functionality and features of its online store. The Internet and
the online commerce industry are rapidly changing. If competitors introduce new
products and services, or if new industry standards and practices emerge,
Ashford's existing Web site and proprietary technology and systems may become
obsolete. To develop Ashford's Web site and technology entails significant
technical and business risks. Ashford may use new technologies ineffectively or
it may fail to adapt its technology to meet customer requirements or emerging
industry standards.
Intellectual property claims against Ashford can be costly and could impair
Ashford's business.
Other parties may assert infringement or unfair competition claims against
Ashford. Ashford cannot predict whether they will do so, or whether any future
assertions or prosecutions will harm its business. If Ashford is forced to
defend against any infringement claims, whether they are with or without merit
or are determined in Ashford's favor, then Ashford may face costly litigation,
diversion of technical and management personnel, or product shipment delays.
Further, the outcome of a dispute may be that Ashford would need to develop
non-infringing technology or enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may be unavailable on terms
acceptable to Ashford, or at all.
37
If the protection of Ashford's trademarks and proprietary rights is inadequate,
Ashford's brand and reputation could be impaired and Ashford could lose
customers.
The steps Ashford takes to protect its proprietary rights may be inadequate.
Ashford regards its copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success. Ashford
relies on trademark and copyright law, trade secret protection and
confidentiality or license agreements with its employees, customers, partners
and others to protect its proprietary rights. Ashford currently has
applications for registration in the United States Patent and Trademark Office,
as well as various foreign trademark offices, of several of the company's
trademarks. In some instances, these applications span a variety of goods and
services. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which Ashford will sell its
products and services online. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, Ashford may be unable to prevent third parties
from acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of its trademarks and other proprietary rights.
The loss of the services of one or more of Ashford's key personnel, or
Ashford's failure to attract, assimilate and retain other highly qualified
personnel in the future, could disrupt Ashford's operations and result in loss
of net sales.
Ashford's future performance will depend on the continued services of its
management and key personnel and the ability to attract additional management
and key personnel. The loss of the services of one or more of Ashford's key
personnel could seriously interrupt its business. Ashford depends on the
continued services and performance of its senior management and other key
personnel. Ashford's future success also depends upon the continued service of
its executive officers and other key sales, marketing and support personnel.
Ashford's relationships with officers and key employees are at will and none of
its officers or key employees is bound by an employment agreement for any
specific term. Ashford currently has a key person life insurance policy
covering James H. Whitcomb, Jr. While the proceeds of this policy might assist
Ashford in recruiting executive officers, the proceeds would not address the
potential disruption to its business of recruiting and integrating new senior
management.
Executive officers, directors and entities affiliated with them have
substantial control over Ashford which could delay or prevent a change in
Ashford's corporate control favored by Ashford's other stockholders.
Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by Ashford stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
It may be difficult for a third party to acquire Ashford even if doing so would
be beneficial to Ashford stockholders.
Provisions of Ashford's certificate of incorporation and bylaws and Delaware
law could make it more difficult for a third party to acquire Ashford, even if
doing so would be beneficial to Ashford stockholders. In particular, Ashford's
certificate of incorporation provides for a board of directors that is divided
into three classes which may issue preferred stock without any stockholder
action. Ashford's certificate of incorporation also does not allow stockholders
to act by written consent or for cumulative voting in the election of
directors. Only one class of directors is up for reelection at each annual
meeting. In addition, Section 203 of the Delaware General Corporation Law
places restrictions on business combinations with interested stockholders.
Ashford depends on increasing use of the Internet and on the growth of online
commerce.
Ashford's future revenues substantially depend upon the increased acceptance
and use of the Internet and other online services as a medium of commerce.
Rapid growth in the use of the Internet, the Web and online services is a
recent phenomenon. As a result, acceptance and use may not continue to develop
at historical rates and a sufficiently broad base of customers may not adopt,
and/or continue to use, the Internet and other online
38
services as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty and there exist few proven services and products.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. If the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability as a commercial medium due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or insufficient availability of, telecommunications
services to support the Internet also could result in slower response times and
adversely affect usage of the Internet generally.
Ashford's business, financial condition and results of operations would be
seriously harmed if:
. use of the Internet, the Web and other online services does not continue
to increase or increases more slowly than expected;
. the infrastructure for the Internet, the Web and other online services
does not effectively support expansion that may occur; the Internet, the
Web and other online services do not become a viable commercial
marketplace; or
. traffic to Ashford's Web site decreases or fails to increase as expected
or if Ashford spend more than it expects to attract visitors to its Web
site.
If Ashford is unable to acquire the necessary Web domain names, Ashford's brand
and reputation could be damaged and Ashford could lose customers.
Ashford may be unable to acquire or maintain Web domain names relating to
its brand in the United States and other countries in which Ashford may conduct
business. As a result, Ashford may be unable to prevent third parties from
acquiring and using domain names relating to its brand, which could damage its
brand and reputation and take customers away from its Web site. Ashford
currently holds, among others, the "Ashford.com," "newwatch.com,"
"sunglasses.com," "Jasmin.com" and "Ashfordcorporategifts.com" domain names and
may seek to acquire additional domain names. Governmental agencies and their
designees generally regulate the acquisition and maintenance of domain names.
The regulation of domain names in the United States and in foreign countries is
subject to change in the near future. The changes in the United States are
expected to include a transition from the current system to a system that is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names.
Ashford may need to change the manner in which it conducts its business if
government regulation increases.
The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which Ashford currently conducts its
business. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the
United States and abroad, that may impose additional burdens on Ashford. Laws
and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. The United States Congress recently
enacted Internet laws regarding children's privacy, copyrights, taxation and
the transmission of sexually explicit material. The European Union recently
enacted its own privacy regulations. Laws regulating the Internet, however,
remain largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel and taxation apply to the
Internet. In order to comply with new or existing laws regulating online
commerce, Ashford may need to modify the manner in which it does business,
which may result in additional expenses. For instance, Ashford may need to
spend time and money revising the process by which Ashford fulfills customer
orders to ensure that each shipment complies with
39
applicable laws. Ashford may need to hire additional personnel to monitor its
compliance with applicable laws. Ashford may also need to modify its software
to further protect its customers' personal information.
Ashford may be subject to liability for the Internet content that Ashford
publishes.
As a publisher of online content, Ashford faces potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that Ashford publishes or
distributes. If Ashford faces liability, then its reputation and its business
may suffer. In the past, plaintiffs have brought these types of claims and
sometimes successfully litigated them against online companies. In addition,
Ashford could be exposed to liability with respect to the unauthorized
duplication of content or unauthorized use of other parties' proprietary
technology. Although Ashford carries general liability insurance, its insurance
currently does not cover claims of these types. Ashford cannot be certain that
it will be able to obtain insurance to cover the claims on reasonable terms or
that it will be adequate to indemnify itself for all liability that may be
imposed on it. Any imposition of liability that is not covered by Ashford's
insurance or is in excess of insurance coverage could increase Ashford's
expenses.
Ashford's net sales could decrease if Ashford becomes subject to sales or other
taxes.
If one or more states or any foreign country successfully asserts that
Ashford should collect sales or other taxes on the sale of its products, its
net sales and results of operations could be harmed. One or more local, state
or foreign jurisdictions may seek to impose sales tax collection obligations on
Ashford. In addition, any new operation could subject Ashford's shipments in
other states to state sales taxes under current or future laws. If Ashford
becomes obligated to collect sales taxes, Ashford will need to update its
system that processes customer orders to calculate the appropriate sales tax
for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades will increase Ashford's operating
expenses. In addition, Ashford's customers may be discouraged from purchasing
products from Ashford because they have to pay sales tax, causing Ashford's net
sales to decrease. As a result, Ashford may need to lower prices to retain
these customers.
Ashford common stock price is volatile, which could result in substantial
losses for individual stockholders.
The trading price of Ashford common stock fluctuates significantly. For
example, from its initial public offering through September 30, 2001, the
reported sale price of Ashford common stock on the Nasdaq National Market was
as high as $24.88 and as low as $0.06. Trading prices of Ashford common stock
may fluctuate in response to a number of events and factors, such as:
. actual or anticipated variations in its quarterly operating results;
. announcements of technological innovations or new products or services by
Ashford or its competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and/or online commerce industries;
. changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
. announcements by Ashford or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. release of transfer restrictions on its outstanding shares of common stock
or sales of additional shares of common stock; and
. potential litigation.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of Ashford common stock.
40
THE SPECIAL MEETING OF ASHFORD STOCKHOLDERS
General
Ashford is furnishing this prospectus/proxy statement to holders of Ashford
common stock in connection with the solicitation of proxies by Ashford's board
of directors for use at the special meeting of Ashford stockholders to be held
on [ ], 2001, and any adjournment or postponement thereof.
This prospectus/proxy statement is being mailed to Ashford stockholders on
or about [ ], 2001. This prospectus/proxy statement is also being
furnished to Ashford stockholders as a prospectus in connection with the
issuance by Global Sports of shares of Global Sports common stock as
contemplated by the merger agreement.
Date, Time and Place
The special meeting of Ashford stockholders will be held on [ ], 2001,
at [ a.m.], local time, at the Renaissance Hotel, 6 Greenway Plaza East,
Suite 1809, Houston, Texas 77046.
Matters to be Considered at the Special Meeting of Ashford Stockholders
At the special meeting of Ashford stockholders, and any adjournment or
postponement thereof, Ashford stockholders will be asked to consider and vote
upon a proposal to adopt the merger agreement, pursuant to which a subsidiary
of Global Sports will merge with and into Ashford, Ashford will become a wholly
owned subsidiary of Global Sports and each outstanding share of Ashford common
stock will be converted into the right to receive a combination of $0.125 in
cash and 0.0076 of a share of Global Sports common stock, with cash in lieu of
any fractional share.
Record Date
Ashford's board of directors has fixed [ ], 2001, as the record date
for determination of Ashford stockholders entitled to notice of and to vote at
the special meeting of Ashford stockholders.
Voting of Proxies
Ashford requests that its stockholders complete, date and sign the proxy
card and promptly return it by mail in the accompanying envelope in accordance
with the instructions accompanying the proxy card. Brokers holding shares in
"street name" may vote the shares only if the stockholder provides instructions
on how to vote. Brokers will provide directions on how to instruct the broker
to vote the shares. All properly signed and dated proxies that Ashford receives
prior to the vote at the special meeting of Ashford stockholders, and that are
not revoked, will be voted in accordance with the instructions indicated on the
proxies or, if no direction is indicated, for adoption of the merger agreement.
Stockholders may revoke their proxies at any time prior to their use:
. by delivering to the Secretary of Ashford a signed notice of revocation or
a later-dated, signed proxy; or
. by attending the special meeting of Ashford stockholders and voting in
person.
Attendance at the special meeting of Ashford stockholders does not in itself
constitute the revocation of a proxy.
41
Votes Required
As of the close of business on [ ], 2001, the record date for the
special meeting of Ashford stockholders, there were [ ] shares of Ashford
common stock outstanding and entitled to vote, held by approximately [ ]
holders of record. The holders of a majority of the outstanding shares of
Ashford common stock entitled to vote thereon must vote to adopt the merger
agreement. Ashford stockholders have one vote per share of Ashford common stock
owned on the record date.
As of the record date for the special meeting of Ashford stockholders, the
directors and executive officers of Ashford and their affiliates owned
approximately [ ] shares of Ashford common stock, which represented
approximately [ ]% of the outstanding shares of Ashford common stock entitled
to vote at the special meeting of Ashford stockholders. David Gow, Chief
Executive Officer and a director of Ashford, James H. Whitcomb, President and a
director of Ashford, J. Robert Shaw, Chairman of Ashford's board of directors,
Robert Cohn and Kevin Harvey, directors of Ashford, and Benchmark Capital
Partners II, L.P., Benchmark Capital Partners III, L.P. and Benchmark Capital
Partners IV, L.P. have each entered into a voting agreement with Global Sports
dated as of September 13, 2001, pursuant to which they have agreed to vote all
shares of Ashford common stock owned by them as of the record date in favor of
the proposal to adopt the merger agreement. Each of these parties has also
granted Global Sports an irrevocable proxy to vote his or its shares of Ashford
common stock in favor of the proposal to adopt the merger agreement.
Approximately [ ] shares of Ashford common stock, which represents
approximately [ ]% of the outstanding shares of Ashford common stock as of
the record date, are subject to the voting agreements. See "Voting Agreements."
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
of Ashford stockholders is holders, present in person or by proxy, of a
majority of the shares of Ashford common stock issued and outstanding on the
record date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the special meeting of
Ashford stockholders for the purpose of determining the presence of a quorum.
Because adoption of the merger agreement requires the affirmative vote of a
majority of the outstanding shares of Ashford common stock entitled to vote,
abstentions and broker non-votes will have the same effect as votes against the
adoption of the merger agreement. In addition, the failure of an Ashford
stockholder to return a proxy or to vote in person will have the effect of a
vote against the adoption of the merger agreement. Brokers holding shares for
beneficial owners cannot vote on the proposal to adopt the merger agreement
without the owners' specific instructions. Accordingly, Ashford stockholders
are encouraged to return the enclosed proxy card marked to indicate their vote
as described in the instructions accompanying the proxy card.
Solicitation of Proxies and Expenses
Ashford has retained the services of Mellon Investor Services LLC to assist
in the solicitation of proxies from Ashford stockholders. The fees to be paid
to the firm by Ashford for these services are not expected to exceed $10,000
plus reasonable out-of-pocket expenses. Ashford will bear its own expenses in
connection with the solicitation of proxies for the special meeting of Ashford
stockholders.
In addition to solicitation by mail, the directors, officers and employees
of Ashford may solicit proxies from stockholders by telephone, email, facsimile
or in person. Brokerage houses, nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
Other Matters
No other matters may be brought before the special meeting of Ashford
stockholders. Under Ashford's bylaws, business transacted at the special
meeting of Ashford stockholders will be limited to the purpose stated in
42
the notice accompanying this prospectus/proxy statement. No other purpose has
been stated in the notice accompanying this prospectus/proxy statement.
Stockholder Proposals for the Ashford 2002 Annual Meeting
If the merger is not completed, proposals of Ashford stockholders that are
intended to be presented at Ashford's 2002 Annual Meeting must be timely
delivered or received by Ashford. Under Ashford's bylaws, in order to be deemed
properly presented, notice must be delivered to, or mailed and received by,
Ashford not later than June 25, 2002. The stockholder's notice must set forth,
(1) as to each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (2) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (3) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (a) the name and address of such
stockholder, and of such beneficial owner and (b) the class and number of
shares which are owned beneficially and of record by such stockholder and such
beneficial owner. If the presiding officer of the meeting determines that such
business has not been properly brought before the meeting, then such business
shall not be transacted.
Board Recommendation
Ashford's board of directors has unanimously approved the merger agreement
and the merger and has determined that the merger agreement and the merger are
advisable and fair to, and in the best interests of, Ashford and its
stockholders, and recommends that Ashford stockholders vote FOR adoption of the
merger agreement. In considering such recommendation, Ashford stockholders
should be aware that some Ashford directors and officers may have interests in
the merger that are different from, or in addition to, those of other Ashford
stockholders generally. Among other things, Global Sports has agreed to
continue certain indemnification and insurance arrangements in favor of
directors and officers of Ashford. See "The Merger--Interests of Ashford's
Officers and Directors in the Merger."
The matter to be considered at the special meeting of Ashford stockholders
is of great importance to Ashford stockholders. Accordingly, Ashford
stockholders are encouraged to read and carefully consider the information
presented in this prospectus/proxy statement, and to complete, date, sign and
promptly return the enclosed proxy card in the enclosed postage-paid envelope,
as described in the instructions accompanying the proxy card.
Ashford stockholders should not send any stock certificates with their proxy
cards. A transmittal form with instructions for the surrender of Ashford common
stock certificates will be mailed to Ashford stockholders promptly after
completion of the merger. For more information regarding the procedures for
exchanging Ashford stock certificates for the merger consideration, see
"Certain Terms of the Merger Agreement--Manner and Basis of Converting Shares."
43
THE MERGER
General
This section of this prospectus/proxy statement describes aspects of the
proposed merger that are considered to be important. The discussion of the
merger in this prospectus/proxy statement and the description of the principal
terms of the merger agreement are only summaries of the material features of
the proposed merger. Ashford stockholders can obtain a more complete
understanding of the merger by reading the merger agreement, a copy of which is
attached to this prospectus/proxy statement as Annex A. Ashford stockholders
are encouraged to read the merger agreement and the other annexes to this
prospectus/proxy statement in their entirety.
General Description of the Merger
At the effective time of the merger, Ruby Acquisition Corp., a wholly owned
subsidiary of Global Sports, will be merged with and into Ashford. Ashford will
be the surviving corporation and will continue as a wholly owned subsidiary of
Global Sports. In the merger, each share of Ashford common stock outstanding at
the effective time of the merger will automatically be converted into the right
to receive a combination of $0.125 in cash and 0.0076 of a share of Global
Sports common stock, with cash in lieu of any fractional share.
Based on the number of shares of Global Sports common stock and Ashford
common stock outstanding as of the record date, approximately [$ ] in cash
will be payable pursuant to the merger agreement in exchange for outstanding
shares of Ashford common stock, and approximately [ ] shares of Global
Sports common stock will be issuable pursuant to the merger agreement in
exchange for outstanding shares of Ashford common stock, representing
approximately [ ]% of the total Global Sports common stock to be outstanding
immediately after such issuance. This assumes that no Ashford or Global Sports
stock options or warrants are exercised after the record date and before the
effective time of the merger.
Background of the Merger
The terms and conditions of the merger agreement and the merger are the
result of arm's-length negotiations between representatives of Global Sports
and representatives of Ashford. Set forth below is a summary of the background
of these negotiations.
On August 21, 2001, Michael G. Rubin, Global Sports' Chairman, President and
Chief Executive Officer, telephoned Kevin Harvey, a member of the board of
directors of Ashford, and expressed Global Sports' possible interest in
acquiring Ashford. On August 22, 2001, Mr. Rubin spoke by telephone with David
Gow, Chief Executive Officer of Ashford, and discussed Global Sports' possible
interest in acquiring Ashford. Following and as a result of these
communications, a meeting was scheduled for August 26, 2001 at Ashford's
headquarters in Houston, Texas between members of the executive teams of Global
Sports and Ashford.
On August 26, 2001, Mr. Rubin, Arthur H. Miller, Executive Vice President
and General Counsel of Global Sports, and Michael R. Conn, Senior Vice
President, Business Development of Global Sports, met with Mr. Gow, James
Whitcomb, President of Ashford, Brian Bergeron, Chief Financial Officer of
Ashford, and Kim Richard, Senior Vice President, Marketing and Corporate
Strategy of Ashford, and discussed Global Sports' possible interest in
acquiring Ashford. Global Sports' management presented information regarding
Global Sports' business and answered questions from the Ashford team. Ashford's
management presented information regarding Ashford's business and answered
questions from the Global Sports team. The Global Sports representatives
indicated that based on what they had heard so far, Global Sports was
interested in continuing the process with a view to acquiring all of the stock
of Ashford for Global Sports common stock at an implied valuation of between
$9.0 million and $12.0 million. Mr. Rubin indicated that Global Sports'
preference was to acquire the Ashford stock in exchange for Global Sports
common stock, but that Global Sports would consider paying cash or a
combination of cash and Global Sports common stock. Global Sports' management
stated that
44
any acquisition would be subject to satisfactory completion of due diligence,
approval of its board of directors and completion of a definitive merger
agreement. Mr. Gow indicated that he would advise Ashford's board of directors
of Global Sports' interest at a telephonic meeting scheduled for August 27,
2001 and that he would advise Mr. Rubin of their response on August 28, 2001.
On August 27, 2001, Mr. Gow advised Ashford's board of directors of Global
Sports' possible interest in acquiring Ashford.
On August 28, 2001, Mr. Rubin and Mr. Gow spoke by telephone. Mr. Gow
advised Mr. Rubin that Ashford's board of directors was interested in pursuing
a possible transaction but that the $9.0 million to $12.0 million range of
implied value was less than the board was willing to accept. Mr. Gow also
informed Mr. Rubin that Ashford's board of directors preferred a cash
transaction. Mr. Gow and Mr. Rubin agreed to speak again in two days.
On August 29, 2001, Mr. Gow had further conversations with members of
Ashford's board of directors.
On August 30, 2001, Mr. Rubin and Mr. Gow spoke by telephone. Mr. Gow
indicated that Ashford's board of directors was prepared to move forward with
Global Sports toward a possible acquisition of Ashford for cash at an implied
valuation of $14.0 million. Mr. Rubin and Mr. Gow agreed to speak again later
that day.
Later on August 30, 2001, Mr. Rubin and Mr. Gow again spoke by telephone.
Mr. Rubin stated that Global Sports would accept an implied valuation of $14.0
million but only if the purchase price consisted of Global Sports common stock.
Mr. Rubin and Mr. Gow agreed to speak again later that day.
Still later on August 30, 2001, Mr. Rubin and Mr. Gow again spoke by
telephone. Mr. Gow indicated that Ashford's board of directors would consider a
partial cash, partial stock offer with an implied value of $14.0 million,
subject to learning more about Global Sports, and requested that Mr. Rubin
address Ashford's board of directors at a meeting scheduled for September 6,
2001. Mr. Rubin agreed to make this presentation. Mr. Rubin and Mr. Gow agreed
to continue to move forward with the process.
On August 31, 2001, Global Sports retained CIBC World Markets as its
financial advisor and Cooley Godward LLP as its legal advisor, and Ashford
retained Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP as its
legal advisor.
On September 4, 2001, Ashford began discussions with U.S. Bancorp Piper
Jaffray regarding U.S. Bancorp Piper Jaffray's interest in providing a fairness
opinion for the proposed transaction. Also on September 4, 2001, Global Sports
and Ashford entered into a mutual non-disclosure agreement and an exclusivity
agreement, and Cooley Godward delivered the initial draft of the merger
agreement to Ashford and its legal advisors.
On September 5, 2001, Mr. Miller, Mr. Conn, Paul D. Cataldo, Assistant
General Counsel of Global Sports, and representatives of CIBC World Markets and
Cooley Godward commenced meetings in Houston, Texas with Ashford's senior
management and legal advisors to negotiate the merger agreement and conduct due
diligence.
On September 6, 2001, Global Sports and Ashford continued negotiating the
merger agreement and conducting due diligence, and Jordan M. Copland, Executive
Vice President and Chief Financial Officer of Global Sports, joined the
meetings in Houston. Also on September 6, 2001, Ashford's board of directors
held a telephonic meeting to discuss the transaction. Messrs. Rubin, Miller and
Conn were present for a portion of the meeting to present an overview of Global
Sports and answer questions from Ashford's board of directors. Mr. Rubin and
Mr. Gow spoke by telephone following Ashford's board of directors meeting, and
Mr. Gow indicated that the board of directors needed to deliberate further on
the proposed transaction the next morning.
45
On September 7, 2001, Global Sports and Ashford continued negotiating the
merger agreement and conducting due diligence. Mr. Rubin and Mr. Gow spoke by
telephone, and Mr. Gow indicated that Ashford was prepared to move forward with
the proposed transaction at an implied valuation of $14.0 million if the
purchase price were paid 50% in cash and 50% in Global Sports stock. Mr. Rubin
stated that Global Sports was prepared to move forward on that basis, subject
to satisfactory completion of its due diligence, approval of its board of
directors and completion of a definitive merger agreement. Later on September
7, 2001, Mr. Rubin and Robert Liewald, Executive Vice President, Merchandising
of Global Sports, joined the meetings in Houston.
On September 8 and 9, 2001, Global Sports continued conducting due diligence
and met with management of Ashford. Mr. Rubin and Mr. Gow discussed the implied
valuation of $14.0 million for the transaction and agreed that Global Sports
would exchange 0.0076 of a share of Global Sports common stock and pay $0.125
in cash for each outstanding share of Ashford stock.
On September 10, 2001, Ashford engaged U.S. Bancorp Piper Jaffray to provide
an opinion as to the fairness, from a financial point of view, to the
stockholders of Ashford (other than Global Sports) of the consideration to be
received pursuant to the terms of the merger agreement. Also on September 10,
2001, Global Sports and Ashford continued conducting due diligence, and U.S.
Bancorp Piper Jaffray visited Global Sports headquarters and Ashford
headquarters. Global Sports' board of directors convened a telephonic meeting
to discuss the proposed transaction and gave Mr. Rubin approval to continue to
move forward with the proposed transaction along the terms outlined, subject to
satisfactory completion of due diligence, completion of a definitive merger
agreement and final approval from the board of directors.
On September 11 and 12, 2001, Global Sports and Ashford continued
negotiating the merger agreement and conducting due diligence. On September 12,
Global Sports convened a telephonic meeting of its board of directors in which
the board approved the merger transaction, subject to there being no material
changes to the terms outlined in the meeting.
Ashford also convened a meeting of its board of directors on September 12,
2001. U.S. Bancorp Piper Jaffray presented its opinion to Ashford's board of
directors that the merger consideration was fair, from a financial point of
view, to the stockholders of Ashford (other than Global Sports). Ashford's
board of directors approved the merger transaction, subject to there being no
material changes to the terms outlined in the meeting.
On September 13, 2001, the parties finalized the merger agreement and
related documentation, and the definitive merger agreement was executed by
Global Sports, Ruby Acquisition Corp. and Ashford.
On September 14, 2001, Global Sports and Ashford publicly announced the
proposed merger.
Reasons for the Merger
The following discussion of the parties' reasons for the merger contains a
number of forward-looking statements that reflect the current views of Global
Sports or Ashford with respect to future events that may have an effect on
their future financial performance. Forward-looking statements are subject to
risks and uncertainties. Actual results and outcomes may differ materially from
the results and outcomes discussed in the forward-looking statements.
Cautionary statements that identify important factors that could cause or
contribute to differences in results and outcomes include those discussed in
"Summary--Forward-Looking Information" and "Risk Factors."
Global Sports' Reasons for the Merger
At a meeting held on September 12, 2001, Global Sports' board of directors
determined that the terms of the merger and the merger agreement were fair to,
and in the best interests of, Global Sports and its stockholders. Global
Sports' board of directors consulted with Global Sports' senior management, as
well as its legal counsel
46
and financial advisors in reaching its decision to approve the merger and the
merger agreement. Global Sports' primary reasons for seeking to complete the
merger with Ashford are the beliefs of Global Sports' board of directors and
management that the merger could result in a number of benefits, including the
following:
. Ashford's merchandising and fulfillment expertise in the luxury products
category could serve as a platform for Global Sports to extend its
outsource business model into the luxury products category;
. Ashford's sales force, merchandising expertise and clientele in the
corporate gift category could serve as a platform for Global Sports to
extend its outsource business model to the corporate gift category; and
. the merger could enable Global Sports to expand its business and realize
greater operational efficiencies, including higher purchase volumes for
online marketing and greater economies of scale in its customer service
center and technology operations.
In reaching its determination that the merger was in the best interests of
Global Sports and its stockholders, Global Sports' board of directors
considered a number of factors, including the factors discussed above and
listed below. The conclusions reached by Global Sports' board of directors with
respect to these factors supported its determination that the merger and the
issuance of shares of Global Sports common stock in the merger were fair to,
and in the best interests of, Global Sports:
. the judgment, advice and analyses of Global Sports' management with
respect to the potential strategic, financial and operational benefits of
the merger, including Global Sports' management's favorable recommendation
of the merger, based in part on the business, operational, financial,
accounting and legal due diligence investigations performed with respect
to Ashford;
. the terms of the merger agreement and related agreements, including price
and structure, which were considered by both the board of directors and
management of Global Sports to provide a fair and equitable basis for the
merger; and
. the cash position and balance sheet liquidity of Global Sports following
completion of the merger, especially during periods of volatility in the
financial markets.
Global Sports' board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger. The potentially
negative factors considered by Global Sports' board of directors included:
. the risk that the merger might not be completed in a timely manner or at
all;
. the potential negative impact of any vendor or partner confusion after
announcement of the proposed merger;
. the potential negative reaction of the financial community after
announcement of the proposed merger;
. the risk that the potential benefits of the merger may not be realized,
including Global Sports inability to retain the merchandising, fulfillment
or corporate gift employees of Ashford;
. the costs associated with the merger, including merger related transaction
costs and costs associated with renegotiating or terminating marketing and
other agreements; and
. the other risks and uncertainties discussed above under "Risk Factors."
The foregoing discussion of information and factors considered by Global
Sports' board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the board. In view of the wide
variety of factors it considered, Global Sports' board of directors did not
find it practicable to quantify or otherwise assign relative weights to the
specific factors considered. In addition, Global Sports' board of directors did
not reach any specific conclusion on each factor considered, or any aspect of
any particular factor, but conducted an overall analysis of these factors.
Individual members of Global Sports' board of directors may have
47
given different weights to different factors. After taking into account all of
the factors set forth above, however, Global Sports' board of directors
unanimously agreed that the merger agreement and the merger were fair to, and
in the best interests of, Global Sports and its stockholders and that Global
Sports should proceed with the merger.
There can be no assurance that the benefits of the potential growth,
synergies or opportunities considered by Global Sports' board of directors will
be achieved through completion of the merger. See "Risk Factors."
Ashford's Reasons for the Merger and Recommendation of Ashford's Board of
Directors
Ashford's board of directors has determined that the terms of the merger and
the merger agreement are advisable and fair to, and in the best interests of,
Ashford and its stockholders, and determined to recommend that the stockholders
of Ashford adopt the merger agreement. In its evaluation of the merger and the
merger agreement, Ashford's board of directors consulted with Ashford's senior
management, as well as its legal and financial advisors. The decision of
Ashford's board of directors to approve the merger and the merger agreement was
based upon, among other things, several potential benefits of the merger to
Ashford and its stockholders compared to Ashford continuing to operate as an
independent business. Ashford's management has also considered a number of
alternatives for enhancing its business, including raising new capital and
remaining an independent entity.
In addition to the potential benefits described under "Global Sports'
Reasons for the Merger" that would be applicable to Ashford stockholders,
Ashford's board of directors believes that the merger could be beneficial to
Ashford and its stockholders for the following reasons, as well as the access
to greater resources and the opportunity for Ashford stockholders to
participate in the broader scope of consumer groups served by Global Sports
after the merger and the potential growth of Global Sports after the merger:
. the merger would provide Ashford stockholders with cash and shares of
Global Sports common stock at an implied premium over the closing price
for Ashford common stock on the last trading day prior to the time the
merger agreement was entered into;
. the potential synergies created from combining the procurement,
distribution and other strengths developed by Global Sports with the
brand, consumer relationships, luxury goods inventory and other strengths
built by Ashford; and
. the availability following the merger of Global Sports' greater resources
to establish and support Ashford's products and sales.
Ashford's board of directors reviewed a number of factors in evaluating the
merger, including but not limited to the following:
. information concerning the financial performance and condition, results of
operations, competitive position, management and business of Global Sports
and Ashford before and after giving effect to the merger;
. current financial market conditions and historical market prices,
volatility and trading information with respect to Global Sports common
stock and Ashford common stock;
. the consideration Global Sports will pay or issue in the merger in light
of comparable merger transactions;
. the belief that the terms of the merger agreement and related agreements
are reasonable;
. the impact of the merger on the customers and employees of Ashford and
Global Sports;
. the market conditions affecting e-retailers;
. the ability of Ashford to obtain additional financing as a stand-alone
entity;
48
. results of the due diligence investigation conducted by Ashford's
management, accountants and legal and financial advisors; and
. the financial presentation of U.S. Bancorp Piper Jaffray, including its
opinion as to the fairness, from a financial point of view and as of the
date of the opinion, to the stockholders of Ashford (other than Global
Sports) of the merger consideration provided for in the merger agreement.
Please see "Opinion of Ashford's Financial Advisor" for more information
on U.S. Bancorp Piper Jaffray's fairness opinion, including the underlying
assumptions and methodologies, matters considered and limitations on the
review undertaken. This opinion is included as Annex C to this
prospectus/proxy statement.
Ashford's board of directors also considered the terms of the merger
agreement regarding Ashford's rights and limits on its ability to consider and
negotiate other acquisition proposals, as well as the possible effects of the
provisions regarding termination and termination fees.
Ashford's board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger and the
merger agreement, including the following:
. the risk that the potential benefits of the merger may not be realized;
. the fact that the proposed exchange ratio is fixed and will not change
with increases or decreases in the market price of either company's stock
before completion of the merger, and the possibility that the dollar value
of a share of Global Sports stock at the closing of the merger may be more
or less than the dollar value of a share of Global Sports stock at the
time of the signing of the merger agreement;
. the risk that the merger may not be completed, notwithstanding the voting
agreements obtained from holders representing beneficial ownership,
excluding any shares issuable upon the exercise of options or warrants, of
approximately 34.7% of Ashford common stock as of September 13, 2001;
. the effect of the public announcement of the merger on Ashford's sales,
customer relations and operating results;
. the risk of management and employee disruption associated with the merger,
including employee layoffs and the fact that some key technical, sales and
management personnel would likely not be employed by Global Sports
following the merger;
. the fact that the merger agreement requires Ashford to obtain Global
Sports' consent in order to take a variety of actions;
. the challenges of integrating Ashford's operations with those of Global
Sports; and
. other applicable risks described in this prospectus/proxy statement under
"Risk Factors."
Ashford's board of directors concluded, however, that these risks could be
managed or mitigated and that on balance, the merger's potential benefits to
Ashford and its stockholders outweighed the associated risks. This discussion
of the information and factors considered by Ashford's board of directors is
not exhaustive. In view of the variety of factors considered in connection with
its evaluation of the merger, Ashford's board of directors did not find it
practicable to, and did not quantify or otherwise assign relative weight to,
the specific factors considered in reaching the determination.
For the reasons discussed above, Ashford's board of directors has approved
the merger agreement and the merger and has determined that the merger
agreement and the merger are advisable and fair to, and in the best interests
of, Ashford and its stockholders, and recommends that Ashford stockholders vote
FOR adoption of the merger agreement.
In considering the recommendation of Ashford's board of directors with
respect to the merger agreement, Ashford stockholders should be aware that
certain directors and officers of Ashford have interests in the merger
49
that are different from, or are in addition to, the interests of other Ashford
stockholders and that Global Sports has agreed to continue certain
indemnification and insurance arrangements in favor of directors and officers
of Ashford. Please see "The Merger--Interests of Ashford's Officers and
Directors in the Merger."
Opinion of Ashford's Financial Advisor
Ashford's board of directors retained U.S. Bancorp Piper Jaffray to render
an opinion as to the fairness, from a financial point of view, to Ashford
stockholders of the consideration to be received by these stockholders in
connection with the merger. On September 12, 2001, Ashford's board of directors
met to review the proposed merger. During this meeting, U.S. Bancorp Piper
Jaffray reviewed with Ashford's board of directors certain financial analyses,
which are summarized below. Also at this meeting, U.S. Bancorp Piper Jaffray
rendered its opinion to Ashford's board of directors that, as of September 12,
2001 and based upon and subject to the factors and assumptions set forth in its
opinion, the merger consideration to be received by holders (other than Global
Sports) of Ashford common stock in the merger pursuant to the merger agreement
was fair, from a financial point of view, to such holders.
The full text of the U.S. Bancorp Piper Jaffray written opinion dated
September 12, 2001, which sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the scope of the
review undertaken by U.S. Bancorp Piper Jaffray in rendering its opinion, is
attached as Annex C to this prospectus/proxy statement and is herein
incorporated by reference in its entirety. Ashford stockholders are urged to,
and should, read the U.S. Bancorp Piper Jaffray opinion carefully in its
entirety. The U.S. Bancorp Piper Jaffray opinion addresses only the fairness,
from a financial point of view and as of the date of the opinion, of the merger
consideration to be received by holders (other than Global Sports) of Ashford
common stock in the merger. The U.S. Bancorp Piper Jaffray opinion was directed
to Ashford's board of directors and was not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote or act on any matter relating to the proposed merger. The summary
of the U.S. Bancorp Piper Jaffray opinion in this prospectus/proxy statement is
qualified in its entirety by reference to the full text of the U.S. Bancorp
Piper Jaffray opinion.
In connection with its opinion, U.S. Bancorp Piper Jaffray, among other
things:
. reviewed the financial terms of a draft of the merger agreement dated
September 12, 2001;
. reviewed and analyzed certain publicly available business and financial
information relating to Ashford and Global Sports;
. reviewed and analyzed certain other financial and other information
relating to Ashford and Global Sports furnished to it by or discussed with
Ashford and Global Sports, including financial forecasts furnished to it
by Ashford, and met with the managements of Ashford and Global Sports to
discuss the businesses and prospects of Ashford and Global Sports;
. considered certain financial and stock market data of Ashford and Global
Sports and compared that data with similar data for other publicly held
companies in businesses similar to those of Ashford and Global Sports;
. considered, to the extent publicly available, the financial terms of
certain other business combinations and other transactions which have
recently been effected or announced; and
. considered such other information, financial studies and analyses and
investigations and financial, economic and market criteria which U.S.
Bancorp Piper Jaffray deemed relevant.
U.S. Bancorp Piper Jaffray relied upon and assumed the accuracy and
completeness of the financial statements and other information provided by
management of Ashford and Global Sports or otherwise made available to it and
did not assume the responsibility independently to verify such information.
U.S. Bancorp Piper Jaffray further relied upon the statements of Ashford's and
Global Sports' management that the information
50
provided by each of them, respectively, had been prepared on a reasonable basis
in accordance with industry practice, and, with respect to Ashford's financial
forecasts, statements of Ashford's management that such forecasts reflected the
best currently available estimates and judgment of Ashford's management. U.S.
Bancorp Piper Jaffray assumed that the liquidation analysis furnished by
Ashford's management was correct and accurate in all respects. U.S. Bancorp
Piper Jaffray assumed that neither Ashford nor Global Sports was a party to any
pending material transaction, including external financing, recapitalizations,
acquisitions or merger discussions, other than the proposed merger or in the
ordinary course of business. In arriving at its opinion, U.S. Bancorp Piper
Jaffray assumed that all necessary regulatory approvals and consents required
for the proposed merger would be attained in a manner that would not change the
consideration to be received by Ashford stockholders and that the merger would
be completed on substantially the terms set forth in the draft merger agreement
dated September 12, 2001 reviewed by U.S. Bancorp Piper Jaffray, without
modification of material terms or conditions. U.S. Bancorp Piper Jaffray's
opinion was necessarily based on the information available to it and facts and
circumstances as they existed and were subject to evaluation as of the date of
the opinion.
U.S. Bancorp Piper Jaffray was not asked to, and did not, advise Ashford in
the negotiation of the consideration to be received by its stockholders, any
other terms of the proposed merger, or with respect to alternatives to the
proposed merger that may have been, or may be, available. In addition,
Ashford's board of directors did not request that U.S. Bancorp Piper Jaffray
solicit, and U.S. Bancorp Piper Jaffray did not solicit, any indications of
interest from any third party that may be interested in purchasing all or any
part of Ashford's shares or assets.
U.S. Bancorp Piper Jaffray did not undertake any independent analysis of any
pending or threatened litigation to which Ashford or any of its affiliates is a
party or may be subject or the existing investigation by the staff of the
Securities and Exchange Commission concerning Ashford. U.S. Bancorp Piper
Jaffray also did not undertake any independent analysis of any other
governmental investigation or possible unasserted claims or other contingent
liabilities to which Ashford, Global Sports or any of their respective
affiliates is a party or may be subject. At the direction of Ashford's board of
directors and with its consent, U.S. Bancorp Piper Jaffray's opinion made no
assumption concerning, and therefore did not consider, the potential effects of
such litigation, investigations, or possible assertions of claims, or the
outcomes or damages arising out of any such matters.
The following is a summary of selected analyses performed by U.S. Bancorp
Piper Jaffray in connection with the preparation of its opinion and reviewed
with Ashford's board of directors at a meeting of the board held on September
12, 2001. It does not purport to be a complete statement of the analyses
performed by U.S. Bancorp Piper Jaffray or a complete description of its
presentation to Ashford's board of directors on September 12, 2001. This
summary includes information presented in tabular format. In order to fully
understand the financial analyses presented by U.S. Bancorp Piper Jaffray,
these tables must be read together with the text of each analysis summary, and
considered as a whole. The tables alone do not constitute a complete summary of
the financial analyses. The order in which these analyses are presented below
should not be taken as any indication of the relative weight given to these
analyses by U.S. Bancorp Piper Jaffray or Ashford's board of directors. Except
as otherwise noted, the following quantitative information, to the extent that
it is based on market data, is based on market data as it existed on or before
September 12, 2001, and is not necessarily indicative of current market
conditions.
Selected Market and Financial Information Concerning Global Sports. U.S.
Bancorp Piper Jaffray reviewed financial information, ratios and stock market
information concerning Global Sports. This review included, among other things,
the market price of Global Sports common stock, as of September 10, 2001
($15.26 low, $16.75 high and $16.51 close), its 30, 60, 90 and 180-day trading
average prices ($16.44, $14.36, $11.92 and $8.32, respectively), its low and
high over the prior 52 weeks ($2.38 and $19.88, respectively) and its price on
September 10, 2001 as a percentage of its 52-week high (83.1%). This review by
U.S. Bancorp Piper Jaffray also showed that the market capitalization for
Global Sports based on its closing market price as of September 10, 2001 was
$616.9 million. U.S. Bancorp Piper Jaffray also compared selected financial
data and ratios for Global Sports to the corresponding data and ratios for a
group of companies it deemed comparable to Global Sports.
51
U.S. Bancorp Piper Jaffray also summarized recent research analyst comments
concerning Global Sports common stock, reviewed weekly prices and trading
volumes of Global Sports common stock during the past year, compared the
relative price performance over the past year of Global Sports common stock to
several sectors and indices, including traditional retail, e-commerce,
fulfillment and the Nasdaq National Market Index and listed the major
institutional, venture capital and insider stockholders of Global Sports. U.S.
Bancorp Piper Jaffray analyzed the prices at which Global Sports common stock
had traded during the 12 months prior to September 10, 2001, noting that the
weighted average stock price over the prior month was $16.82, the weighted
average stock price during 2001, year to date, was $12.45 and the weighted
average stock price over the last 12 months was $11.76.
U.S. Bancorp Piper Jaffray's analysis concerning Global Sports common stock
was based on information concerning Global Sports and its common stock
available as of September 10, 2001. U.S. Bancorp Piper Jaffray did not, and
does not, express any opinion as to the actual value of Global Sports common
stock on September 10, 2001 or when issued to Ashford stockholders in
connection with the proposed merger or the prices at which Global Sports common
stock may trade subsequent to the proposed merger.
Stock Price Volatility. U.S. Bancorp Piper Jaffray compared the price
volatility of Global Sports common stock, Ashford common stock and the Nasdaq
National Market Index from March 15, 2001 to September 10, 2001 and the price
volatility of these securities and this index during the various time periods
preceding September 10, 2001.
Selected Market and Financial Information Concerning Ashford. U.S. Bancorp
Piper Jaffray reviewed selected market information concerning Ashford common
stock. Among other things, U.S. Bancorp Piper Jaffray noted the following with
respect to the trading of Ashford common stock:
. The closing sale price, and the high sale price, on September 10, 2001 was
$0.17, $0.12 was the low sale price.
. The 10, 20, 30, 60, 90 and 180-day trading averages ended on September 10,
2001 were $0.15, $0.13, $0.14, $0.17, $0.22 and $0.44, respectively.
. Over the 52-week period ended September 10, 2001, the stock had traded in
a range from $0.06 to $4.13, and had an average daily volume of 196,000
shares.
. From September 12, 2000 to September 10, 2001 the majority of the trading
volume in the stock had occurred at prices of $0.75 or less.
. The weighted average stock price over the month ended September 10, 2001
was $0.14, the weighted average stock price over the prior three months
was $0.19 and the weighted average stock price during 2001 through
September 10, 2001 was $0.48.
U.S. Bancorp Piper Jaffray also compared the relative price performance over
the past year of Ashford common stock to the relative price performance of
companies that U.S. Bancorp Piper Jaffray deemed comparable to Ashford and to
the relative performance of the Nasdaq National Market Index. In addition, U.S.
Bancorp Piper Jaffray listed the major institutional, venture capital and
insider stockholders of Ashford and tracked the net outflow (sale) of Ashford
common stock by these stockholders.
Internet Company Shutdowns and Liquidations. U.S. Bancorp Piper Jaffray
summarized the difficulties facing internet companies and e-tailers in the
current environment. U.S. Bancorp Piper Jaffray reported that the number of
internet companies which shut down or declared bankruptcy since the beginning
of 2000 had grown from five in the first quarter of 2000 to 181 during the
second quarter of 2001. U.S. Bancorp Piper Jaffray reported on the details of a
number of e-tailers that had recently liquidated.
52
Challenges Facing Ashford. U.S. Bancorp Piper Jaffray noted various capital
and other challenges faced by Ashford, including the following:
. As of August 31, 2001, Ashford had an aggregate of $6.1 million in cash,
including $4.6 million of unrestricted cash and $1.5 million of restricted
cash.
. Ashford's management estimated continued quarterly deficits of earnings
before interest, taxes, depreciation and amortization, referred to below
as "EBITDA," for the foreseeable future.
. In August 2001, Ashford's borrowing capacity with its bank was effectively
reduced as a result of a significant reduction in the liquidation value of
its inventory, as estimated by a third party appraisal firm.
. Ashford recently borrowed approximately $3.5 million against its line of
credit with its bank, representing substantially all of its borrowing
capacity.
. According to Ashford's management, Ashford faced substantial challenges in
obtaining additional capital and has restricted access to credit
facilities and other forms of funding.
. According to Ashford's management, certain of Ashford's suppliers had
recently imposed payment terms that were less favorable to Ashford after
reviewing its financial condition and Ashford's management believed that
the potential existed for suppliers to continue to reduce payment terms as
Ashford's unrestricted cash balance continues to decrease.
. A cash flow analysis, using Ashford's internal estimates, indicated that
Ashford would not have enough cash and cash equivalents to continue
operations beyond the end of June 2002 without making use of external
sources of funds.
. Ashford common stock had failed to maintain a minimum bid price of $1.00
over 30 consecutive trading days as required by the Nasdaq National Market
for continued listing.
. Ashford is a party to multiple class action stockholder lawsuits.
. Ashford is a party to a Securities and Exchange Commission investigation
regarding its accounting practices.
Summary of Proposal. U.S. Bancorp Piper Jaffray reviewed the terms of the
proposed transaction, including the cash consideration per share, the exchange
ratio and the aggregate transaction value. U.S. Bancorp Piper Jaffray reviewed
the implied value of the consideration offered based upon the closing share
price of Global Sports common stock on September 10, 2001. This analysis showed
that the implied value of the consideration to be received in the merger was
approximately $0.25 per share of Ashford common stock. Based on 55.173 million
fully diluted Ashford shares outstanding, this implied an equity value of $13.8
million and a company value of $10.7 million for Ashford.
Liquidation Analysis. Ashford's management provided a liquidation analysis
to U.S. Bancorp Piper Jaffray that indicated a range of values for the net
liquidation equity per share available to stockholders. This analysis included
Ashford's management's estimates of the book values of Ashford's assets and
liabilities as of September 30, 2001. These book value estimates were
discounted by Ashford's management to reflect various liquidation adjustments,
based on internal estimates provided by Ashford's management. The liquidation
value of Ashford's inventory was estimated by Ashford's management based on an
appraisal performed by an independent third party appraisal firm. The resulting
values were then further adjusted by Ashford's management to reflect
termination of leases, contingencies and other costs associated with wrap-up
and liquidation of the business, including salaries, severance, fees and
expenses of advisors and D&O insurance, as estimated by Ashford's management.
U.S. Bancorp Piper Jaffray observed that based on this analysis the net
liquidation equity value available to Ashford stockholders would range from
$0.11 to $0.15 per share. These values compared to the offer price of the
proposed transaction of $0.25 per share. U.S. Bancorp Piper Jaffray's review of
this analysis made no assumptions and did not consider the possible assertions
of claims, outcomes or damages arising out of any pending or threatened
litigation, possible unasserted claims or other contingent liabilities, to
which Ashford
53
or any of its affiliates was a party or could have been subject. The following
table summarizes the results of this analysis, all values except for per share
values are in millions:
Low High
------ ------
Total Assets..................................... $7.4 $10.5
Total Liabilities................................ $5.2 $5.5
Marketing, Sales, General Administrative Expenses $1.6 $2.9
Lease Buyouts and Terminations................... $0.5 $0.3
Severance Payments............................... $3.0 $3.0
Class Action Litigation Expenses................. $0.4 $0.4
Directors & Officers Insurance................... $0.5 $0.5
Professional Fees................................ $0.5 $0.5
Net Liquidation Equity Available to Stockholders. $6.1 $8.4
Fully Diluted Shares Outstanding................. 55.292 55.292
Net Liquidation Equity per Share................. $0.11 $0.15
Cash Flow Analysis. A cash flow analysis, using Ashford's internal
estimates, indicated that Ashford would not have enough cash and cash
equivalents to continue operations beyond the end of June 2002 without making
use of external sources of funds, and, as a result, U.S. Bancorp Piper Jaffray
noted that a discounted cash flow analysis would not be meaningful.
Comparable Companies Analysis. U.S. Bancorp Piper Jaffray reviewed selected
financial data and ratios for Ashford and compared them to corresponding data
for the following publicly traded companies that it deemed comparable to
Ashford:
. Beyond.com Corp.
. Bluefly, Inc.
. iParty Corp.
. Mcglen Internet Group, Inc.
. Varsity Group, Inc.
U.S. Bancorp Piper Jaffray calculated and analyzed the ratio of company
value of Ashford and each comparable company to its revenue and gross profit
for the last 12 months, referred to below as "LTM revenue" and "LTM gross
profit," respectively, and the ratio of fully diluted market value of equity,
using the treasury method, to book value for Ashford and each comparable
company, with values for LTM revenue, LTM gross profit and book value for
Ashford as of June 30, 2001. The analysis indicated the following multiples:
Comparable Company Multiples
Merger ----------------------------
Consideration Low Mean Median High
------------- ------ ----- ------ -----
Company Value as a Multiple of:
LTM revenue.......................... 0.16x -0.44x 0.07x 0.21x 0.26x
LTM gross profit..................... 1.03x -1.38x 0.84x .58x 2.62x
Equity Value as a multiple of book value 0.41x -1.33x 0.11x 0.42x 0.66x
The "company value" for each company was obtained by adding its short-term
and long-term debt to the sum of the market value of its common equity and the
value of any preferred stock (at liquidation value) and subtracting its cash
and cash equivalents.
Comparable Transactions Analysis. U.S. Bancorp Piper Jaffray reviewed and
analyzed certain financial information involving transactions in which the
businesses of the acquired entities were deemed comparable to
54
Ashford's business. The following 16 transactions were deemed similar to the
proposed transaction with targets deemed similar to Ashford:
Frys Electronics (acquiror)/Cyberian Outpost (target)
BS Acquisition Group (acquiror)/BigStar Entertainment (target)
Scott Blum (acquiror)/Buy.com (target)
Yahoo!, Inc. (acquiror)/Launch Media, Inc. (target)
Divine, Inc. (acquiror)/RoweCom, Inc. (target)
Gemstar-TV Guide International (acquiror)/Skymall, Inc. (target)
Autobytel.com, Inc. (acquiror)/Autoweb.com, Inc. (target)
Universal Music (Vivendi) (acquiror)/eMusic.com, Inc. (target)
iVillage, Inc. (acquiror)/Women.com Networks (target)
AmericanGreetings.com, Inc. (acquiror)/Egreetings Network, Inc. (target)
CyBear, Inc. (Andryx Corp) (acquiror)/Mediconsult.com, Inc. (target)
Hotel Reservations Network, Inc. (acquiror)/TravelNow.com, Inc. (target)
Global Sports, Inc. (acquiror)/Fogdog, Inc. (target)
Gaiam, Inc. (acquiror)/Real Goods Trading Corp. (target)
barnesandnoble.com, Inc. (acquiror)/Fatbrain.com, Inc. (target)
Bertelsmann AG (acquiror)/CDnow, Inc. (target)
U.S. Bancorp Piper Jaffray calculated the ratio of company value to LTM
revenue, company value to LTM gross profit and equity value to book value of
the targets in each transaction and compared the results of these calculations
with such calculations for the proposed transaction, with values for LTM
revenue, LTM gross profit and book value for Ashford as of June 30, 2001. This
analysis indicated the following multiples:
Comparable Transaction Multiples
Merger --------------------------------
Consideration Low Mean Median High
------------- ------ ----- ------ ------
Company Value as a Multiple
of:
LTM revenue............... 0.16x -0.44x 0.56x 0.17x 5.03x
LTM gross profit.......... 1.03x -1.53x 1.82x 0.62x 14.52x
Equity Value as a multiple of
book value................. 0.41x -2.25x 3.49x 0.68x 22.39x
Premium Analysis. U.S. Bancorp Piper Jaffray compared the premium of the
implied price per share of the merger consideration over the last sale price of
the common stock of Ashford on September 10, 2001, September 4, 2001, and
August 13, 2001 to similar premiums for the 16 comparable transactions
described above at announcement date. U.S. Bancorp Piper Jaffray observed that
such premiums were as follows:
Comparable Premium (%)
Merger ------------------------
Consideration (%) Low Mean Median High
----------------- ----- ---- ------ -----
1-day premium................ 47.1 (77.1) 24.2 16.0 160.6
1-week premium............... 66.7 (71.4) 40.5 20.5 147.3
1-month premium.............. 92.3 (46.8) 26.9 17.8 101.7
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
55
considering the analyses as a whole, could create an incomplete view of the
processes underlying U.S. Bancorp Piper Jaffray's opinion. In arriving at its
opinion, U.S. Bancorp Piper Jaffray considered the results of all of its
analyses and did not attribute any particular weight to any factor or analysis
considered by it Instead, U.S. Bancorp Piper Jaffray made its determination as
to fairness on the basis of its experience and professional judgment after
considering the results of all of its analyses. No company or transaction used
in the above analyses as a comparison is directly comparable to Ashford or the
contemplated transaction.
The analyses were prepared solely for purposes of U.S. Bancorp Piper
Jaffray's providing its opinion to Ashford's board of directors that the merger
consideration to be received by holders of Ashford common stock in the proposed
merger pursuant to the merger agreement was fair, from a financial point of
view, to such holders, other than Global Sports and its affiliates, as of
September 12, 2001 and do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities actually may be sold. Analyses
based upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by these analyses. These analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors. U.S. Bancorp Piper Jaffray does not
assume responsibility if future results are materially different from those
forecasted.
As described above, U.S. Bancorp Piper Jaffray's opinion to Ashford's board
of directors was one of many factors taken into consideration by Ashford's
board of directors in making its determination to approve the merger agreement.
The foregoing summary does not purport to be a complete description of the
analyses performed by U.S. Bancorp Piper Jaffray in connection with the opinion
and is qualified by reference to the written opinion of U.S. Bancorp Piper
Jaffray set forth in Appendix C.
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwriting and secondary
distributions of securities, private placements and valuations for estate,
corporate and other purposes. Ashford's board of directors selected U.S.
Bancorp Piper Jaffray to render its fairness opinion in connection with the
proposed merger on the basis of U.S. Bancorp Piper Jaffray's experience and
reputation in valuing securities in connection with mergers and acquisitions.
In the ordinary course of its business, U.S. Bancorp Piper Jaffray and its
affiliates may actively trade securities of Ashford and Global Sports for its
own account or the account of its customers and, accordingly, it may at any
time hold a long or short position in such securities.
U.S. Bancorp Piper Jaffray was retained pursuant to an engagement letter
dated September 10, 2001 to render a fairness opinion to Ashford's board of
directors in connection with the proposed merger. Under the terms of the U.S.
Bancorp Piper Jaffray engagement letter, Ashford will pay U.S. Bancorp Piper
Jaffray a fee for providing the opinion that is not contingent upon
consummation of the proposed merger. Such fees are customary amounts for
transactions of this type. In addition, Ashford has agreed to reimburse U.S.
Bancorp Piper Jaffray for its reasonable out-of-pocket expenses, including
attorney's fees, and to indemnify U.S. Bancorp Piper Jaffray against certain
liabilities, including certain liabilities under the federal securities laws.
Interests of Ashford's Officers and Directors in the Merger
Upon completion of the merger, based on the number of shares of common stock
of Global Sports and Ashford outstanding on September 30, 2001, it is
anticipated that the directors and executive officers of Ashford and their
affiliates will beneficially own less than one percent of the then outstanding
shares of Global Sports common stock, calculated on the basis set forth under
the heading "Security Ownership by Certain Beneficial Owners of Ashford."
56
As of September 30, 2001, the executive officers of Ashford held outstanding
stock options to purchase an aggregate of 4,431,250 shares of Ashford common
stock. In addition, the non-employee members of Ashford's board of directors
have received option grants as follows:
Non-employee Director Option Shares
--------------------- -------------
J. Robert Shaw..... 14,250
Kevin R. Harvey.... 14,250
J. Terry Manning... 252,375
Robert Cohn........ 152,750
Gordon Mayer....... 125,144
Colombe Nicholas... 229,500
-------
Total........... 788,269
=======
Upon completion of the merger, all of the then-unvested options granted to
the non-employee members of Ashford's board of directors shall automatically
vest. See "Certain Terms of the Merger Agreement--Ashford Stock Options and
Warrants" for a description of the treatment of outstanding Ashford stock
options and warrants upon completion of the merger.
Under Ashford's 1999 Equity Incentive Plan and 1998 Stock Incentive Plan, if
a change in control of Ashford occurs, an option or other award will become
fully exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute comparable awards for the awards granted under such
plans.
Ashford has granted Mr. Gow options to purchase a total of 2,108,500 shares
of common stock. Pursuant to the terms of the various options and option plans,
if Ashford is subject to a change of control and the acquiring company does not
assume the options, the vesting of the options will fully accelerate. Global
Sports is not assuming any Ashford options and therefore all of Mr. Gow's
options will be fully vested upon the consummation of the merger.
Ashford entered into a stock restriction agreement, dated December 4, 1998,
with Mr. Whitcomb, Ashford's President and a director. Pursuant to that
agreement, if a change in control occurs and Ashford's repurchase right that
applies to his shares is not assigned to the successor corporation, then Mr.
Whitcomb's shares will become fully vested. Pursuant to an employment
agreement, all shares vest upon termination with or without cause and would no
longer be subject to the stock restriction agreement upon such termination.
In addition, Ashford entered into an employment agreement with William
Hensler, dated February 3, 2000, pursuant to which Mr. Hensler received an
option for 360,000 shares of Ashford common stock that vests in monthly equal
installments over 48 months. Pursuant to this agreement, Mr. Hensler would
receive six months acceleration of vesting and six months of salary and
benefits if Ashford is subject to a change of control.
Ashford has entered into indemnification agreements with its directors and
executive officers containing provisions that may require Ashford to, among
other things:
. indemnify its directors and officers against liabilities that may arise by
reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature;
. advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified; and
. maintain directors' and officers' insurance if available on reasonable
terms.
In addition, Global Sports has agreed to cause Ashford to continue to honor
and maintain certain indemnification arrangements in favor of the current
officers and directors of Ashford for a period of six years.
57
The current officers and directors of Ashford will also be covered by
directors' and officers' insurance to be obtained by Ashford, with aggregate
premiums not to exceed $900,000.
As a result of the foregoing, the directors and executive officers of
Ashford may be more likely to vote for the adoption of the merger agreement
than Ashford stockholders generally.
Material Federal Income Tax Consequences
The following summary is a general discussion of the material United States
federal income tax consequences to Ashford stockholders upon the conversion of
their shares of Ashford common stock into cash and shares of Global Sports
common stock in the merger. This summary is based on the current provisions of
the Internal Revenue Code of 1986, as amended, which is referred to in this
prospectus/proxy statement as the "Code," applicable Treasury Regulations,
judicial authority and administrative rulings, all of which are subject to
change, possibly with retroactive effect. Any such change could alter the tax
consequences to Ashford stockholders as described herein. No ruling from the
Internal Revenue Service or opinion of counsel has been or will be sought with
respect to any aspect of the transactions described herein. No assurance can be
given that the Internal Revenue Service will not successfully assert a position
contrary to that described in this discussion. This summary is for Ashford
stockholders' general information only and does not purport to be a complete
analysis of all potential tax effects of the merger. For example, it does not
consider the effect of any applicable state, local or foreign tax laws nor does
it consider the tax consequences of transactions effectuated before, after or
concurrently with the merger (whether or not any such transactions are
undertaken in connection with the merger) including any transaction in which
Ashford common stock is acquired or Global Sports common stock is disposed of.
Moreover, it does not consider the tax consequences to holders of options,
warrants, or similar rights to acquire Ashford common stock, including the
assumption by Global Sports of outstanding warrants to acquire Ashford common
stock. In addition, it does not address all aspects of federal income taxation
that may affect particular stockholders in light of their particular
circumstances, including:
. stockholders that are insurance companies;
. stockholders that are tax-exempt organizations;
. stockholders that are financial institutions, broker or dealers in
securities or foreign currency;
. stockholders who hold their Ashford shares as a hedge or as part of an
integrated investment such as a hedge, straddle, constructive sale or
other risk reduction strategy or as part of a conversion transaction;
. stockholders that hold shares of Ashford common stock which constitutes
qualified small business stock for purposes of Section 1202 of the Code or
"Section 1244 Stock" for purposes of Section 1244 of the Code;
. stockholders who acquired their common stock pursuant to the exercise of
an employee stock option or otherwise as compensation;
. stockholders who are subject to the alternative minimum tax provisions of
the Code;
. stockholders who do not hold their shares of Ashford common stock as
"capital assets," generally meaning property held for investment; or
. stockholders who are not citizens or residents of the United States or
that are foreign corporations, foreign partnerships or foreign estates or
trusts with respect to the United States.
For U.S. federal income tax purposes, income earned through a foreign or
domestic partnership or similar entity is generally attributed to its owners.
58
Treatment of Holders of Ashford Common Stock
The conversion of shares of Ashford common stock into cash and shares of
Global Sports common stock in the merger will be a taxable transaction.
Generally, this means that an Ashford stockholder will recognize a capital gain
or loss equal to the difference between (1) the amount of cash received in the
merger plus the fair market value, as of the effective date of the merger, of
the shares of Global Sports common stock received in the merger, and (2) the
Ashford stockholder's tax basis in its shares of Ashford common stock. If the
Ashford stockholder is an individual, capital gain or loss will be taxable at a
maximum federal capital gains rate of 20% if the Ashford common stock has been
held for more than one year at the time of the merger. If the Ashford
stockholder is a corporation, the maximum federal tax rate applicable to its
capital gains is 35%. Capital losses are subject to limitations on
deductibility for both corporations and individuals.
The aggregate tax basis of the shares of Global Sports common stock an
Ashford stockholder receives in the merger, including any fractional share
deemed received as described below, generally should be equal to the fair
market value of such Global Sports common stock, measured on the effective date
of the merger. The holding period, for capital gain purposes, for each share of
Global Sports common stock received in the merger will begin the day after the
effective date of the merger.
A fractional share of Global Sports common stock not actually issued
pursuant to the merger but for which cash is received in lieu thereof should be
treated as a fractional share of Global Sports common stock that is issued in
the merger and then redeemed by Global Sports. An Ashford stockholder receiving
cash in lieu of a fractional share generally should recognize gain or loss upon
the payment thereof equal to the difference, if any, between such stockholder's
adjusted tax basis in the fractional share and the amount of cash received.
Such gain or loss should be a long-term capital gain or loss if, on the date of
the merger, the shares of Ashford common stock were held for more than one
year.
Backup Withholding
Ashford stockholders may be subject to backup withholding at the rate of
30.5% with respect to the gross proceeds they receive in the merger unless (1)
the stockholder is a corporation or other exempt recipient and, when required,
it establishes this exemption or (2) the stockholder provides his or her
correct taxpayer identification number to Global Sports, certifying that he or
she is not currently subject to backup withholding and otherwise complying with
applicable requirements of the backup withholding rules. Any amount withheld
under these rules will be creditable against the Ashford stockholder's federal
income tax liability.
Global Sports will report to stockholders and to the IRS the amount of any
reportable payments, including payments made to stockholders pursuant to the
merger, and any amount withheld pursuant to the merger.
The foregoing discussion of the United States federal income tax
consequences of the merger is for Ashford stockholders' general information
only and is not tax advice. Accordingly, each Ashford stockholder should
consult its own tax advisor with respect to the particular tax consequences to
the Ashford stockholder of the merger, including the applicable federal, state,
local and foreign tax consequences.
Accounting Treatment
For purposes of financial reporting, the merger will be accounted for as a
"purchase."
Regulatory Approvals
Global Sports and Ashford believe that the merger is not subject to the
reporting obligations and statutory waiting period applicable to transactions
falling within the jurisdiction of the Hart-Scott-Rodino Antitrust
59
Improvements Act of 1976, as amended. However, at any time before or after the
completion of the merger, either the Antitrust Division of the Department of
Justice or the Federal Trade Commission could take any action under U.S.
antitrust laws as it deems necessary or desirable, including seeking to enjoin
the completion of the merger or seeking the divestiture of substantial assets
of Global Sports or Ashford. Private parties and state attorneys general may
also bring actions under U.S. antitrust laws depending on the circumstances.
Restrictions on Resales by Affiliates
The shares of Global Sports common stock to be received by Ashford
stockholders in the merger will have been registered under the Securities Act
of 1933 and, except as described in this paragraph, may be freely traded
without restriction. The shares of Global Sports common stock to be issued in
the merger and received by persons who may be considered to be "affiliates," as
that term is defined in Rule 144 under the Securities Act of 1933, of Ashford
before the merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act of 1933, or as otherwise
permitted under the Securities Act of 1933. The merger agreement provides that
Ashford will use all reasonable efforts to obtain a signed affiliate agreement
in favor of and for the benefit of Global Sports from all persons who may be
considered affiliates of Ashford. The affiliate agreements will provide that
these persons will not sell, transfer or otherwise dispose of any shares of
Global Sports common stock at any time in violation of the Securities Act of
1933, or the rules and regulations promulgated under the Securities Act of
1933, including Rule 145.
Absence of Appraisal Rights
Under Section 262 of the Delaware General Corporation Law, stockholders of a
Delaware corporation are not entitled to appraisal rights, even if they do not
vote in favor of or consent to a merger, if the stock subject to such merger is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. and the
consideration to be received in such merger consists of any combination of cash
and shares of stock listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. Because the Nasdaq National
Market is designated as such a system and Ashford common stock and Global
Sports common stock are quoted on the Nasdaq National Market, holders of
Ashford common stock are not entitled to appraisal rights with respect to the
merger.
60
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description of the merger agreement describes certain material
terms of the merger agreement. The full text of the merger agreement is
attached as Annex A to this prospectus/proxy statement and is incorporated
herein by reference. Ashford stockholders are encouraged to read the entire
merger agreement.
The Merger
At the effective time of the merger, Global Sports' wholly owned subsidiary,
Ruby Acquisition Corp., will be merged with and into Ashford. Upon completion
of the merger, Ashford will continue as the surviving corporation and will be a
wholly owned subsidiary of Global Sports, and the directors and officers of
Ruby Acquisition Corp. immediately prior to the merger will become the
directors and officers of Ashford.
Effective Time of the Merger
The merger agreement provides that the merger will become effective when a
certificate of merger executed by Ashford is delivered to and filed with the
Delaware Secretary of State. The consummation of the transactions contemplated
by the merger agreement will take place no later than the tenth business day
after all of the conditions to the merger contained in the merger agreement are
satisfied or waived, and it is anticipated that the effective time of the
merger will occur as soon as practicable following the special meeting of
Ashford stockholders.
Manner and Basis of Converting Shares
The merger agreement provides that, at the effective time of the merger,
each outstanding share of Ashford common stock will automatically be converted
into the right to receive a combination of cash consideration in the amount of
$0.125, and 0.0076 of a share of Global Sports common stock. No fractional
shares of Global Sports common stock will be issued in the merger. Instead,
each Ashford stockholder otherwise entitled to a fractional share will receive
a cash amount, rounded to the nearest whole cent, without interest, based on
the closing price of Global Sports common stock on the Nasdaq National Market
on the date the merger becomes effective.
If, between the date of the merger agreement and the effective time of the
merger, the outstanding shares of Ashford common stock are changed into a
different number or class of shares by reason of any stock split, division or
subdivision of shares, stock dividend, reverse stock split, consolidation of
shares, reclassification, recapitalization or other similar transaction, then
each component of the merger consideration shall be appropriately adjusted. If,
between the date of the merger agreement and the effective time of the merger,
the outstanding shares of Global Sports common stock are changed into a
different number or class of shares by reason of any stock split, division or
subdivision of shares, stock dividend, reverse stock split, consolidation of
shares, reclassification, recapitalization or other similar transaction, then
the exchange ratio applicable to the stock component of the merger
consideration shall be appropriately adjusted, but the cash component of the
merger consideration would not be adjusted.
Under the terms of the merger agreement, following the effective time of the
merger, American Stock Transfer & Trust Company, which has been selected by
Global Sports to act as exchange agent, will mail to each record holder of
Ashford common stock a letter indicating that the merger has been completed.
Record holders of Ashford common stock will also be provided with a letter of
transmittal and instructions for use, which record holders will use to exchange
Ashford common stock certificates for the merger consideration and cash for any
fractional share of Global Sports common stock. Ashford common stock
certificates should not be surrendered for exchange by Ashford stockholders
before the effective time of the merger.
After the effective time of the merger, transfers of Ashford common stock
will not be registered on the stock transfer books of Ashford, and each
certificate that previously evidenced Ashford common stock will be deemed
61
to evidence the right to receive the merger consideration and the right to
receive cash instead of any fractional share of Global Sports common stock.
Global Sports will not pay dividends or other distributions on any shares of
Global Sports common stock to be issued in exchange for any Ashford common
stock certificate that is not surrendered until the Ashford common stock
certificate is surrendered as provided in the merger agreement. No interest
will be payable on the cash component of the merger consideration.
Ashford Stock Options and Warrants
Global Sports will not assume any Ashford stock options as a result of the
merger, and all outstanding Ashford stock options will terminate immediately
prior to the effective time of the merger.
At the effective time of the merger, Global Sports will assume each
outstanding and unexercised Ashford warrant that does not, by its terms,
terminate at the effective time of the merger, or otherwise as a result of the
merger. Each outstanding warrant assumed by Global Sports will become a warrant
to purchase a combination of cash and shares of Global Sports common stock. The
amount of cash payable upon the exercise of the assumed warrant will be equal
to the number of shares of Ashford common stock issuable upon the exercise of
the warrant immediately prior to the effective time of the merger, multiplied
by the per-share cash consideration of $0.125, rounding down to the nearest
whole cent. The number of shares of Global Sports common stock issuable upon
the exercise of the assumed warrant will be equal to the number of shares of
Ashford common stock issuable upon the exercise of the warrant immediately
prior to the effective time of the merger, multiplied by the exchange ratio of
0.0076 of a share of Global Sports common stock, rounding to the nearest whole
share. Any restriction on the exercise of any Ashford warrant assumed by Global
Sports will remain in full force and effect, and the term, exercisability and
other provisions of the warrant will remain unchanged.
Based on the number of Ashford warrants outstanding at the record date that
do not by their terms terminate at the effective time of the merger, or
otherwise as a result of the merger, and assuming that these warrants are not
exercised before the effective time of the merger, Global Sports will be
required at the effective time to reserve approximately [ ] shares of Global
Sports common stock for issuance upon the exercise of the Ashford warrants
assumed by Global Sports in connection with the merger.
Ashford Employee Stock Purchase Plan
The merger agreement provides that Ashford's 1999 Employee Stock Purchase
Plan will be terminated immediately prior to the effective time of the merger.
The last business day before the effective time will be treated as the last day
of any offering period then underway under the Employee Stock Purchase Plan.
Pro-rata adjustments may be required under the Employee Stock Purchase Plan to
reflect this shortened offering period, but the offering period will otherwise
be treated as a fully effective and completed offering period for all purposes
of the Employee Stock Purchase Plan.
Representations and Warranties
The merger agreement contains customary representations and warranties of
Ashford, Global Sports and Ruby Acquisition Corp. relating to, among other
things, certain aspects of the respective businesses and assets of the parties
and other matters. The representations and warranties expire at the effective
time of the merger.
Covenants; Conduct of Business Prior to the Merger
Affirmative Covenants of Ashford. Under the terms of the merger agreement,
Ashford has agreed that before the effective time of the merger it will, among
other things, and subject to specified exceptions:
. ensure that Ashford and each of its subsidiaries conducts its business and
operations in the ordinary course, prudently and in accordance with past
practices and in compliance with all applicable legal requirements and the
requirements of all material contracts;
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. except as expressly contemplated by the merger agreement, use all
reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and employees and
maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other persons
having business relationships with it and its subsidiaries;
. promptly notify Global Sports in writing of the discovery by Ashford of
any event, condition, fact or circumstance that occurred or existed on or
prior to the date of the merger agreement and that caused or constitutes a
material inaccuracy in any representation or warranty made by Ashford in
the merger agreement;
. promptly notify Global Sports in writing of any event, condition, fact or
circumstance that occurs, arises or exists after the date of the merger
agreement and that would cause or constitute a material inaccuracy in any
representation or warranty made by Ashford in the merger agreement if the
representation or warranty had been made as of the time of the occurrence,
existence or discovery of the event, condition, fact or circumstance, or
the event, condition, fact or circumstance had occurred, arisen or existed
on or prior to the date of the merger agreement;
. promptly notify Global Sports in writing of any material breach of any
covenant or obligation of Ashford under the merger agreement;
. promptly notify Global Sports in writing of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in the merger agreement impossible or unlikely or
that has had or could reasonably be expected to have a material adverse
effect on Ashford and its subsidiaries;
. use all reasonable efforts to file all notices, reports and other
documents required to be filed with any governmental body with respect to
the merger and the other transactions contemplated by the merger
agreement, and to submit promptly any additional information requested by
any such governmental body; and
. use all reasonable efforts to take, or cause to be taken, all actions
necessary, proper or advisable to consummate the merger and make effective
the other transactions contemplated by the merger agreement, including (1)
making all filings and giving all notices, if any, required to be made and
given by Ashford in connection with the merger and the other transactions
contemplated by the merger agreement, (2) using all reasonable efforts to
obtain each consent, if any, required to be obtained by Ashford in
connection with the merger or any of the other transactions contemplated
by the merger agreement, and (3) using all reasonable efforts to lift any
restraint, injunction or other legal bar to the merger.
Under the terms of the merger agreement, Ashford has also agreed that its
board of directors will recommend that Ashford stockholders vote to adopt the
merger agreement. However, at any time before the special meeting of Ashford
stockholders, Ashford's board of directors is entitled to withdraw or modify
its recommendation that Ashford stockholders vote for adoption of the merger
agreement if certain requirements, including the following, are satisfied:
. an unsolicited, bona fide written offer to purchase all or substantially
all of the outstanding shares of Ashford common stock or all or
substantially all of the assets of Ashford is made to Ashford and is not
withdrawn;
. Ashford provides Global Sports with at least five business days prior
notice of any meeting of Ashford's board or directors at which Ashford's
board of directors will determine whether the offer constitutes a superior
offer as defined below;
. Ashford's board of directors determines in good faith, after consultation
with an independent financial advisor of nationally recognized reputation,
that the offer constitutes a superior offer;
. Ashford's board of directors determines in good faith, after having
consulted with Ashford's outside legal counsel, that, in light of the
superior offer, withdrawal or modification of its recommendation is
required for the board of directors to comply with its fiduciary
obligations to Ashford stockholders;
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. Ashford's board of directors' recommendation that Ashford stockholders
vote for adoption of the merger agreement is not withdrawn or modified in
a manner adverse to Global Sports at any time within two business days
after Global Sports receives written notice from Ashford confirming that
its board of directors has determined that the offer constitutes a
superior offer; and
. neither Ashford nor any of its representatives has violated its covenant
under the terms of the merger agreement not to solicit or encourage, or
participate in discussions or negotiations with respect to, acquisition
proposals from or with parties other than Global Sports.
For purposes of the merger agreement, the term "superior offer" means an
unsolicited, bona fide written offer made by a third party to purchase all or
substantially all of the outstanding shares of Ashford common stock or all or
substantially all of the assets of Ashford on terms that Ashford's board of
directors determines, in its reasonable judgment, after consultation with an
independent financial advisor of nationally recognized reputation, to be more
favorable to Ashford stockholders than the terms of the merger. An offer will
not, however, be deemed to be a superior offer if any financing required to
consummate the transaction contemplated by the offer is not reasonably capable
of being obtained by the third party.
Under the terms of the merger agreement, Ashford's obligation to call, give
notice of and hold the special meeting of Ashford stockholders will not be
affected by the commencement, disclosure, announcement or submission of a
superior offer or acquisition proposal, or by any withdrawal or modification of
the recommendation by Ashford's board of directors that Ashford stockholders
vote for adoption of the merger agreement.
The merger agreement provides that, if Ashford's board of directors
withdraws or modifies its recommendation that Ashford stockholders vote for
adoption of the merger agreement, Ashford may be required to pay Global Sports
a fee in the amount of $750,000, and to pay Global Sports' fees and expenses
associated with the preparation of the merger agreement and otherwise in
connection with the merger. See "Certain Terms of the Merger
Agreement--Expenses and Termination Fee."
Negative Covenants of Ashford. Under the terms of the merger agreement,
Ashford has agreed that before the effective time of the merger, without the
prior written consent of Global Sports and subject to specified exceptions, it
will not and will not permit any of its subsidiaries to:
. declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
. sell, issue, grant or authorize the issuance or grant of any capital stock
or other security, any option, call, warrant or right to acquire any
capital stock or other security or any instrument convertible into or
exchangeable for any capital stock or other security;
. amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of Ashford's stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted stock
purchase agreement, or otherwise modify the terms of any outstanding
option, warrant or other security or related contract;
. amend or permit the adoption of any amendment to its certificate of
incorporation or bylaws or other charter or organizational documents;
. effect or become a party to any merger, consolidation, share exchange,
business combination, amalgamation, recapitalization, reclassification of
shares, stock split, reverse stock split, division or subdivision of
shares, consolidation of shares or similar transaction;
. take or permit to be taken any action other than in accordance with an
agreed operating budget or fail to take or cause to be taken any action
required to be taken or otherwise contemplated by the operating budget;
64
. make or permit to be made any capital expenditure or other cash
expenditure which, when aggregated with other similar expenditures,
exceeds the aggregate dollar amount of the operating budget;
. enter into, renew or become bound by, or permit any of the assets owned or
used by Ashford to become bound by, any material contract, or amend or
terminate, or waive or exercise any material right or remedy under, any
material contract;
. enter into, renew or become bound by, or permit any of the assets owned or
used by it to become bound by, any insurance policy, or amend or
terminate, or waive or exercise any material right or remedy under, any
insurance policy;
. enter into or become bound by any new marketing agreements, other than
marketing agreements under which the payments for which Ashford and its
subsidiaries are obligated, are solely performance-based and do not
involve revenue guarantees or revenue sharing arrangements requiring
Ashford and its subsidiaries to share over 15% of the applicable revenues
with third parties;
. publish or otherwise make available any coupons or comparable promotions
applicable to the purchase of the products sold by Ashford or its
subsidiaries outside the ordinary course of business or inconsistent with
past practices;
. acquire, lease or license any right or other asset from any other person
or sell or otherwise dispose of, or lease or license, any right or other
asset to any other person, or waive or relinquish any material right;
. lend money to any person, or incur or guarantee any indebtedness;
. establish, adopt or amend any employee benefit plan, pay any bonus or make
any profit-sharing payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation payable to, any
of its directors, officers or employees;
. hire or promote any employee;
. terminate any employee, except as expressly contemplated by the merger
agreement;
. change any of its pricing policies, product return policies, product
maintenance policies, service policies, product modification or upgrade
policies, personnel policies or other business policies or any of its
methods of accounting or accounting practices in any respect;
. make any tax election;
. commence any legal proceeding or enter into any settlement agreement with
respect to any legal proceeding;
. cause or permit Ashford or any of its subsidiaries to fail to comply with
any term of any employee plan;
. enter into any transaction or take any other action outside the ordinary
course of business or inconsistent with past practices; or
. make any disclosure regarding the merger or any of the other transactions
contemplated by the merger agreement unless Global Sports will have
approved of the disclosure or Ashford will have been advised by outside
legal counsel that the disclosure is required by applicable law.
Affirmative Covenants of Global Sports. Under the terms of the merger
agreement, Global Sports has agreed that, before the effective time of the
merger, it will, among other things, and subject to specified exceptions:
. register under the Securities Act of 1933 the issuance of the shares of
Global Sports common stock in the merger;
. use reasonable efforts to register under the securities laws of every
jurisdiction of the United States in which any Ashford stockholder has an
address of record on the record date the issuance of the shares of Global
Sports common stock in the merger;
65
. use all reasonable efforts to file all notices, reports and other
documents required to be filed with any governmental body with respect to
the merger and the other transactions contemplated by the merger
agreement, and to submit promptly any additional information requested by
any such governmental body; and
. use all reasonable efforts to take, or cause to be taken, all actions
necessary to consummate the merger and make effective the other
transactions contemplated by the merger agreement, including (1) making
all filings and giving all notices required to be made and given by Global
Sports in connection with the merger and the other transactions
contemplated by the merger agreement, (2) using all reasonable efforts to
obtain each consent, if any, required to be obtained by Global Sports in
connection with the merger or any of the other transactions contemplated
by the merger agreement, and (3) using all reasonable efforts to lift any
restraint, injunction or other legal bar to the merger.
Global Sports does not have any obligation under the merger agreement: (1)
to dispose of or transfer or cause any of its subsidiaries to dispose of or
transfer any assets, or to commit to cause Ashford or any of Ashford's
subsidiaries to dispose of any assets; (2) to discontinue or cause any of its
subsidiaries to discontinue offering any product or service, or to commit to
cause Ashford or Ashford's subsidiaries to discontinue offering any product or
service; (3) to license or otherwise make available, or cause or commit to
cause any of its subsidiaries to license or otherwise make available, to any
person, any technology, software or other proprietary asset, or to commit to
cause Ashford or Ashford's subsidiaries to license or otherwise make available
to any person any technology, software or other proprietary asset; (4) to hold
separate or cause any of its subsidiaries to hold separate any assets or
operations, either before or after the closing date, or to commit to cause
Ashford or Ashford's subsidiaries to hold separate any assets or operations;
(5) to make or cause any of its subsidiaries to make any commitment (to any
governmental body or otherwise) regarding its future operations or the future
operations of Ashford or its subsidiaries; or (6) to contest any legal
proceeding relating to the merger if Global Sports determines in good faith
that contesting the legal proceeding might not be advisable.
Limitation on Ashford's Ability to Consider Other Acquisition Proposals
Under the terms of the merger agreement, Ashford has agreed that it will not
directly or indirectly, and that it will not authorize or permit any of its
representatives, subsidiaries or subsidiaries' representatives directly or
indirectly, to:
. solicit, initiate, encourage, induce or facilitate the making, submission
or announcement of any acquisition proposal, as defined below, or take any
action that could reasonably be expected to lead to an acquisition
proposal;
. furnish any information regarding Ashford or any of its subsidiaries to
any person in connection with or in response to an acquisition proposal or
an inquiry or indication of interest that could lead to an acquisition
proposal;
. engage in discussions or negotiations with any person with respect to any
acquisition proposal;
. approve, endorse or recommend any acquisition proposal; or
. enter into any letter of intent or similar document or any contract
contemplating or relating to any acquisition transaction, as defined
below.
For purposes of the merger agreement, the term "acquisition proposal" means
any offer, proposal, inquiry or indication of interest, other than by Global
Sports, contemplating or otherwise relating to any acquisition transaction.
For purposes of the merger agreement, the term "acquisition transaction"
means:
. any merger, consolidation, amalgamation, share exchange, business
combination, issuance of securities, acquisition of securities,
recapitalization, tender offer, exchange offer or other similar
transaction (1) in
66
which Ashford or any of its subsidiaries is a constituent corporation, (2)
in which a person or group of persons directly or indirectly acquires
ownership of securities representing more than 15% of the outstanding
securities of any class of voting securities of Ashford or any of its
subsidiaries or (3) in which Ashford or any of its subsidiaries issues
securities representing more than 15% of the outstanding securities of any
class of voting securities of Ashford or any of its subsidiaries;
. any sale, lease, exchange, transfer, license, acquisition or disposition
of any business or businesses or assets that constitute or account for 15%
or more of the consolidated net revenues, net incomes or assets of Ashford
or any of its subsidiaries; or
. any liquidation or dissolution of Ashford or any of its subsidiaries.
However, these restrictions will not be deemed to prevent Ashford or its
board of directors from complying with its legal obligations under Rules 14d-9
and 14c-2 of the Securities Exchange Act of 1934 with regard to an acquisition
proposal.
Furthermore, prior to the adoption of the merger agreement by the required
vote of Ashford stockholders, these restrictions will not prohibit Ashford from
furnishing nonpublic information regarding Ashford or any of its subsidiaries
to, or entering into discussions with, any person in response to a superior
offer, as defined above, that is submitted to Ashford by that person if:
. neither Ashford, nor any of its representatives, subsidiaries or
subsidiaries' representatives have breached or taken any action
inconsistent with these restrictions;
. Ashford's board of directors concludes in good faith, after having
consulted with Ashford's outside legal counsel, that the action is
required in order for the board of directors to comply with its fiduciary
obligations to Ashford stockholders under applicable law;
. at least two business days prior to furnishing any of the nonpublic
information to, or entering into discussions with, that person, Ashford
gives Global Sports written notice of the identity of that person and of
Ashford's intention to furnish nonpublic information to, or enter into
discussions or negotiations with, that person, and Ashford receives from
that person an executed confidentiality agreement containing customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to that person by or on behalf of Ashford; and
. at least two business days prior to furnishing any of the nonpublic
information to that person, Ashford furnishes the nonpublic information to
Global Sports, to the extent the nonpublic information has not been
previously furnished by Ashford to Global Sports.
Under the terms of the merger agreement, if Ashford's board of directors
receives an acquisition proposal, any inquiry or indication of interest that
could reasonably be expected to lead to an acquisition proposal or any request
for nonpublic information then Ashford must, within 24 hours of receipt of such
acquisition proposal, inquiry, indication of interest or request, advise Global
Sports orally and in writing of the matter, including the identity of the
person making or submitting the acquisition proposal, inquiry, indication of
interest that could reasonably be expected to lead to an acquisition proposal
or request, and the terms thereof. Ashford must keep Global Sports fully
informed with respect to the status of any acquisition proposal, inquiry,
indication of interest or request and any modification or proposed modification
to the acquisition proposal. Ashford must immediately cease and cause to be
terminated any existing discussions with any person that relate to any
acquisition proposal.
Under the terms of the merger agreement, Ashford has agreed not to release
or permit the release of any person from, or to waive or permit the waiver of
any provision of, any confidentiality, "standstill," nonsolicitation or similar
agreement to which Ashford or any of its subsidiaries is a party or under which
Ashford or any of its subsidiaries has any rights, and will use its
commercially reasonable best efforts to enforce or cause to be enforced each of
these agreements at the request of Global Sports. Ashford has also agreed to
promptly request each person that has executed a confidentiality agreement in
connection with its consideration of a
67
possible acquisition transaction or equity investment to return all
confidential information furnished to that person by or on behalf of Ashford or
any of its subsidiaries.
Conditions to the Merger
Conditions to the Obligations of Each Party. The merger agreement provides
that the obligations of Global Sports, Ruby Acquisition Corp. and Ashford to
effect the merger and otherwise consummate the transactions contemplated by the
merger agreement are subject to the satisfaction, at or prior to the closing of
the merger, of the following conditions, in addition to the additional
conditions applicable to each of the parties set forth below:
. the registration statement, which includes this prospectus/proxy
statement, will have become effective in accordance with the provisions of
the Securities Act of 1933 and will not be subject to any issued and
pending stop order, or any pending or threatened stop order proceedings;
. the merger agreement will have been duly adopted by a vote of Ashford
stockholders; and
. no court order will be in effect that prevents the consummation of the
merger and no material legal requirement will have been enacted since the
date of the merger agreement that makes consummation of the merger
illegal.
Additional Conditions to the Obligations of Global Sports and Ruby
Acquisition Corp. The merger agreement provides that the obligations of Global
Sports and Ruby Acquisition Corp. to effect the merger and otherwise consummate
the transactions contemplated by the merger agreement are subject to the
satisfaction, at or prior to the closing of the merger, of the following
conditions, in addition to the conditions set forth above under "Conditions to
the Obligations of Each Party":
. the representations and warranties made by Ashford that are qualified by
"material adverse effect" or otherwise qualified as to materiality must
have been accurate in all respects as of the date of the merger agreement,
except for those representations and warranties made as of a specific
date, which must have been accurate in all respects as of that date;
. the representations and warranties made by Ashford that are not qualified
by "material adverse effect" or otherwise qualified as to materiality must
have been accurate in all material respects as of the date of the merger
agreement, except for those representations and warranties made as of a
specific date, which must have been accurate in all material respects as
of that date;
. the representations and warranties made by Ashford regarding Ashford's
corporate structure, corporate standing, capitalization and cash,
receivables, customers and inventories will be accurate in all material
respects as of the date on which the merger is completed as if made on and
as of that date, provided that, for purposes of determining the accuracy
of such representations and warranties, all materiality qualifications
contained in the representations and warranties will be disregarded;
. the representations and warranties made by Ashford, other than those
representations and warranties mentioned in the previous paragraph, will
be accurate in all respects as of the date on which the merger is
completed as if made on that date, except for those representations and
warranties made as of a specific date, which will have been accurate in
all material respects as of that date, and except that any inaccuracies in
such representations and warranties will be disregarded if, after
aggregating all inaccuracies in the representations and warranties as of
that specific date or the closing date, the inaccuracies and the
circumstances giving rise to all of the inaccuracies do not constitute and
could not reasonably be expected to result in a "material adverse effect"
on Ashford or its subsidiaries determined as of that specific date or the
date on which the merger is completed, provided that for purposes of
determining the accuracy of the representations and warranties, all
"material adverse effect" qualifications and other materiality
qualifications contained in the representations and warranties will be
disregarded;
. Ashford will have complied with and performed in all respects the covenant
in the merger agreement regarding permitted expenditures;
68
. Ashford will have complied with and performed in all material respects
each other covenant or obligation that Ashford is required to comply with
or to perform at or prior to the consummation of the merger;
. holders of less than 15% of Ashford common stock entitled to vote in the
merger will have perfected their appraisal rights, if any, under Section
262 of the Delaware General Corporation Law with respect to their shares
of Ashford common stock or will otherwise continue to have appraisal
rights under any applicable law;
. Ashford will have obtained consents that, if not received by the closing
date, would likely have a "material adverse effect" on Ashford and its
subsidiaries or on Global Sports;
. Global Sports will have received the following agreements and documents,
each of which will be in full force and effect: (1) a certificate executed
by the Chief Executive Officer and Chief Financial Officer of Ashford
confirming that certain closing conditions have been satisfied; and (2)
the written resignations of all of the officers and directors of Ashford
and its subsidiaries, effective as of the effective time of the merger;
. there will not be pending or threatened any legal proceeding in which a
governmental body is or is threatened to become a party or is otherwise
involved and neither Global Sports nor Ashford will have received any
communication from any governmental body in which the governmental body
indicates that the commencement of any legal proceeding or taking of any
other action is reasonably likely: (a) challenging or seeking to restrain
or prohibit the consummation of the merger or any of the other
transactions contemplated by the merger agreement; (b) relating to the
merger and seeking to obtain from Global Sports, Ashford or any of
Ashford's subsidiaries, any damages or other relief that could reasonably
be expected to have a "material adverse effect" on Global Sports, Ashford
or any of Ashford's subsidiaries; (c) seeking to prohibit or limit in any
material respect Global Sports' ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the
stock of the surviving corporation; (d) that could materially and
adversely affect the right of Global Sports, Ashford or any of Ashford's
subsidiaries to own the assets or operate the business of Ashford or any
of its subsidiaries; or (e) seeking to compel Ashford, any of Ashford's
subsidiaries, Global Sports or any of Global Sports' subsidiaries to
dispose of or hold separate any material assets as a result of the merger
of any of the other transactions contemplated by the merger agreement; and
. there will not be pending any legal proceeding in which, in the reasonable
good faith judgment of Global Sports, there is a reasonable possibility of
an outcome that could have a "material adverse effect" on Ashford and its
subsidiaries or on Global Sports: (a) challenging or seeking to restrain
or prohibit the consummation of the merger or any of the other
transactions contemplated by the merger agreement; (b) relating to the
merger and seeking to obtain from Global Sports, Ashford or any subsidiary
of Ashford, any damages or other relief that could reasonably be expected
to have a "material adverse effect" on Global Sports, Ashford or any of
Ashford's subsidiaries; (c) seeking to prohibit or limit in any material
respect Global Sports' ability to vote, receive dividends with respect to
or otherwise exercise
ownership rights with respect to the stock of Ashford or any of Ashford's
subsidiaries; (d) that would materially and adversely affect the right of
Global Sports, Ashford or any of Ashford's subsidiaries to own the assets
or operate the business of Ashford or any of Ashford's subsidiaries; or
(e) seeking to compel Ashford or any of Ashford's subsidiaries, Global
Sports or any of Global Sports' subsidiaries to dispose of or hold
separate any material assets as a result of the merger or any of the other
transactions contemplated by the merger agreement.
Additional Conditions to the Obligation of Ashford. The merger agreement
provides that the obligation of Ashford to effect the merger and otherwise
effect the transactions contemplated by the merger agreement are subject to the
satisfaction, at or prior to the closing of the merger, of the following
conditions, in addition to the conditions set forth above under "Conditions to
the Obligations of Each Party":
. the representations and warranties made by Global Sports and Ruby
Acquisition Corp. that are qualified by "material adverse effect" or
otherwise qualified as to materiality must have been accurate in all
respects as of the
69
date of the merger agreement, except for those representations and
warranties made as of a specific date, which must have been accurate in
all respects as of that date;
. the representations and warranties made by Global Sports and Ruby
Acquisition Corp. that are not qualified by "material adverse effect" or
otherwise qualified as to materiality must have been accurate in all
material respects as of the date of the merger agreement, except for those
representations and warranties made as of a specific date, which must have
been accurate in all material respects as of that date;
. the representations and warranties of Global Sports and Ruby Acquisition
Corp. will be accurate in all respects as of the closing date as if made
on and as of the closing date, except for those representations and
warranties made as of a specific date, which must have been accurate in
all respects as of that date, and except that any inaccuracies in such
representations and warranties as of the closing date will be disregarded
if, after aggregating all inaccuracies of the representations and
warranties as of the closing date, the inaccuracies and the circumstances
giving rise to all of the inaccuracies do not constitute a "material
adverse effect" on Global Sports determined as of the date on which the
merger is completed, provided that, for purposes of determining the
accuracy of the representations and warranties, all materiality
qualifications contained in the representations and warranties will be
disregarded;
. Global Sports and Ruby Acquisition Corp. will have complied with and
performed in all material respects each covenant or obligation that either
of them is required to comply with or to perform at or prior to the
consummation of the merger;
. the shares of Global Sports common stock to be issued in the merger will
have been approved for listing on the Nasdaq National Market; and
. Ashford will have received a certificate executed by an executive officer
of Global Sports confirming that certain closing conditions have been
satisfied.
As used with respect to Ashford in the merger agreement, "material adverse
effect" means any event, violation, inaccuracy, circumstance or other matter
that, when considered together with all other matters that would constitute
exceptions to the representations and warranties of Ashford, disregarding any
"material adverse effect" or other materiality qualifications, or any similar
qualifications, in the representations and warranties, had or could reasonably
be expected to have a material adverse effect on (1) the business, financial
condition, capitalization, assets, liabilities, operations or financial
performance of Ashford and its subsidiaries taken as a whole, (2) the ability
of Ashford to consummate the merger or any of the other transactions
contemplated by the merger agreement, or to perform any of its obligations
under the merger agreement, or (3) Global Sports' ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect
to the stock of Ashford following consummation of the merger.
However, any adverse effect that results from general economic, business or
industry conditions, the taking by Ashford of any action permitted or required
by the merger agreement, or the announcement or pendency of the merger or any
of the other transactions contemplated by the merger agreement, will not, in
and of itself, constitute a "material adverse effect," and will not be
considered in determining whether there has been or would be a "material
adverse effect," on Ashford and its subsidiaries. In addition, the failure of
Ashford to meet published or internal earnings or revenue estimates or
projections will not, in and of itself, constitute a "material adverse effect,"
and will not be considered in determining whether there has been or would be a
"material adverse effect," on Ashford and its subsidiaries. Moreover, a decline
in Ashford's stock price will not, in and of itself, constitute a "material
adverse effect," and will not be considered in determining whether there has
been or would be a "material adverse effect," on Ashford and its subsidiaries.
As used with respect to Global Sports in the merger agreement, "material
adverse effect" means any event, violation, inaccuracy, circumstance or other
matter, that when considered together with all other matters that would
constitute exceptions to the representations and warranties of Global Sports,
disregarding any "material adverse effect" or other materiality qualifications,
or any similar qualifications, in the representations and
70
warranties, had or could reasonably be expected to have a material adverse
effect on (1) the business, financial condition, capitalization, assets,
liabilities, operations or financial performance of Global Sports and its
subsidiaries taken as a whole, or (2) the ability of Global Sports to
consummate the merger or any of the other transactions contemplated by the
merger agreement, or to perform any of its obligations under the merger
agreement.
However, any adverse effect that results from general economic, business or
industry conditions, the taking by Global Sports of any action permitted or
required by the merger agreement, or the announcement or pendency of the merger
or any of the other transactions contemplated by the merger agreement, will
not, in and of itself, constitute a "material adverse effect," and will not be
considered in determining whether there has been or would be a "material
adverse effect," on Global Sports. In addition, the failure of Global Sports to
meet published or internal earnings or revenue estimates or projections will
not, in and of itself, constitute a "material adverse effect," and will not be
considered in determining whether there has been or would be a "material
adverse effect," on Global Sports. Moreover, a decline in Global Sports' stock
price will not, in and of itself, constitute a "material adverse effect," and
will not be considered in determining whether there has been or would be a
"material adverse effect," on Global Sports.
Termination of the Merger Agreement
The merger agreement provides that Global Sports and Ashford can agree by
mutual written consent to terminate the merger agreement at any time before the
consummation of the merger. In addition, either Global Sports or Ashford may
terminate the merger agreement if:
. the merger is not completed on or before March 31, 2002, unless the
failure to consummate the merger by March 31, 2002 is attributable to a
failure on the part of the party seeking to terminate the merger agreement
to perform any covenant required to be performed by that party before
consummation of the merger;
. a court or other governmental body issues a final and nonappealable order,
decree or ruling permanently restraining, enjoining or otherwise
prohibiting the merger, provided that the party seeking termination of the
merger agreement has used commercially reasonable efforts to have the
order, decree or ruling vacated;
. Ashford stockholders fail to adopt the merger agreement; or
. the representations and warranties of the other party in the merger
agreement are or become inaccurate, or the other party breaches its
covenants, so that a condition to the obligation of the party to which the
representations and warranties or covenants are made would not be
satisfied and the inaccuracy or breach is not curable through the exercise
of reasonable efforts or the other party is not using reasonable efforts
to cure the breach.
In addition, the merger agreement provides that Global Sports may terminate
the merger agreement, before the adoption of the merger agreement by Ashford
stockholders, if any of the following "triggering events" occurs:
. Ashford's board of directors fails to recommend that Ashford stockholders
vote to adopt the merger agreement, or withdraws or adversely modifies its
recommendation that Ashford stockholders vote for adoption of the merger
agreement;
. Ashford fails to include in this prospectus/proxy statement the
recommendation by Ashford's board of directors that Ashford stockholders
vote for adoption of the merger agreement or a statement to the effect
that Ashford's board of directors has determined and believes the merger
is in the best interests of Ashford stockholders;
. Ashford's board of directors fails to reaffirm its recommendation that
Ashford stockholders vote for adoption of the merger agreement, or its
determination that the merger is in the best interests of Ashford
71
stockholders, within five business days after Global Sports requests in
writing that the recommendation or determination be reaffirmed;
. Ashford's board of directors approves, endorses or recommends another
acquisition proposal;
. Ashford enters into a letter of intent or similar document, or any other
contract relating to another acquisition proposal, other than a
confidentiality agreement permitted by the merger agreement;
. Ashford fails to hold the special meeting of Ashford stockholders within
45 days after the registration statement which includes this
prospectus/proxy statement is declared effective;
. a tender or exchange offer relating to securities of Ashford is commenced,
and Ashford does not send to its securityholders, within 10 business days
after the commencement of the tender or exchange offer, a statement
disclosing that Ashford recommends rejection of the tender or exchange
offer;
. another acquisition proposal is publicly announced and Ashford fails to
issue a press release announcing its opposition to the acquisition
proposal within five business days after the acquisition proposal is
announced or otherwise fails to actively oppose the acquisition proposal;
. any person or group of persons directly or indirectly acquires or agrees
to acquire from Ashford securities representing more than 10% of the
outstanding securities of any class of voting securities of Ashford; or
. Ashford or any of its representatives breaches its agreement not to
solicit or encourage, or participate in discussions or negotiations with
respect to, acquisition proposals from or with parties other than Global
Sports.
If the merger agreement is terminated, then it will be of no further effect,
there will be no liability on the part of Global Sports or Ashford to the
other, and all rights and obligations of the parties will cease other than
liabilities relating to payment of termination fees and breaches of
representations and warranties and covenants contained in the merger agreement.
Expenses and Termination Fee
The merger agreement provides that, regardless of whether Global Sports and
Ashford consummate the merger, each of Ashford and Global Sports will pay its
own costs and expenses incurred in connection with the merger agreement and the
transactions contemplated by the merger agreement, except that Global Sports
and Ashford have agreed to share equally all fees and expenses, other than
attorneys' fees, incurred in connection with the filing, printing and mailing
of the registration statement of which this prospectus/proxy statement is a
part, this prospectus/proxy statement, and any amendments or supplements to
either of them.
Under the terms of the merger agreement, Ashford has agreed to pay Global
Sports a termination fee in the amount of $750,000 if the merger agreement is
terminated by Global Sports because one of the "triggering events" described
above occurs. In such event, the termination fee would be payable promptly
following termination of the merger agreement. In addition, Ashford has agreed
to pay Global Sports a termination fee in the amount of $750,000 if the merger
agreement is terminated by either Ashford or Global Sports because the merger
is not consummated by March 31, 2002, or because Ashford stockholders fail to
adopt the merger agreement, provided in either case that, between the date of
the merger agreement and the time of the termination of the merger agreement,
an acquisition proposal has been disclosed, announced, commenced, submitted or
made, and Ashford consummates or is subject to an acquisition transaction
within one year of the termination of the merger agreement or Ashford or any of
its representatives signs a definitive agreement or letter of intent within one
year of the termination of the merger agreement providing for an acquisition
transaction. In such event, the termination fee would be payable upon or prior
to the consummation of such acquisition transaction.
In addition, the merger agreement provides that, if (a) the merger agreement
is terminated by Global Sports because one of the "triggering events" described
above occurs, (b) the merger agreement is terminated by either
72
Ashford or Global Sports because the merger is not consummated by March 31,
2002 and between the date of the merger agreement and the time of the
termination of the merger agreement, an acquisition proposal has been
disclosed, announced, commenced, submitted or made, or (c) the merger agreement
is terminated by either Ashford or Global Sports because Ashford stockholders
fail to adopt the merger agreement, then Ashford will be obligated to make a
nonrefundable cash payment to Global Sports, upon or promptly following the
termination of the merger agreement, in an amount equal to the aggregate amount
of all fees and expenses that have been paid or that may become payable by or
on behalf of Global Sports in connection with the preparation and negotiation
of the merger agreement and otherwise in connection with the merger.
Amendment
The merger agreement may be amended at any time, whether before or after the
adoption of the merger agreement by Ashford stockholders, with the approval of
Global Sports' board of directors and Ashford's board of directors. However,
after the adoption of the merger agreement by Ashford stockholders, no
amendment which by law requires the approval of Ashford stockholders will be
effective until approved by Ashford stockholders.
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VOTING AGREEMENTS
The following description of the voting agreements entered into by a number
of Ashford stockholders in favor of Global Sports sets forth certain material
terms of the voting agreements. The form of voting agreement is attached as
Annex B to this prospectus/proxy statement and is incorporated herein by
reference. Ashford stockholders are encouraged to read the entire form of
voting agreement.
David Gow, Chief Executive Officer and a director of Ashford, James H.
Whitcomb, President and a director of Ashford, J. Robert Shaw, Chairman of
Ashford's board of directors, Robert Cohn and Kevin Harvey, directors of
Ashford, and Benchmark Capital Partners II, L.P., Benchmark Capital Partners
III, L.P. and Benchmark Capital Partners II, L.P. have entered into voting
agreements with Global Sports dated as of September 13, 2001.
The stockholders of Ashford who have entered into the voting agreements have
agreed to vote all shares of Ashford common stock owned by them in favor of the
adoption of the merger agreement, against any action or agreement that would or
could reasonably result in a breach of any representation, warranty, covenant
or obligation of Ashford in the merger agreement and otherwise as provided in
the voting agreements. The voting agreements also provide that they must vote
against: (1) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Ashford or any subsidiary
of Ashford; (2) any sale, lease or transfer of a material amount of assets of
Ashford or any subsidiary of Ashford; (3) any reorganization, recapitalization,
dissolution or liquidation of Ashford or any subsidiary of Ashford; (4) any
change in a majority of Ashford's board of directors; (5) any amendment to
Ashford's certificate of incorporation or bylaws; (6) any material change in
the capitalization of Ashford or Ashford's corporate structure; and (7) any
other action which is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, discourage or adversely affect the merger or
any of the other transactions contemplated by the merger agreement or the
voting agreements.
The stockholders of Ashford who have entered into the voting agreements have
also granted Global Sports an irrevocable proxy to vote their shares of Ashford
common stock in favor of the adoption of the merger agreement, against other
acquisition proposals and in the discretion of the proxy holder with respect to
the other matters covered by the voting agreements. As of the record date,
these individuals and entities collectively beneficially owned [ ] shares
of Ashford common stock which represents approximately [ ]% of the
outstanding shares of Ashford common stock entitled to vote at the special
meeting of Ashford stockholders. These Ashford stockholders may vote their
shares of Ashford common stock on all matters not covered by the voting
agreements.
Ashford stockholders who signed the voting agreements also have agreed not
to transfer any shares of Ashford common stock, or any option to purchase
shares of Ashford common stock, owned by them before the earlier of the
termination of the merger agreement or the completion of the merger, unless
each person to whom any shares or options are transferred agrees to be bound by
all of the terms and provisions of the voting agreements.
The voting agreements will terminate upon the earlier to occur of the
termination of the merger agreement or the completion of the merger.
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INFORMATION RELATING TO GLOBAL SPORTS
Prior Filings
The following information supplements and updates important business and
financial information about Global Sports that is incorporated in this
prospectus/proxy statement from documents filed by Global Sports with the
Securities and Exchange Commission. This information is available at the
Internet web site that the Securities and Exchange Commission maintains at
http://www.sec.gov, as well as from other sources. See "Where You Can Find More
Information," on page 109 of this prospectus/proxy statement.
Recent Developments
On July 20, 2001, Global Sports issued to Interactive Technology Holdings,
LLC, or ITH, a five-year warrant to purchase an aggregate of 300,000 shares of
Global Sports common stock at an exercise price of $6.00 per share in
consideration for certain corporate development services performed by ITH on
behalf of Global Sports.
In August 2001, Global Sports announced its intention to expand its business
to include developing and operating e-commerce businesses beyond the sporting
goods merchandise category. Concurrent with this announcement, Global Sports
announced that it had entered into an e-commerce agreement with Kmart
Corporation and Bluelight.com LLC, a subsidiary of Kmart. Under this agreement,
Global Sports manages certain aspects of Kmart's overall e-commerce business,
including fulfillment, technology and customer service in exchange for a
combination of fixed fees and a percentage of sales. Kmart selects the
merchandise to be sold on the site, owns a portion of the inventory and
provides in-store marketing of the e-commerce business at its retail outlets.
In addition to its agreement with Kmart and BlueLight.com, Global Sports
intends to selectively pursue additional opportunities outside of sporting
goods, while continuing to grow its existing sporting goods business.
On August 23, 2001, ITH acquired an aggregate of 3,000,000 shares of Global
Sports common stock from Global Sports at a price of $10.00 per share, for an
aggregate purchase price of $30.0 million. At the same time, ITH acquired an
aggregate of 1,000,000 shares of Global Sports common stock from Michael G.
Rubin, Chairman, President and Chief Executive Officer of Global Sports, at a
price of $10.00 per share, for an aggregate purchase price of $10.0 million. In
connection with the acquisition, SOFTBANK agreed, among other things, to reduce
the number of directors of Global Sports that it has the contractual right to
appoint from up to three to up to two, depending on the number of shares of
Global Sports common stock that it holds or has the right to acquire.
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INFORMATION RELATING TO ASHFORD
Forward-Looking Statements
The discussion in this prospectus/proxy statement contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, including statements regarding Ashford's expectations, beliefs, hopes,
intentions or strategies regarding the future. These forward-looking statements
involve risks and uncertainties. Ashford is under no duty to update any of the
forward-looking statements after the date of this filing to conform these
statements to actual results. Ashford's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section
and in the "Risk Factors" section of this prospectus/proxy statement.
Overview of Ashford
Ashford is a Web-based retailer focused on luxury and premium products,
including new and vintage watches, clocks, diamonds, jewelry, leather goods,
writing instruments, fragrances, and sunglasses, altogether offering more than
12,000 styles of products from over 300 leading luxury brands. Since late 1999,
Ashford has rapidly expanded its primary product focus from offering only new
watches to offering 11 different product categories. Ashford's strategy has
been to add complementary products to create a portfolio that combines items
purchased frequently, such as leather and sunglasses, with higher priced items
purchased less frequently, such as watches and diamonds. In March 2000, Ashford
launched its corporate gift business, which offers an additional 800 luxury
products in new categories such as crystal, silver and pewter that are targeted
to the corporate market. By combining its expertise in luxury products and its
commitment to excellent customer service with the benefits of Internet
retailing, Ashford is able to deliver a unique shopping experience to its
retail and corporate consumers. Ashford believes that its current luxury and
premium product offerings are well suited for online commerce given its brand
recognition, generally high average sales prices and relatively low average
distribution and shipping costs.
Ashford's Web site features detailed product information, helpful and useful
shopping services and innovative merchandising through easy-to-navigate Web
pages. Ashford offers customers the convenience and flexibility of shopping 24
hours a day, seven days a week, from their homes, offices or other locations.
In addition, with the exception of diamonds, Ashford carries almost all of the
products it sells in inventory, which enables it to ship most products to its
customers within 24 hours. Ashford's customer service representatives are
available through phone and e-mail and are trained to answer a broad array of
questions regarding product styles, features and technical specifications, as
well as provide product recommendations. This informative and high-quality
shopping experience provides luxury brand owners a Web-based retail channel
consistent with the luxury character and premium quality of their products.
Industry Overview
Growth of the Internet and Online Commerce
Internet usage and online commerce continue to grow worldwide. International
Data Corporation, or IDC, estimates that there were 142 million Web users
worldwide at the end of 1998. IDC anticipates that number will grow to
approximately 502 million users by the end of 2003. IDC also estimates that
revenue generated worldwide from online commerce will exceed $1.3 trillion by
2003, although growth rates for online commerce for luxury and premium products
and the growth rate for its business may differ significantly from the growth
of online commerce generally. These projected growth rates can be attributed to
many factors, including:
. a large and growing installed base of personal computers and other
Internet-connected devices in the workplace and home;
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. advances in performance and speed of personal computers and modems;
. improvements in network security, infrastructure and bandwidth;
. easier and cheaper access to the Internet; and
. the rapidly expanding availability of online content and commerce sites.
The growth in online commerce can also be attributed to a number of
advantages the Internet provides to online retailers. Online retailers can
display a larger number of products at a lower cost than traditional
store-based or catalog retailers. In addition, online retailers can rapidly
adjust their selections, editorial content and pricing, providing significant
merchandising flexibility. Online retailers also benefit from the minimal cost
to publish on the Web, the ability to reach a large group of customers from a
central location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the cost of managing
and maintaining a retail store infrastructure or the significant printing and
mailing costs of catalogs. Online retailers can also easily obtain demographic
and behavioral data about customers, increasing opportunities for direct
marketing and personalized services. The benefits of online retailing should be
viewed in the context of the inherent challenges of online retailing, such as
the expenses of establishing and maintaining a Web site, reliance on newly
developed Internet technology, coordinating new distribution channels, and the
difficulty of converting a Web site visitor to a purchaser given limitations
such as a customer's inability to physically inspect, try on or use a product.
Traditional Luxury Goods Market
The luxury goods market includes a broad selection of product categories.
Based on data from Global Industry Analysts and DataMonitor, leading
independent market research companies, and Ashford's own internal research,
Ashford estimates the worldwide market for luxury and premium lifestyle
products to be greater than $130 billion. This market includes fine watches and
other luxury and premium product categories, such as sunglasses, fragrances,
leather goods, ties and scarves, jewelry and corporate gifts. Ashford believes
that its current luxury and premium product categories represent a significant
online commerce opportunity.
Traditional retail channels for luxury and premium products. Ashford
believes that the traditional retailers for luxury and premium products in the
United States today can be grouped as follows:
. high-end department stores and jewelry stores that often strive to provide
a high level of customer service and a knowledgeable sales staff, but
typically offer a limited selection of mid-range to high-end products;
. national department stores that tend to carry broad selections of low-end
to mid-range products from brands that are complementary to the stores'
other offerings, but typically offer limited product-specific customer
service;
. specialty and single-brand stores, which are retail locations that carry a
broad selection of specific product categories, but are limited to the
geographic region in which the few physical stores are located; and
. boutiques, which are small stores, often located in malls that generally
carry a selection of the latest trends in lower-priced fashion products
and accessories.
Challenges in traditional luxury goods retailing. Ashford believes that
traditional store-based retailers face a number of challenges in providing a
satisfactory shopping experience for buyers of luxury and premium products.
. Selection is limited because physical retail space constrains the number
of styles and the amount of product inventory that may be carried by any
one store. In addition, the significant carrying costs of physical
inventory in multiple store locations require traditional store-based
retailers to focus their product selection on the most popular products
that produce the highest inventory turns, further limiting consumer
selection.
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. Traditional store-based retailers have a high cost structure. Most of the
leading luxury and premium product retailers are located either in the
most exclusive and expensive shopping locales or in high-cost retail
outlets or malls, both of which must be in close proximity to the target
buyers. This is because their sales are dependent on serving customers who
are willing to physically visit their stores.
. Traditional retailers sell luxury products often at a significantly higher
price than wholesale to cover high operating costs. As a result, consumers
ultimately pay for the high cost structure of the retail store.
. The needs of luxury goods customers are changing. Increasingly, luxury
goods brands are appealing to a broader, time-constrained customer base
that is not willing or able to spend the time necessary to shop in
traditional store-based retail locations.
. In many cases, customers are served by employees with limited knowledge
regarding the features of the products they sell, whether due to high
employee turnover, limited training or other factors.
. Traditional store-based retailers can only serve those customers who have
convenient access to their stores. These store-based retailers must open
new stores to serve additional geographic areas, resulting in significant
investments in inventory, physical space, leasehold improvements and the
hiring and training of store personnel.
Ashford believes that these challenges facing traditional store-based
retailers limit their ability to offer an extensive selection of luxury and
premium products, broad geographic coverage and convenient access, and staff
that is sufficiently knowledgeable to assist with significant customer
decisions typically involving purchases of several hundred dollars. As a
result, Ashford believes customers often do not find shopping for luxury and
premium products to be a convenient or enjoyable experience.
The Ashford.com Solution
Ashford's online store is designed to provide consumers with a convenient
and enjoyable shopping experience in a Web-based retail environment. Ashford
provides an extensive selection, detailed product information that enables
consumers to make informed decisions, competitive pricing compared to
traditional retail channels, a commitment to the highest level of customer
service and the convenience of online shopping. The key components of the
Ashford.com experience include:
Extensive product selection. Ashford offers a broad selection of luxury and
premium products that would be economically and physically difficult to offer
in a traditional store, together with the unique environment of the Internet
that enables Ashford to dynamically adjust its product mix and merchandising
strategy. Ashford's online store offers over 12,000 styles of products from
over 300 leading luxury brands across 11 product categories. Additionally, some
of the brands Ashford offers lack a U.S. distribution network, making them hard
to find in traditional retail outlets. Ashford believes that its extensive
selection increases the likelihood that the consumer will find the product they
would like to purchase.
Compelling content and detailed product information. Ashford's Web site
includes significant content and detailed product information to provide its
customers with a convenient and enjoyable shopping experience. Ashford's Web
site displays detailed product descriptions and product photos. For certain
brands, Ashford is dedicated pages to communicating specific brand histories
and key messages. Ashford also employs specialists with product expertise, such
as master watchmakers and a certified gemologist, who are available to address
detailed customer questions by phone or e-mail. Ashford's goal is to provide
its customers with the product information they need to make educated and
highly satisfactory purchase decisions.
Competitive prices and compelling value. Ashford offers its customers
products at competitive prices and, combined with its high-quality shopping
experience, provides compelling value.
Commitment to excellent customer service. Luxury and premium goods consumers
expect the highest level of personalized customer service, which Ashford is
committed to providing. Ashford's customer service
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representatives are available through phone and e-mail and are trained to
answer a broad array of questions regarding product styles, features and
technical specifications, as well as provide product recommendations. Before
shipping, Ashford inspects each product, and in the case of watches, sets the
time and date for the customer. In addition, Ashford offers gift-wrapping and
same-day shipping on orders placed before 4:00 p.m. CST (2:00 p.m. CST for
items in the diamonds and bridal department) and standard overnight shipping in
the United States. Ashford also offers a 30-day return policy on all products
to ensure customer satisfaction. Ashford also offers its watch customers a
certification of authenticity, repair and battery replacement services and an
Ashford.com warranty for the length of the manufacturer's warranty.
Personalized shopping experience. Ashford provides a convenient and
enjoyable shopping experience that addresses the dynamic needs of the luxury
goods customer. These services are designed to help consumers search through
Ashford's product offerings and make informed selections. Ashford's services
include:
. Search capability. Ashford's site offers search capabilities making it
easy for customers to find products on the site. Search criteria include
brand, price, keyword, size, features and other criteria.
. Real-time customer interaction. Using real-time, online customer
interaction software, Ashford's customer service representatives are able
to answer specific questions about its products and services. This feature
allows customers shopping from home with just one phone line to
communicate in real-time with a customer service representative without
losing their Internet connection and leaving Ashford's online store.
. In-stock notification. With the exception of diamonds, Ashford carries
almost all of its products in inventory. For items in stock, Ashford
clearly indicates to the customer on its Web site that Ashford can ship
the product generally within 24 hours. For an item not currently in stock,
Ashford indicates on its Web site that the customer can expect a longer
delivery time.
. Gifts and wish list. Ashford provides a variety of gift suggestions and
feature product suggestions for particular holidays. Ashford also provides
a wish list service that customers can use to provide friends and
relatives with gift ideas by e-mail. Customers buying gifts can choose
among a variety of gift-wrap styles at the time of order.
. Shopping hours. Ashford's online store provides consumers the opportunity
to shop from their homes, offices or other locations 24 hours a day, seven
days a week.
Geographic coverage. By selling online, Ashford is able to sell products
throughout the U.S. and worldwide where the products might not otherwise be
available. In addition, consumers are able to go to one location and find an
extensive selection as opposed to visiting several stores with limited product
offerings.
Business Strategy
Ashford's objective is to be one of the leading online retailers of luxury
and premium products. Key elements of its strategy include:
Focus on the premium retail watch market. Ashford has become what it
believes to be one of the leading sellers of watches on the Internet by
providing thousands of styles of new and vintage watches from premium brands at
competitive prices. Ashford intends to capitalize on its online market position
in watches to become the primary destination for consumers to purchase premium
watches. Ashford's objective is to grow its market position and expand its
customer base through superior execution and strong relationships with luxury
and premium brand owners.
Extend leadership position in fine watches to other product categories.
Ashford believes that there are excellent online market opportunities for a
variety of luxury and premium products, including leather goods, sunglasses,
fragrances, diamonds and jewelry. Over the past two years Ashford has enhanced
its product offerings by expanding into these luxury and premium product
categories, which has enabled it to leverage its
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customer base, brand name, merchandising expertise and distribution
capabilities. Ashford believes that offering a broad selection of luxury goods
will enable it to increase sales per customer visit, encourage repeat purchases
and expand its customer base.
Leverage leadership position in luxury and premium products to the corporate
gifts market. Ashford believes that there are excellent online opportunities
targeted to the business market for corporate gifts. Ashford believes that the
combination of its extensive selection, hands-on customer service and the
efficiencies of the Internet allow it to offer corporate accounts a more
convenient, customized and value added service. Ashford's objective is to grow
its market position in the corporate gift category by adding a regionalized
sales force to provide personalized service and access to premium brands more
conveniently via the Internet.
Build Ashford.com experience and brand. Ashford intends to establish a brand
identity that will support the creation of an Internet luxury community and
provide luxury brand owners a powerful new distribution channel consistent with
their luxury identities. Ashford will focus its brand campaign on convenience,
value, selection, trust and service. Ashford intends to create an environment
where its shoppers are confident that they have found a smarter, easier and
more compelling way to buy luxury goods. Ashford believes this approach will
support an ongoing relationship with and sales to its target customers who are
more likely to purchase its products.
Expand relationships with leading luxury brands. Ashford's intent is to be
the Internet retailer of choice for luxury and premium brands. Direct
relationships enable Ashford to purchase products more efficiently. Ashford
believes that its merchandising history and well-established relationships with
brand owners enable it to provide its customers with compelling product
offerings, while giving it access to additional sources of merchandise.
Pursue ways to increase Ashford's sales. Ashford intends to pursue new
opportunities to increase its sales by:
. continuing to take steps to add new customers and to promote repeat
purchases;
. establishing advantageous relationships with distributors and brand
owners; and
. acquiring complementary businesses, products and technologies.
Expand Ashford's operational and systems infrastructure. Ashford plans to
continue to devote resources to growing its systems and operational
infrastructure to handle increased volume, enhance its service offerings and
take advantage of the unique characteristics of online luxury goods retailing.
Ashford has developed technologies and implemented systems to support secure
and reliable online retailing. Ashford is committed to growing capacity rapidly
in order to sustain high levels of customer service.
The Ashford.com Online Retail Store
Ashford has designed its online retail store to be the primary place for
consumers to purchase luxury and premium products online. Ashford believes its
Web site provides a secure, reliable and enjoyable shopping experience in an
attractive, easy-to-use online store. The user interface is simple and
generally consistent throughout the site. The interface also has powerful
search features that allow customers to search products by brand, price,
keyword, size, features and other criteria. A consumer on Ashford's site can
browse the different departments of Ashford's store, conduct targeted searches,
view recommended products, verify product availability, visit Ashford's gifts
department and participate in promotions. Unlike a traditional retail store,
consumers can shop in the comfort and convenience of their homes or offices.
Ashford's Store Departments
Ashford has categorized products into different departments, including but
not limited to new watches, vintage watches, diamonds and bridal, jewelry,
writing accessories, sunglasses, fragrances and leather goods and handbags.
Within each department, products can be viewed by brand, or sorted by price,
keyword, size, features and other criteria. The following is a summary of
Ashford's most significant departments.
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New watches. Since inception, Ashford has focused on becoming the leading
retailer of fine watches on the Internet. Ashford offers over 7,500 new watch
styles from over 50 brands, providing outstanding selection for the customer.
Ashford's prices in this department generally range from $75 to over $30,000.
To date, Ashford's average purchase price in this department has been
approximately $500 per watch.
Vintage watches. This department offers Ashford's collection of fine,
vintage watches in various price ranges. Vintage watches are generally
high-quality brand, previously owned watches. These watches often attract
collectors or watch enthusiasts in search of a specific model. Unlike many
other sellers of vintage watches, Ashford offers a broad selection combined
with outstanding service, including maintenance, cleaning, a certification of
authenticity and extended warranties.
Diamonds and bridal. The diamonds and bridal department offers an extensive
collection of bridal jewelry and certified loose diamonds. Ashford carries a
broad selection of diamonds of various cuts, sizes and quality with prices
generally ranging from $99 to over $400,000. Ashford offers customers a unique
diamond purchasing experience through its "Build Your Ring" functionality that
enables customers to build and purchase custom rings interactively.
Jewelry. The jewelry department offers a broad selection of jewelry from
semi-precious stones to sterling silver with prices generally from $75 to over
$10,000 from leading jewelry manufacturers as well as Ashford's exclusive
Ashford Collection(TM).
Writing accessories. The writing accessories department offers fine pens,
pencils and stationery from leading brands, with prices generally ranging from
$20 to over $2,000. The collection includes over 700 styles from over 35
leading brands.
Sunglasses. This department offers Ashford's growing collection of
sunglasses, with prices generally ranging from $50 to over $350. The collection
includes over 500 styles from 35 brands.
Fragrances. The fragrance department offers a broad selection of over 200
fragrances. Ashford's prices in this department generally range from $30 to
$75.
Leather goods and handbags. This department offers over 500 styles of
leather goods products from 25 brands. Ashford's prices in this department
generally range from $25 to $1,200.
In March 2000, Ashford launched its corporate gift business offering an
additional 800 luxury products in new categories such as crystal, silver and
pewter that are targeted for the corporate market. Ashford believes that the
corporate gift market complements its retail offerings because it is less
seasonal and offers the opportunity for higher margins. In addition to offering
thematically organized corporate gifts, Ashford.com offers custom engraving,
etching and embossing to its corporate customers.
Merchandising
Ashford believes that the breadth and depth of its product selection,
together with the flexibility of its online store and its range of helpful and
useful shopping services, enable it to pursue a unique merchandising strategy.
Unlike store-based retail formats, Ashford's online store provides it with
significant flexibility with regard to the organization and presentation of its
product selection. To encourage purchases, Ashford features various promotions
on a rotating basis throughout the store and continually updates its online
recommendations. Ashford also actively creates and maintains pages that are
designed to highlight certain products and brands. The following are examples
of some of its specific merchandising strategies.
Featured products. Ashford frequently gives a product prominent placement on
the site, describes its key features and potentially highlights it as its
"collector's choice." Products that receive this merchandising focus generally
receive a boost in sales.
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Product bundling. To promote purchases of higher value items, Ashford
combines products from its large selection to offer bundling promotions.
Special promotions. Ashford offers certain products on promotion and provide
special pricing. The technological advantages of online retailing, compared to
traditional store-based retailing, allow Ashford to adjust its promotions
rapidly to promote targeted sales.
Ashford employs a dedicated team of buyers and merchandisers that
continually monitor the consistency and quality of Ashford's merchandising
efforts. This team, combined with its technology, is able to pursue a
merchandising strategy in which Ashford dynamically changes its product
offerings to enhance the consumer's shopping experience.
Marketing and Promotion
Ashford has designed its marketing and promotion strategy to build the
Ashford.com brand, increase customer traffic, promote the sales of new
products, maximize repeat purchases and build strong customer loyalty.
Ashford's marketing and promotional activities primarily target a customer
demographic that is more likely to buy its luxury and premium products. These
activities include both offline and online advertising. In fiscal 2001, Ashford
spent approximately $11.9 million on advertising, of which approximately 50%
was spent online.
Online advertising. Ashford has agreements with significant Internet
destinations under which its advertisement banner will appear on the screen
each time one of over several hundred watches or fashion accessory-related
words is entered as a search term by a user. Ashford also has month-to-month
banner advertising agreements with a broad range of online sites, including
major online portals. These agreements typically provide for minimum
impressions and Ashford renews these agreements on a month-to-month basis
depending on results. Ashford also advertises its site in conjunction with
other major online portals, Internet service providers and luxury and premium
market-related Web sites to build its brand and increase Ashford's reach on the
Internet. In addition, Ashford is an affiliate program and other initiatives
aimed at increasing traffic and supporting its brand development. Under its
affiliate program, Ashford pays its registered affiliates referral fees for
sales generated via their links to its Web site.
Online direct marketing. As its customer base grows, Ashford continues to
collect significant data about its customers' buying preferences and habits in
an effort to increase repeat purchases. Ashford intends to maximize the value
of this information by delivering meaningful information and special offers to
its customers via e-mail and other means. In addition, Ashford publishes a
weekly, online newsletter delivered by e-mail to subscribers in which Ashford
highlights important developments and special promotions.
Offline advertising. Ashford has used offline advertising to promote both
its brand and specific merchandising opportunities. Ashford's offline
advertising has primarily consisted of television advertisements and print
advertisements in magazines and newspapers. During fiscal 2001, Ashford shifted
its primary marketing focus from traditional print and broadcast media to
Internet and online media. Ashford believes Internet and online media provides
a more efficient and economical means of attracting new customers.
Other promotional activities. During April 2000, Ashford gave away the
Ashford Diamond, a 15-carat, colorless, internally flawless, pear-shaped
diamond worth an estimated $1.5 million as part of the Ashford.com Million
Dollar Diamond Giveaway contest. The promotion ran for several months during
the year and as part of the promotion Ashford made donations to designated
charities.
Fulfillment Operations
Ashford obtains its products from brands and a diverse network of
distributors, brokers and retailers. Ashford has ongoing efforts to continue to
expand the number of direct relationships with brand owners in all its
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product categories. For brands where Ashford does not have direct
relationships, Ashford buys products from a network of distributors, brokers
and retailers.
With the exception of diamonds, Ashford carries inventory on almost all of
the products available for sale on its site. Ashford stores its products and
conducts its fulfillment operations in its headquarters facility located in
Houston, Texas. When Ashford receives an order, Ashford immediately begins the
packaging and shipping operation. Most orders are shipped on the date of order
entry. Ashford's inventory management system tracks the quantities of all stock
keeping units, which enables it to display information about the availability
of the products on Ashford's Web site.
Ashford offers overnight shipping on all orders and next-day delivery on
orders placed before 4:00 p.m. CST (2:00 p.m. CST for items in the diamonds and
bridal department) along with a variety of other convenient delivery options.
Ashford has developed relationships with both United Parcel Service and Federal
Express to maximize its overall service level to all 50 states. The ability to
provide overnight delivery is an important ongoing service for its customers.
Customer Service
Ashford believes that its ability to establish and maintain long-term
relationships with its customers, earn their trust and encourage repeat visits
and purchases, largely depends on the strength of its customer support and
fulfillment operations and staff. Ashford is committed to providing the high
level of personalized customer service that luxury and premium goods consumers
expect. Ashford has a high-quality customer service staff with a broad range of
experience and knowledge enabling it to quickly respond to customer phone calls
and e-mails. Ashford provides extensive training to its customer service
representatives, including on-site training from manufacturers, to allow its
representatives to answer a broad array of questions regarding product styles,
features and technical specifications, as well as provide product
recommendations.
Ashford's customer service representatives are available through phone and
e-mail 24 hours a day, seven days a week. Before shipment, Ashford inspects
each product, and in the case of watches, adjusts the date and sets the time
for the customer. With the exception of diamonds, Ashford ships almost all of
its products on the date of order entry. Once shipment is made, Ashford
immediately sends e-mail confirmation to the customer. Ashford offers a 30-day
return policy on all products. Ashford also offers its watch customers a
certification of authenticity, repair and battery replacement services and an
extended warranty.
Operations and Technology
Ashford has implemented a broad array of site management, search, customer
interaction and distribution services and systems that Ashford uses to process
customer orders and payments. These services and systems use a combination of
Ashford's own and commercially available, licensed technologies. These
applications also manage the process of accepting, authorizing and charging
customer credit card orders with an address verification and approval system.
Ashford focuses its internal development efforts on creating, implementing and
enhancing specialized software that it uses to:
. accept and validate customer orders;
. enable customer service representatives to engage in real-time, online
interaction with multiple customers simultaneously;
. organize, place and manage orders with vendors;
. receive product and assign it to customer orders; and
. manage shipment of products to customers based on various ordering
criteria.
83
Ashford's systems are based on industry-standard architectures and have been
designed to reduce downtime in the event of outages or catastrophic
occurrences. Ashford's Web site is available 24 hours a day, seven days a week.
Ashford's system hardware is hosted at a third-party facility in Houston,
Texas, which provides redundant communications lines and emergency power
backup. Ashford has implemented load balancing systems and redundant servers to
provide fault tolerant service.
The market in which Ashford competes is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements and enhancements, and changing customer demands. Accordingly,
Ashford's future success will depend on its ability to:
. adapt to rapidly changing technologies;
. adapt its services to evolving industry standards; and
. continually improve the performance, features and reliability of its
service in response to competitive service and product offerings and
evolving demands of the marketplace.
Ashford's failure to adapt to market changes could harm its business. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by Ashford to modify or adapt its services or
infrastructure. This could have a material adverse effect on Ashford's
business, results of operations and financial condition.
Government Regulation
Ashford is not currently subject to direct federal, state or local
regulation other than regulations applicable to businesses generally and
directly applicable to online commerce, as well as the secondhand watch
statutes enacted in several states, as discussed below. However, as Internet
use gains popularity, it is possible that a number of laws and regulations may
be adopted with respect to the Internet. These laws may cover issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Furthermore, the growth of online commerce may prompt
calls for more stringent consumer protection laws. Several states have proposed
legislation to limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission has also initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties. Ashford does not currently provide personal
information regarding its users to third parties. However, the adoption of
additional consumer protection laws could create uncertainty in Web usage and
reduce the demand for Ashford's products and services.
Ashford is not certain how its business may be affected by the application
of existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted
prior to the advent of the Internet. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes in
laws that are intended to address these issues could create uncertainty in the
Internet market place. This uncertainty could reduce demand for Ashford's
services or its cost of doing business may increase as a result of litigation
costs or increased service delivery costs.
In addition, because Ashford's services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that
Ashford is required to qualify to do business in that state or foreign country.
Ashford's failure to qualify in a jurisdiction where it is required to do so
could subject it to taxes and penalties. It could also hamper Ashford's ability
to enforce contracts in these jurisdictions. The application of laws or
regulations from jurisdictions whose laws do not currently apply to Ashford's
business could have a material adverse effect on its business, results of
operations and financial condition.
Several states have laws regulating the sale of secondhand watches. For
example, California, New York and Texas prohibit anyone from representing as
"new" any watch that has had its serial number removed. Pursuant to
84
these laws, a watch with a serial number removed must clearly be labeled as
"secondhand" even if it has never been worn. Ashford has implemented procedures
whereby all of its buyers explicitly communicate to suppliers that Ashford will
only buy a watch if its serial number has not been removed. In addition,
Ashford inspects each watch it sells that is manufactured with a serial number
to ensure that the watch has a serial number prior to shipment. If a court were
to find, however, that Ashford is violated these statutes, it could be subject
to civil or criminal penalties.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. Since the introduction of online commerce, the number of online
commerce Web sites competing for customer attention has increased rapidly.
Ashford expects future competition to intensify given the relative ease with
which new Web sites can be developed.
Ashford currently competes or potentially will compete with a variety of
competitors, including the following:
. traditional retailers of luxury and premium products, which may compete
with both an online and offline presence, including high-end department
stores such as Saks Fifth Avenue and Neiman Marcus, jewelers such as Zales
and national department stores such as Macy's;
. manufacturers of Ashford's products that decide to sell directly to
end-customers, either through physical retail outlets or through an online
store;
. other online retailers of luxury and premium products, including online
service providers that feature shopping services; and
. catalog retailers of luxury and premium products.
Ashford believes that the following are the principal competitive factors in
its market:
. brand recognition;
. selection;
. convenience;
. order delivery performance;
. customer service;
. site features and content; and
. price.
Many of Ashford's current and potential traditional store-based and online
competitors, particularly the traditional store-based retailers and the brand
owners of products Ashford sells, have longer operating histories, larger
customer or user bases, greater brand recognition and significantly greater
financial, marketing and other resources than Ashford does. Many of these
current and potential competitors can devote substantially more resources to
Web site and systems development than Ashford can. In addition, larger,
well-established and well-financed entities may acquire, invest in or form
joint ventures with online competitors.
Ashford's competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than Ashford can.
Traditional store-based retailers also enable customers to see and feel
products in a manner that is not possible over the Internet. Given Ashford's
limited operating history, many of its competitors have significantly greater
experience selling luxury and premium products. For example, established
catalog retailers may have greater experience than Ashford does in marketing
and selling goods with in-person customer interaction.
Ashford's online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies,
85
such as price comparison programs that select specific titles from a variety of
Web sites and may direct customers to other online retailers, may increase
competition.
Intellectual Property
Ashford relies on various intellectual property laws and contractual
restrictions to protect its proprietary rights in products and services. These
include confidentiality, invention assignment and nondisclosure agreements with
Ashford's employees, contractors, vendors and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use Ashford's intellectual property without Ashford's authorization. In
addition, Ashford pursues the registration of its trademarks and service marks
in the U.S. and internationally. However, effective intellectual property
protection may not be available in every country in which Ashford's services
are made available online.
Ashford relies on technologies that it licenses from third parties. These
licenses may not continue to be available to Ashford on commercially reasonable
terms in the future. As a result, Ashford may be required to obtain substitute
technology of lower quality or at greater cost, which could materially
adversely affect its business, results of operations and financial condition.
As of the date of this filing, Ashford is not been notified that its
technologies infringe the proprietary rights of any third party. However, there
can be no assurance that third parties will not claim infringement by Ashford
with respect to its current or future technologies. Ashford expects that
participants in its markets will be increasingly subject to infringement claims
as the number of services and competitors in its industry segment grows. Any
infringement claim, with or without merit, could be time-consuming, result in
costly litigation, cause service upgrade delays or require Ashford to enter
into royalty or licensing agreements. These royalty or licensing agreements
might not be available on terms acceptable to Ashford or at all. As a result,
any claim of infringement against Ashford could have a material adverse effect
upon its business.
Employees
As of September 30, 2001, Ashford had 170 full-time and part-time employees.
Ashford also employs independent contractors to perform duties in various
departments. None of Ashford's employees is represented by a labor union.
Ashford has not had any work stoppages and consider its employee relations to
be good. Ashford believes that its success is dependent on its ability to
attract and retain qualified personnel in numerous areas.
Properties
Ashford's corporate offices and fulfillment operations are located in
Houston, Texas, where Ashford leases approximately 76,000 square feet under a
lease that provides for aggregate annual lease payments through the term of the
lease expiring in April 2003.
Legal Proceedings
Since July 11, 2001, several stockholder class action complaints have been
filed in the United States District Court for the Southern District of New York
against Ashford, several of Ashford's officers and directors, and various
underwriters of Ashford's initial public offering. The purported class actions
have all been brought on behalf of purchasers of Ashford common stock during
various periods beginning on September 22, 1999, the date of Ashford's initial
public offering. The plaintiffs allege that Ashford's prospectus, incorporated
in Ashford's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, was materially false and misleading because it failed to
disclose, among other things, certain fees and commissions collected by the
underwriters or arrangements designed to inflate the price of the common stock.
The plaintiffs further allege that because of these purchases, Ashford's
post-initial public offering stock price was artificially inflated. As a result
of the alleged omissions in the prospectus and the purported inflation of the
stock price, the plaintiffs claim violations of Sections 11 and 15 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934. The complaints have been consolidated into a single action. Ashford
believes that it has meritorious defenses against these actions and intends to
vigorously defend them. Ashford is also subject to various other claims and
legal actions arising in the ordinary course of business. In the opinion of
Ashford's management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material effect on
Ashford's business, financial condition or results of operations.
86
ASHFORD.COM, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial and operating data should be
read in conjunction with Ashford's consolidated financial statements and notes
thereto, which are included elsewhere in this prospectus/proxy statement, and
the section of this prospectus/proxy statement entitled "Ashford Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected consolidated financial data reflect that prior to March 31,
1998, Ashford had no operations or activities. The following selected
consolidated financial data for the period from inception through March 31,
1999 and the years ended March 31, 2000 and 2001, respectively, were derived
from Ashford's audited consolidated financial statements appearing elsewhere in
this prospectus/proxy statement. Ashford's independent public accountant's
report on the financial statements for the year ended March 31, 2001 included
an explanatory fourth paragraph expressing substantial doubt as to Ashford's
ability to continue as a going concern. The following selected consolidated
financial data for the three months ended June 30, 2000 and 2001, respectively,
were derived from Ashford's unaudited financial statements appearing elsewhere
in this prospectus/proxy statement and includes all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
information when read in conjunction with the audited financial statements and
the notes thereto. Ashford was incorporated in March 1998, and did not commence
operations or activities until April 1998.
Period from Year Year Three Months Ended
Inception Ended Ended ------------------
through March 31, March 31, June 30, June 30,
March 31, 1999 2000 2001 2000 2001
-------------- --------- --------- -------- --------
(unaudited)
(in thousands, except per share amounts)
Statement of Operations Data:
Net sales...................................... $ 5,938 $ 39,931 $ 67,195 $ 13,105 $ 12,106
Cost of sales.................................. 5,110 33,487 56,348 10,666 10,099
------- -------- --------- -------- --------
Gross profit(1)................................ 828 6,444 10,847 2,439 2,007
Operating expenses:
Marketing and sales (includes non-cash
amortization of $0, $27,525, $79,735,
$26,034 and $304, respectively).............. 1,013 60,806 105,895 32,823 3,096
General and administrative (includes non-
cash amortization of $0, $3,003, $2,633,
$847 and $272, respectively)(2).............. 1,019 17,093 27,929 6,748 5,470
Settlement loss................................ -- -- -- -- 2,297
Loss on sale of assets......................... -- -- -- -- 620
Restructuring charge........................... -- -- 662 -- 399
Impairment loss................................ -- -- 1,094 -- --
Depreciation and amortization.................. 67 3,277 13,460 2,654 3,882
------- -------- --------- -------- --------
Total operating expenses.......................... 2,099 81,176 149,040 42,225 15,764
------- -------- --------- -------- --------
Loss from operations.............................. (1,271) (74,732) (138,193) (39,786) (13,757)
Interest income................................... 13 2,677 1,644 684 87
Interest expense.................................. (6) (7) (132) -- (86)
------- -------- --------- -------- --------
Net loss before discontinued operations........... (1,264) (72,062) (136,681) (39,102) (13,756)
Net loss from discontinued operations............. -- -- -- -- 667
------- -------- --------- -------- --------
Net loss.......................................... $(1,264) $(72,062) $(136,681) $(39,102) $(14,423)
======= ======== ========= ======== ========
Net loss before discontinued operations per share,
basic and diluted............................... $ (0.12) $ (2.65) $ (2.99) $ (0.87) $ (0.27)
Net loss from discontinued operations per share,
basic and diluted............................... $ -- $ -- $ -- $ -- $ (0.01)
Net loss per share, basic and diluted............. $ (0.12) $ (2.65) $ (2.99) $ (0.87) $ (0.28)
Shares used to compute net less per share, basic
and diluted..................................... 10,397 27,197 45,725 45,099 51,188
87
March 31,
----------------------- June 30,
1999 2000 2001 2001
------ -------- ------- -----------
(unaudited)
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........... $ 893 $ 46,474 $ 7,095 $ 4,571
Working capital..................... 2,555 148,898 23,861 23,298
Total assets........................ 5,108 177,608 56,266 41,377
Total long-term liabilities......... -- 117 104 97
Total stockholders' equity.......... 2,808 171,270 43,268 33,361
--------
(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 year ended March
31, 2001, relating to inventory valuation reserves. See Note 2 of Notes to
Consolidated Financial Statements included elsewhere in this
prospectus/proxy statement.
(2) Includes non-recurring charges of approximately $400,000 during the year
ended March 31, 2001, relating to the pending settlement of litigation. See
Note 12 of Notes to Consolidated Financial Statements included elsewhere in
this prospectus/proxy statement.
88
ASHFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this prospectus/proxy statement contains forward-looking
statements (as such term is defined in Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934) that involve risks
and uncertainties. Ashford's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and in the
"Risk Factors" section included in this prospectus/proxy statement.
Overview
Ashford was incorporated on March 6, 1998 and commenced operations and began
offering products for sale on its Web site in April 1998. Ashford initially
focused exclusively on the sale of new and vintage watches. Since inception,
Ashford has focused on broadening its product offerings, establishing
relationships with luxury and premium brand owners, generating sales momentum
and expanding its operational and customer service capabilities. Ashford has
grown rapidly since launching its site in April 1998 and has experienced
significant increases in its net sales and corresponding cost of sales since
inception. Ashford currently offers more than 12,000 styles of products from
over 300 leading luxury brands. Ashford is currently focusing its efforts on
continuing to increase net sales while maintaining or decreasing current
expense levels. Ashford plans to continue the growth of its corporate gift
business, which generally generates higher margin sales and is less seasonal in
nature than its traditional retail sales, and its newer, higher margin product
categories, such as its Ashford Collection jewelry. As part of a larger effort
to improve overall operating efficiencies and lower total operating costs as a
percentage of sales, Ashford has specifically reduced its traditional print and
media marketing activities and has focused on Internet and online media, which
Ashford believes to be a more efficient and economical means of attracting new
customers. Other specific initiatives designed to improve financial performance
and liquidity management include reducing the scope of product offerings,
decreasing Ashford's investment in inventory and eliminating certain operating
costs, including personnel costs.
As stated above, Ashford plans to continue the growth of its corporate gift
business, which was introduced in March 2000. Ashford's corporate gift business
offers over 800 products such as crystal, silver and pewter that appeal to the
corporate market. These products usually generate higher margin sales and are
less seasonal in nature than its traditional retail sales. Also, many corporate
gift products are finished with custom engraving, etching or embossing, which
further increases Ashford's margin.
The market for luxury and premium products is highly seasonal, with a
disproportionate amount of net sales occurring during the fourth calendar
quarter. Therefore, Ashford increases its purchases of inventory during and in
advance of that quarter. Although less significant, seasonal sales periods
occur in February due to Valentine's Day and in May and June due to graduation
gift giving, Mother's Day and Father's Day. Ashford expects that these trends
will continue in future periods.
Ashford's gross margin will fluctuate in future periods based on factors
such as:
. product sales mix;
. the mix of direct and indirect sources of inventory;
. pricing strategy;
. promotional activities;
. inventory management; and
. inbound and outbound shipping costs.
Ashford has incurred net losses since inception and expects to generate
negative cash flows during future periods. Ashford's ability to become
profitable depends on its ability to generate and sustain substantially higher
89
net sales while maintaining reasonable expense levels, both of which are
uncertain. If Ashford does achieve profitability, it cannot be certain that it
would be able to sustain or increase profitability on a quarterly or annual
basis in the future.
Ashford has a limited operating history upon which to base an evaluation of
its business and prospects. As a result of Ashford's limited operating history,
it is difficult to accurately forecast Ashford's net sales, and Ashford has
limited meaningful historical financial data upon which to base projected
operating expenses. Ashford bases its current and future expense levels on its
operating plans and estimates of future net sales, and its expenses are fixed
to a large extent. Sales and operating results are difficult to forecast
because they generally depend on the volume and timing of the orders Ashford
receives. As a result, Ashford may be unable to adjust its spending in a timely
manner to compensate for any unexpected revenue shortfall. This inability could
cause Ashford's net losses in a given quarter to be greater than expected and
could significantly limit or delay its ability to generate net profits in any
future period.
The Securities and Exchange Commission is conducting an investigation
concerning Ashford's accounting and disclosures relating to certain marketing
activities during fiscal years 2000 and 2001. Ashford has been cooperating with
the Securities and Exchange Commission, and Ashford will continue to do so.
Ashford's audit committee also has completed an internal review of certain
matters related to the Securities and Exchange Commission review. Ashford does
not believe that any of the accounting issues raised by the Securities and
Exchange Commission will have a material effect on its financial statements.
Results of Operations
Comparison of the Three-Month Period Ended June 30, 2001 and the Three-Month
Period Ended June 30, 2000:
Net Sales
Net sales consist of product sales and are net of product returns, coupons
and promotional discounts. Net sales decreased from $13.1 million for quarter
ended June 30, 2000 to $12.1 million for quarter ended June 30, 2001. The
decrease in net sales was affected by a general decline in retail spending and
reduced marketing and sales efforts net of an increase in corporate gift
activity attributed to the addition of new salespeople and a business
acquisition during the quarter ended December 2000.
Cost of Sales
Cost of sales consists primarily of the cost of products sold, free product
and service incentives delivered to customers at the time of sale, inbound and
outbound shipping costs and warranty and inventory obsolescence costs. Cost of
sales decreased as net sales decreased. Gross profit decreased from $2.4
million for quarter ended June 30, 2000 to $2.0 million for quarter ended June
30, 2001. Gross margin decreased from 19% for the quarter ended June 30, 2000
to 17% for the quarter ended June 30, 2001. Gross margin was affected by a
targeted promotional offer implemented with one of Ashford's corporate
marketing partners during the June 2001 quarter and by its actions to narrow
product assortment and reduce its overall investment in merchandise inventory
net of increased sales from corporate gifts which generally generate higher
gross margin. Ashford anticipates gross margin improvements in future periods
as Ashford continues to grow its corporate gift business, develop its newer
higher-margin product categories such as home and lifestyle products and its
Ashford Collection jewelry, and complete its activities to reduce product
assortment and to reduce its overall investment in merchandise inventory.
Ashford also expects gross margin improvements in future periods as a result of
its efforts to reduce certain expenses such as outbound shipping costs which
now are paid by the customer on most orders.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related
employee salary and benefit expenses and amortization of related deferred
90
compensation. Fulfillment activities include receiving of goods, picking of
goods for shipment and packaging of goods for shipment. Fulfillment costs,
including the cost of operating and staffing distribution centers, are included
in marketing and sales. Marketing and sales expenses decreased from
approximately $32.8 million for quarter ended June 30, 2000 to $3.1 million for
quarter ended June 30, 2001. The decrease in marketing and sales is
attributable to a decrease in non-cash amortization from $26.0 million for
quarter ended June 30, 2000 to $0.3 million for quarter ended June 30, 2001
primarily relating to a marketing contract entered into with another online
retailer during the latter part of fiscal 2000 that expired in fiscal 2001.
Excluding non-cash amortization, the decrease in marketing and sales is
primarily attributable to a reduction in traditional print and media marketing
activities and implementation of new and modified agreements with Internet and
online media providers at improved advertising rates or with
pay-for-performance provisions. During fiscal 2001, Ashford shifted its primary
marketing focus from traditional print and broadcast media to Internet and
online media. Ashford believes Internet and online media provides a more
efficient and economical means of attracting new customers. Ashford's
advertising and promotional expenditures are generally intended to build brand
awareness, generate site traffic and increase overall sales. Ashford expects
its marketing and sales expense to continue to decline as a percentage of sales
in future periods as Ashford continues its focus of becoming more efficient and
economical at acquiring customers. See also "Recent Accounting Pronouncements."
General and Administrative. General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
amortization of related deferred compensation, professional fees, Web site
maintenance, office lease expenses and other general corporate expenses.
General and administrative expenses decreased from $6.7 million for quarter
ended June 30, 2000 to $5.5 million for quarter ended June 30, 2001. Ashford's
general and administrative expenses have decreased primarily due to costs
associated with decreased headcount as a result of its restructuring activities
during January 2001 and May 2001 and decreased amortization of related deferred
compensation. Ashford expects its general and administrative expenses to
continue to decline in future periods as Ashford realizes a full period of
benefit from restructuring activities during May 2001, and as it implements
further operating cost efficiencies.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation related to property and equipment and amortization
related to intangible assets. Depreciation and amortization expense increased
from $2.7 million for quarter ended June 30, 2000 to $3.9 million for quarter
ended June 30, 2001. The increase is primarily due to depreciation and
amortization expense related to Internet domain and other intangible asset
purchases.
Interest Income. Interest income consists of earnings on cash and cash
equivalents. The decrease in interest income for quarter ended June 30, 2001 is
due to lower cash balances during the quarter. See also "Liquidity and Capital
Resources."
Interest Expense. Interest expense consists of interest costs on borrowings.
The increase in interest expense for quarter ended June 30, 2001 is due to
borrowings on its revolving credit facility entered into during September 2000.
Comparison of Fiscal 2001 and Fiscal 2000:
Net Sales
Net sales consist of product sales and are net of product returns, coupons
and promotional discounts. Net sales increased from $39.9 million for fiscal
2000 to $67.2 million for fiscal 2001. The growth in net sales is primarily
related to an increase in units sold due to the growth of Ashford's customer
base and the growth of its corporate gift business, including a business
acquisition. The growth in the rate of repeat purchases from existing customers
and the introduction of new product lines during the latter part of fiscal 2000
also contributed to Ashford's net sales growth. Net sales were adversely
affected during the latter part of fiscal 2001 by a general decline in retail
spending and reduced marketing and sales efforts.
91
Cost of Sales
Cost of sales consists primarily of the cost of products sold, free product and
service incentives delivered to customers at the time of sale, inbound and
outbound shipping costs and warranty and inventory obsolescence costs. Cost of
sales increased as net sales increased. Gross profit increased from $6.4
million for fiscal 2000 to $10.8 million for fiscal 2001. The increase in gross
profit is due to several factors. The primary factor is the continued growth of
Ashford's corporate gift business, including a recent acquisition, which has
generated higher-margin sales to date than its traditional retail sales. In
addition, Ashford has reduced the amount of free product and service incentives
offered to customers at the time of purchase. See also "Recent Accounting
Pronouncements." Finally, Ashford continues to see a favorable shift in the mix
of products sold from lower-margin products to higher-margin products due to
the addition and continued expansion of new product categories. Gross margin
was adversely affected by an inventory obsolescence charge of approximately
$1.8 million recorded during the fourth quarter of fiscal 2001 as a result of
Ashford's focus on reducing inventory levels. Ashford anticipates continued
gross margin improvements in future periods as it continues to grow its
corporate gift business and its newer higher-margin product categories such as
home and lifestyle products and its Ashford Collection jewelry. Ashford also
expects gross margin improvements in future periods as a result of its efforts
to reduce certain expenses such as outbound shipping costs which now are paid
by the customer on most orders.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related
employee salary and benefit expenses and amortization of related deferred
compensation. Fulfillment activities include receiving of goods, picking of
goods for shipment and packaging of goods for shipment. Fulfillment costs,
including the cost of operating and staffing distribution centers, are included
in marketing and sales. Marketing and sales expenses increased from
approximately $60.8 million for fiscal 2000 to $105.9 million for fiscal 2001.
The increase in marketing and sales is attributable to an increase in non-cash
amortization from $27.5 million for fiscal 2000 to $79.7 million for fiscal
2001 primarily relating to a marketing contract entered into with another
online retailer during the latter part of fiscal 2000 that expired in fiscal
2001. Excluding non-cash amortization, the decrease in marketing and sales is
primarily attributable to a reduction in traditional print and media marketing
activities. During fiscal 2001, Ashford shifted its primary marketing focus
from traditional print and broadcast media to Internet and online media.
Ashford believes Internet and online media provides a more efficient and
economical means of attracting new customers. Ashford's advertising and
promotional expenditures are generally intended to build brand awareness,
generate site traffic and increase overall sales. Ashford expects its marketing
and sales expense to continue to decline as a percentage of sales in future
periods as it continues its focus of becoming more efficient and economical at
acquiring customers. See also "Recent Accounting Pronouncements."
General and Administrative. General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
amortization of related deferred compensation, professional fees, Web site
maintenance, office lease expenses and other general corporate expenses.
General and administrative expenses increased from $17.1 million for fiscal
2000 to $27.9 million for fiscal 2001. Ashford's general and administrative
expenses have increased primarily as a result of costs associated with
increased headcount, property and franchise taxes and legal costs related to
its overall growth and expanded activities. In the future, Ashford expects its
general and administrative expenses to decrease as a result of its
restructuring activities during January 2001 and May 2001.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation related to property and equipment and amortization
related to intangible assets. Depreciation and amortization expense increased
from $3.3 million for fiscal 2000 to $13.5 million for fiscal 2001. The
increase is primarily due to depreciation and amortization expense related to
Internet domain and other intangible asset purchases as well as Web site
development costs and technology equipment purchases beginning in the latter
half of fiscal 1999 and continuing through the latter part of fiscal 2001.
92
Interest Income. Interest income consists of earnings on cash and cash
equivalents. Interest income decreased from $2.7 million for fiscal 2000 to
$1.6 million for fiscal 2001. The decrease is due to lower cash balances during
the current year. See also "Liquidity and Capital Resources."
Interest Expense. Interest expense consists of interest costs on borrowings.
The increase in interest expense for fiscal 2001 is due to borrowings on
Ashford's revolving credit facility entered into during September 2000.
Comparison of Fiscal 2000 and Fiscal 1999:
Net Sales
Net sales consist of product sales and are net of product returns, coupons
and promotional discounts. Net sales increased from $5.9 million for fiscal
1999 to $39.9 million for fiscal 2000. The growth in net sales reflects a
significant increase in units sold principally due to the growth in Ashford's
customer base and repeat purchases from its existing customers, in addition to
the introduction of new product lines during fiscal 2000. The increase in site
traffic and awareness results primarily from advertising expenditures and
additional product offerings and availability that were financed through
Ashford's convertible preferred and common stock offerings.
Cost of Sales
Cost of sales consists primarily of the cost of products sold, free product
and service incentives delivered to customers at the time of sale, inbound and
outbound shipping costs and warranty and inventory obsolescence costs. Cost of
sales increased as net sales increased. Gross profit increased from $828,000
for fiscal 1999 to $6.4 million for fiscal 2000. Gross margin increased from
14% during fiscal 1999 to 16% during fiscal 2000. The increase in gross margin
is principally due to the addition of new product categories, the mix of
products sold and abnormally low margins during the prior year resulting from
start-up activities.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising costs, credit card fees, fulfillment activities and related
employee salary and benefit expenses and amortization of related deferred
compensation. Fulfillment activities include receiving of goods, picking of
goods for shipment and packaging of goods for shipment. Fulfillment costs,
including the cost of operating and staffing distribution centers, are included
in marketing and sales. Marketing and sales expenses increased from
approximately $1.0 million for fiscal 1999 to $60.8 million for fiscal 2000.
The increase in marketing and sales is partially attributable to an increase in
non-cash amortization from $0 for fiscal 1999 to $27.5 million for fiscal 2000
primarily relating to a marketing contract entered into with another online
retailer during the latter part of fiscal 2000 which expired in fiscal 2001.
The remaining increase during fiscal 2000 is primarily due to increased
advertising and promotional expenditures, amortization of deferred
compensation, and increased payroll and related costs associated with
fulfilling customer demand. Ashford's advertising and promotional expenditures
are intended to build brand awareness, generate site traffic and increase
overall sales.
General and Administrative. General and administrative expenses include
executive, finance and administrative employee salaries and benefits,
amortization of related deferred compensation, professional fees, Web site
maintenance, office lease expenses and other general corporate expenses.
General and administrative expenses increased to $17.1 million for fiscal 2000
compared to $1.0 million for fiscal 1999. The increase in general and
administrative expenses was primarily a result of expenses associated with
increased headcount, new office space and professional fees related to
Ashford's growth and expanded activities.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation related to property and equipment as well as amortization
related to purchased intangibles and other assets. Depreciation
93
and amortization expense was $3.3 million for fiscal 2000 compared to $67,000
in fiscal 1999. The increase relates to Internet domain names and other
intangible assets purchased during fiscal 2000 and technology and other
equipment purchased in the latter half of fiscal 1999 and continuing through
fiscal 2000. Internet domain names and related intangible assets purchased in
connection with business acquisitions are amortized over their estimated useful
lives, which is deemed to be two years.
Interest Income. Interest income consists of earnings on cash and cash
equivalents. The increase during fiscal 2000 relates to interest earned on cash
balances resulting from Ashford's Series B and Series C convertible preferred
stock offerings in April 1999 and July 1999, respectively, and interest earned
on cash balances resulting from its initial public offering in late September
1999. Interest income was $2.7 million during fiscal 2000 compared to $13,000
during fiscal 1999.
Liquidity and Capital Resources
General. Ashford has financed its operations primarily through private sales
of convertible preferred stock, an initial public offering and the private sale
of its common stock. The proceeds from these offerings have been used primarily
to fund Ashford's operations, including inventory purchases, marketing and
advertising campaigns, employee salaries and equipment purchases.
Operating Activities. Net cash used in operating activities decreased from
$5.5 million for the quarter ended June 30, 2000 to $5.0 million for the
quarter ended June 30, 2001. Ashford's net operating cash outflow for the
quarter ended June 30, 2000 was primarily a result of prepaid marketing
agreements, inventory purchases and, to a lesser extent, operating losses,
exclusive of non-cash depreciation and amortization. Ashford's operating cash
outflow during the quarter ended June 30, 2001 was primarily a result of
operating losses, exclusive of non-cash depreciation and amortization,
restructuring charge, settlement loss, and loss on sale of assets and decreases
in accounts payable and accrued liabilities and merchandise inventory. Ashford
anticipates its net cash used in operating activities to continue to decline in
future periods in connection with its efforts to improve overall operating
efficiencies, lower total operating costs as a percentage of sales and improve
inventory management practices and procedures.
Investing Activities. Net cash provided by investing activities totaled $7.2
million for the quarter ended June 30, 2001 compared to net cash used in
investing activities of $2.8 million for the quarter ended June 30, 2000. Net
cash provided by investing activities during the quarter ended June 30, 2001
primarily consisted of $7.3 million related to a merger agreement with an
online art retailer and $100,000 related to property and equipment purchases.
Net cash used in investing activities during the quarter ended June 30, 2000
consisted of approximately $2.8 million related to the purchase of computer and
office equipment and Web site enhancements as well as leasehold improvements
associated with leased office and warehouse facilities.
Financing Activities. Net cash used in financing activities totaled $4.7
million during quarter ended June 30, 2001. Financing activities related to
payments on Ashford's revolving credit facility.
Commitments. As of June 30, 2001, Ashford's principal commitments consisted
of obligations outstanding under non-cancelable operating leases. Ashford has
no material commitments for capital expenditures.
Credit Facility. During September 2000, Ashford 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 Ashford's
assets. Availability under the credit facility is determined pursuant to a
borrowing base as defined in the agreement, and was $8.9 million on June 30,
2001. Amounts outstanding under the credit facility bear interest at the prime
rate or LIBOR plus 250 basis points, as elected by Ashford. There were no
amounts outstanding under the revolving credit facility as of June 30, 2001.
94
During the quarter ended September 30, 2001, an independent appraisal firm
completed a periodic appraisal of Ashford's inventory as required under the
revolving credit facility. This appraisal resulted in a decrease in Ashford's
borrowing base from approximately 42% to 31% of eligible inventory, as defined
in the revolving credit facility. The primary reasons cited by the appraiser
for this decrease were a general oversupply of inventory in the wholesale
marketplace, resulting in a lower rate of recovery and, to a lesser extent, a
shift in Ashford's inventory mix away from loose diamonds (the highest recovery
inventory category). This decrease in availability will result in a reduced
amount of liquidity available under the revolving credit facility during future
periods.
Financial Condition. Ashford has suffered significant losses from operations
since its inception. Management is implementing a strategy to significantly
reduce costs and improve operating efficiencies. Management believes that
Ashford's current cash balances and borrowing capacity will be sufficient to
meet anticipated needs through at least the end of the next fiscal year,
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 Ashford's ability to
continue as a going concern. If current cash and cash that may be generated
from future operations are insufficient to satisfy Ashford'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 Ashford, if at all. Ashford'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 Ashford 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 Ashford's
liquidity requirements or cause Ashford to issue additional equity or debt
securities.
Restructuring and Other Matters. During the fourth quarter ended March 31,
2001, in connection with management's plan to reduce costs and improve
operating efficiencies, Ashford 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 Ashford's workforce,
across all areas of Ashford.
During the first quarter ended June 30, 2001, Ashford 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 Ashford's
investment in inventory and eliminating certain operating costs, including
costs associated with personnel. In connection with this review, Ashford
recorded charges of approximately $0.5 million for headcount reductions.
Headcount reductions consisted of approximately 46 employees, or about 19% of
Ashford's workforce, across all areas of Ashford.
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 Ashford 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. The remaining $0.1 million of
restructuring costs is expected to be paid through December 31, 2001.
In February 2001, Ashford entered into a merger agreement with an online
watch retailer. During June 2001, as a result of certain business difficulties
that arose in the relationship between Ashford and the former principals of the
online watch retailer and to resolve litigation between them, the parties began
negotiating a dissolution of that relationship. Ashford and the online watch
retailer agreed to a settlement whereby the online watch retailer and certain
of the online watch retailer'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 Ashford common stock to settle
all potential future claims and obligations. Ashford recorded a charge of
approximately $2.3 million in connection with this settlement during the
quarter ended June 30, 2001.
95
In May 2001, Ashford closed a merger agreement with an online art retailer.
In connection with the agreement, Ashford issued approximately 7.1 million
shares of Ashford common stock and options and warrants to purchase
approximately 1.6 million shares of Ashford 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
Ashford common stock, $0.7 million of options and warrants to purchase shares
of Ashford 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, Ashford concluded that the operating
cost structure of the online art retailer was inconsistent with the level of
sales activity and overall objectives of Ashford. In June 2001, the prior
management of the online art retailer made a proposal to Ashford, which Ashford
accepted, to assume the prospective operations of the online art retailer as a
separately capitalized entity. Pursuant to this agreement, Ashford 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, Ashford and
the new entity entered into a revenue sharing agreement whereby Ashford offers
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 Ashford's Web site.
Ashford will not assume any future operating costs or obligations. Further,
substantially all Ashford's employees previously employed by the online art
retailer became employees of the new entity or were terminated.
Activity related to art operations during the period 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, have been reflected as net loss from discontinued
operations in the accompanying financial statements. Losses from the
measurement date through the separation date, July 31, 2001, have been deferred
as there is 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. Total net assets acquired in excess of purchase price related to
discontinued operations was approximately $2.9 million at June 30, 2001.
Ashford expects to recognize a net gain on disposal of discontinued operations
of approximately $2.0 million during the quarter ending September 30, 2001.
During June 2001, Ashford 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 ending September 2001. Ashford recorded a loss on sale of approximately
$0.5 million during the quarter ending June 2001.
Recent Accounting Pronouncements
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. Under the new statements, Ashford's purchased
intangibles would continue to be amortized consistent with its current policy.
Although Ashford has not made a final determination, upon adoption of these
standards, Ashford expects to record any goodwill as income or expense.
96
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. Ashford
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. Ashford classifies inbound and outbound shipping costs as costs
of sales. Ashford generally does not impose separate handling charges on
customers. However, during fiscal year 2001, Ashford began charging for
shipping costs. Ashford 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 $0.8 million during both quarters
ended June 30, 2001 and 2000.
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.
Quantitative and Qualitative Disclosures About Market Risk
Ashford has assessed its vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash, cash
equivalents and short-term investments. Due to the short-term nature of these
investments and Ashford's investment policies and procedures, Ashford has
determined that the risk associated with interest rate fluctuations related to
these financial instruments does not pose a material risk to Ashford.
97
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF ASHFORD
The following table sets forth, as of September 30, 2001, certain
information known to Ashford regarding the beneficial ownership of Ashford
common stock by (a) each person who is known by Ashford to be the beneficial
owner of more than five percent of Ashford's outstanding shares of common
stock, (b) the directors of Ashford, (c) the executive officers of Ashford
named in the Summary Compensation Table in Ashford's 2001 Proxy Statement and
(d) the directors and executive officers as a group. Beneficial ownership has
been determined in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934. Under this rule, certain shares may be deemed to be beneficially owned
by more than one person, if, for example, persons share the power to vote or
the power to dispose of the shares. In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares,
for example, upon exercise of an option or warrant, within 60 days of September
30, 2001. In computing the percentage ownership of any person, the amount of
shares is deemed to include the amount of shares beneficially owned by such
person, and only such person, by reason of such acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual voting power
at any particular date. The percentage of beneficial ownership for the
following table is based on 54,208,488 shares of common stock outstanding as of
September 30, 2001. Unless otherwise indicated, the address for each listed
stockholder is: c/o Ashford.com, Inc., 3800 Buffalo Speedway, Suite 400,
Houston, Texas 77098. To Ashford's knowledge, except as otherwise indicated in
the footnotes to this table and pursuant to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of common stock.
Shares Beneficially Owned
as of September 30, 2001(1)
---------------------------
Number of Percentage
Beneficial Owner Shares of Class
---------------- ---------- ----------
Kevin R. Harvey and Entities affiliated with
Benchmark Capital Partners II, L.P.(2)........... 12,668,268 23.4
Amazon.com NV Investment Holdings, Inc. and
Entities affiliated with Amazon.com, Inc.(3)..... 7,406,632 13.7
J. Robert Shaw(4).................................. 3,099,500 5.7
Kenneth E. Kurtzman(5)............................. 85,896 *
James H. Whitcomb, Jr.(6).......................... 3,154,230 5.8
David F. Gow(7).................................... 692,250 1.3
Gary A. Paranzino.................................. 0 *
William J. Hensler(8).............................. 226,875 *
Cheryl L. Holland(9)............................... 106,250 *
Robert Cohn(10).................................... 152,750 *
Gordon Mayer(11)................................... 125,144 *
Terry Manning(12).................................. 121,125 *
Colombe Nicholas(13)............................... 105,359 *
All directors and executive officers as a group (14
persons)(14)..................................... 20,697,162 37
--------
* Less than 1% of the outstanding shares of common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities.
(2) Consists of shares held by Benchmark Capital Partners II, L.P. as nominee
for Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
Kevin R. Harvey is a Managing Member of Benchmark Capital Management Co.
II, L.L.C., the general partner of the Benchmark entities and is a
director of Ashford. He disclaims beneficial ownership of the shares held
by the entities except to the extent of his pecuniary interest therein.
The address for Mr. Harvey and the Benchmark entities is 2480 Sand Hill
Road, Suite 200, Menlo Park, California 94025. Includes options to
purchase 14,250 shares subject to options exercisable within 60 days of
September 30, 2001.
98
(3) As reported in a Schedule 13G filed on January 7, 2000, Amazon.com, Inc.
has the sole power to vote or to direct the vote as to 707,964 shares and
has, along with Amazon.com Holdings, Inc. and Amazon.com Advertising
Services NV, Inc., shared power to vote or to direct the vote as to
6,698,668 shares. Amazon.com, Inc.'s address is 1200 12th Avenue South,
Suite 1200, Seattle, Washington 98144.
(4) Includes options to purchase 14,250 shares subject to options exercisable
within 60 days of September 30, 2001.
(5) Mr. Kurtzman, Ashford's former Chief Executive Officer, resigned from
Ashford effective as of April 22, 2001. Number of shares for Mr. Kurtzman
includes options to purchase 85,896 shares subject to options exercisable
within 60 days of September 30, 2001.
(6) Includes options to purchase 42,979 shares subject to options exercisable
within 60 days of September 30, 2001.
(7) Includes options to purchase 692,250 shares subject to options exercisable
within 60 days of September 30, 2001.
(8) Includes options to purchase 226,875 shares subject to options exercisable
within 60 days of September 30, 2001.
(9) Includes options to purchase 106,250 shares subject to options exercisable
within 60 days of September 30, 2001.
(10) Includes options to purchase 9,500 shares subject to options exercisable
within 60 days of September 30, 2001.
(11) Includes options to purchase 125,144 shares subject to options exercisable
within 60 days of September 30, 2001.
(12) Includes options to purchase 121,125 shares subject to options exercisable
within 60 days of September 30, 2001.
(13) Includes options to purchase 105,359 shares subject to options exercisable
within 60 days of September 30, 2001.
(14) Includes options to purchase 1,703,393 shares subject to options
exercisable within 60 days of September 30, 2001.
99
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for Global Sports consists of the Unaudited Pro Forma Condensed Combined
Statements of Operations for the six months ended June 30, 2001 and the fiscal
year ended December 30, 2000, and the Unaudited Pro Forma Condensed Combined
Balance Sheet as of June 30, 2001.
On December 28, 2000, Global Sports completed its acquisition of Fogdog,
Inc. pursuant to a definitive merger agreement executed on October 24, 2000.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
fiscal year ended December 30, 2000 includes Fogdog's unaudited historical
results of operations for the period January 1, 2000 through December 27, 2000.
Global Sports' historical consolidated results of operations incorporates
Fogdog's results of operations commencing upon the December 28, 2000
acquisition date. The effect of incorporating Fogdog's results of operations
for the three days ended December 30, 2000 was not significant.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
six months ended June 30, 2001 gives effect to the Ashford merger as if it had
taken place on January 2, 2000. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the fiscal year ended December 30, 2000 gives
effect to the Ashford and Fogdog mergers as if they had taken place on January
2, 2000. The Unaudited Pro Forma Condensed Combined Balance Sheet as of June
30, 2001 gives effect to the Ashford merger as if it had taken place on June
30, 2001.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
six months ended June 30, 2001 combines Global Sports' historical results of
operations for the six months ended June 30, 2001 with Ashford's historical
results of operations for the six months ended June 30, 2001. The Unaudited Pro
Forma Condensed Combined Statement of Operations for the fiscal year ended
December 30, 2000 combines Global Sports' historical results of operations for
the fiscal year ended December 30, 2000 with Fogdog's unaudited historical
results of operations for the period January 1, 2000 through December 27, 2000,
and Ashford's historical results of operations for the fiscal year ended March
31, 2001. The results of operations of Ashford for the three months ended March
31, 2001, which included net revenues of $14.3 million and a loss from
continuing operations of $17.0 million, have been included in the results of
operations for the six months ended June 30, 2001 as well as the fiscal year
ended March 31, 2001. The Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 30, 2001 combines Global Sports' unaudited balance sheet as of June
30, 2001 with Ashford's unaudited balance sheet as of June 30, 2001.
The Ashford merger will be accounted for using the purchase method of
accounting.
The pro forma financial information has been prepared on the basis of
assumptions described in the notes, and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of Ashford,
based on preliminary estimates of their fair value. The actual allocation of
the consideration may differ from that reflected in the pro forma financial
information after valuations and other procedures to be performed after the
closing of the merger.
The pro forma financial information should be read in conjunction with the
related notes included in this document and the historical consolidated
financial statements of each of Global Sports and Ashford, and the related
notes thereto, which are included elsewhere or incorporated by reference in
this prospectus/proxy statement.
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and does not purport to be indicative
of the operating results or financial position that would have actually
occurred if the merger had taken place on the dates indicated, nor is it
necessarily indicative of future operating results or financial position of
Global Sports following the merger.
100
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Six Months Ended June 30, 2001
------------------------------
Global Sports, Ashford.com, Pro forma Pro forma
Inc. Inc. Adjustments Combined
-------------- ------------ ----------- ---------
Net revenues........................................ $ 33,168 $ 26,434 $ 59,602
Cost of revenues.................................... 22,846 23,585 46,431
-------- -------- -------- --------
Gross profit........................................ 10,322 2,849 13,171
Operating expenses:
Sales and marketing(a)........................... 14,234 7,975 22,209
Product development.............................. 4,454 1,755 6,209
General and administrative(b).................... 5,117 10,507 15,624
Restructuring charge............................. -- 1,061 1,061
Impairment loss.................................. -- 1,094 1,094
Settlement loss.................................. -- 2,297 2,297
Loss on sale of assets........................... -- 620 620
Stock-based compensation(d)...................... 1,370 414 1,784
Depreciation and amortization(c)................. 3,170 7,908 $ (3,057)(7) 3,170
(4,851)(8)
-------- -------- -------- --------
Total operating expenses..................... 28,345 33,631 (7,908) 54,068
-------- -------- -------- --------
Other (income) expense:
Other income..................................... (300) -- (300)
Interest income, net............................. (1,509) (24) (1,533)
-------- -------- -------- --------
Total other (income) expense................. (1,809) (24) (1,833)
-------- -------- -------- --------
Loss from continuing operations..................... $(16,214) $(30,758) $ 7,908 $(39,064)
======== ======== ======== ========
Loss from continuing operations per share--basic and
diluted........................................... $ (0.51) $ (0.63) $ (1.21)
======== ======== ========
Weighted average shares outstanding--basic and
diluted........................................... 31,964 48,835 (48,426) 32,373
======== ======== ======== ========
--------
(a) Ashford's historical sales and marketing expenses includes $304,000 of
non-cash amortization that has been reclassified to stock-based
compensation expense to be consistent with Global Sports' financial
statement presentation.
(b) Ashford's historical general and administrative expense includes $292,000
of non-cash amortization that has been reclassified to stock-based
compensation expense to be consistent with Global Sports' financial
statement presentation.
(c) Ashford's historical depreciation and amortization expense includes
($182,000) of non-cash amortization that has been reclassified to
stock-based compensation expense to be consistent with Global Sports'
financial statement presentation.
(d) $414,000 of non-cash amortization (the sum of (a), (b) and (c) above) has
been reclassified to Ashford's stock-based compensation expense to be
consistent with Global Sports' financial statement presentation.
101
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Period from Fiscal Year
Ended January 1 to Ended
December 30, December 27, March 31,
2000 2000 Fogdog Pro forma 2001 Ashford
------------ ------------ Merger Global ------------ Merger
Global Fogdog, Inc. Pro forma Sports, Ashford.com, Pro forma Pro forma
Sports, Inc. (2) Adjustments Inc. Inc. Adjustments Combined
------------ ------------ ----------- --------- ------------ ----------- ---------
(unaudited)
Net revenues................. $ 42,808 $ 27,605 $ $ 70,413 $ 67,195 $ 137,608
Cost of revenues............. 29,567 24,616 54,183 56,348 110,531
-------- -------- -------- -------- --------- -------- ---------
Gross profit............... 13,241 2,989 16,230 10,847 27,077
Operating expenses:
Sales and marketing(a)..... 37,730 43,907 (12,746)(3) 68,891 25,743 94,634
Product development........ 7,292 4,692 11,984 3,656 15,640
General and
administrative(b)......... 8,730 7,683 16,413 22,058 38,471
Restructuring charge....... -- -- -- 662 662
Impairment loss............ -- -- -- 1,094 1,094
Stock-based
compensation(d)........... 4,983 5,731 10,714 82,186 92,900
Depreciation and
amortization(c)........... 8,074 2,693 (1,320)(4) 9,831 13,642 $ (5,350)(7) 9,831
(334)(5) (8,292)(8)
718 (6)
-------- -------- -------- -------- --------- -------- ---------
Total operating expenses.. 66,809 64,706 (13,682) 117,833 149,041 (13,642) 253,232
Interest income, net......... (1,408) (3,232) (4,640) (1,512) (6,152)
-------- -------- -------- -------- --------- -------- ---------
Loss from continuing
operations.................. $(52,160) $(58,485) $ 13,682 $(96,963) $(136,682) $ 13,642 $(220,003)
======== ======== ======== ======== ========= ======== =========
Loss from continuing
operations per share--basic
and diluted................. $ (2.37) $ (4.40) $ (2.99) $ (9.81)
======== ======== ========= =========
Weighted average shares
outstanding--basic and
diluted..................... 22,028 22,028 45,725 (45,316) 22,437
======== ======== ========= ======== =========
--------
(a) Ashford's historical sales and marketing expense includes $79.7 million of
non-cash amortization which has been reclassified to stock-based
compensation expense to be consistent with Global Sports' financial
statement presentation.
(b) Ashford's historical general and administrative expense includes $2.6
million of non-cash amortization which has been reclassified to stock-based
compensation expense to be consistent with Global Sports' financial
statement presentation.
(c) Ashford's historical depreciation and amortization expense includes
$(182,000) of non-cash amortization which has been reclassified to
stock-based compensation expense to be consistent with Global Sports'
financial statement presentation.
(d) $82.2 million of non-cash amortization (the sum of (a), (b) and (c) above)
has been reclassified to Ashford's stock-based compensation expense to be
consistent with Global Sports' financial statement presentation.
102
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(in thousands)
June 30, 2001
------------------------
Global Ashford.com, Pro forma Pro forma
Sports, Inc. Inc. Adjustments Combined
------------ ------------ ----------- ---------
Assets
Current assets:
Cash and cash equivalents.............................. $ 62,797 $ 6,071 $ (8,073)(9) $ 60,795
Short-term investments................................. 812 -- 812
Accounts receivable, net............................... 3,368 2,521 5,889
Inventory.............................................. 15,861 18,387 34,248
Prepaid expenses and other current assets.............. 1,029 1,358 2,387
--------- --------- --------- ---------
Total current assets............................... 83,867 28,337 (8,073) 104,131
Property and equipment, net............................ 26,358 6,909 (6,909)(10) 26,358
Goodwill, net.......................................... 13,898 -- 13,898
Purchased intangibles, net............................. -- 5,438 (5,438)(10) --
Other assets, net...................................... 391 693 (693)(10) 391
--------- --------- --------- ---------
Total assets....................................... $ 124,514 $ 41,377 $ (21,113) $ 144,778
========= ========= ========= =========
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses, and other.......... $ 16,695 $ 5,039 $ 21,734
Current portion--long-term debt........................ 394 -- 394
--------- --------- --------- ---------
Total current liabilities.......................... 17,089 5,039 22,128
Net assets acquired in excess of purchase price attributed
to discontinued operations.............................. -- 2,880 $ (2,880)(11) --
Long-term debt............................................ 5,559 -- 5,559
Other long-term liabilities............................... -- 97 97
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................ -- -- --
Common stock........................................... 321 56 (52) 325
Additional paid-in capital and other components of
stockholders' equity................................. 218,902 259,645 (253,079) 225,468
Unearned stock-based compensation...................... -- (1,907) 1,907 --
Accumulated deficit.................................... (117,357) (224,430) 224,430 (108,799)
8,558 (12)
--------- --------- --------- ---------
101,866 33,364 (18,236) 116,994
Less: Treasury stock, at par........................... -- 3 (3) --
--------- --------- --------- ---------
Total stockholders' equity......................... 101,866 33,361 (18,233)(13) 116,994
--------- --------- --------- ---------
Total liabilities and stockholders' equity......... $ 124,514 $ 41,377 $ (21,113) $ 144,778
========= ========= ========= =========
103
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The pro forma financial information gives effect to the following pro forma
adjustments:
1. In accordance with the Ashford merger agreement:
The Ashford merger will be accounted for as a purchase. The purchase price
of $14.6 million is based on cash consideration of $6.7 million and the
issuance of Global Sports common stock with a value of $16.00 per share,
which is the average closing price of Global Sports common stock for the
period from September 6 to 18, 2001, plus acquisition related expenses of
approximately $1.4 million.
All vested Ashford stock warrants are deemed to have been assumed by Global
Sports upon consummation of the merger for purposes of these pro forma
statements. These stock warrants are included as part of the purchase price
based on their fair value as of the date of the merger agreement.
The pro forma financial information has been prepared on the basis of
assumptions described in these notes, and include assumptions relating to
the allocation of the consideration paid for the assets and liabilities of
Ashford, based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro
forma financial information, after valuations and other procedures to be
performed after the closing of the Ashford acquisition.
Tangible assets of Ashford acquired in the merger principally include
inventory and cash and cash equivalents. Liabilities of Ashford assumed in
the merger principally include accounts payable and accrued expenses.
The pro forma financial information does not reflect cost savings that may
result from the elimination of duplicate functions, expenditures, and
activities. Although Global Sports' management expects that cost savings
will result from the merger, there can be no assurance that cost savings
will be achieved.
2. On December 28, 2000, Global Sports completed its acquisition of Fogdog
pursuant to a definitive merger agreement executed on October 24, 2000. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the
fiscal year ended December 30, 2000 includes Fogdog's unaudited historical
results of operations for the period January 1, 2000 through December 27,
2000.
The Fogdog merger has been accounted for under the purchase method and the
acquisition costs of $44.7 million have been allocated to the assets
acquired and the liabilities assumed based upon estimates of their
respective fair values. A total of $14.4 million, representing the excess of
the purchase price over fair value of the net tangible assets acquired, has
been allocated to goodwill and is being amortized by the straight-line
method over twenty years.
Global Sports' consolidated results of operations for the fiscal year ended
December 30, 2000 incorporates Fogdog's results of operations commencing
upon the December 28, 2000 acquisition date. The effect of incorporating
Fogdog's results of operations for the three days ended December 30, 2000
was not significant.
3. The pro forma adjustment eliminates Fogdog's amortization relating to a
warrant based on the adjustment of the warrant to fair market value as of
the date of the merger, and the assumption of the warrant by Global Sports.
4. The pro forma adjustment eliminates Fogdog's amortization of goodwill
relating to Fogdog's merger with Sports Universe, Inc which was effective on
September 3, 1999.
5. The pro forma adjustment reduces Fogdog's depreciation expense based on the
write-down of Fogdog's property and equipment.
6. The pro forma adjustment is for the amortization of goodwill resulting from
the Fogdog acquisition.
104
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION--(Continued)
7. The pro forma adjustment eliminates Ashford's depreciation expense based on
the write-down of Ashford's property and equipment.
8. The pro forma adjustment eliminates Ashford's amortization expense based on
the write-down of Ashford's purchased intangibles.
9. The pro forma adjustment reflects the impact of the cash consideration and
acquisition-related expenses paid in connection with the Ashford merger.
10. The pro forma adjustment is to write down Ashford's non-current assets
acquired due to the excess of the fair value of Ashford's net assets over
the purchase price.
11. The pro forma adjustment is to write off Ashford's net assets acquired in
excess of purchase price attributed to discontinued operations.
12. In accordance with Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, the pro forma adjustment reflects the
extraordinary gain of $8.6 million due to the excess of the fair market
value of Ashford's net assets over the purchase price remaining after the
write-down of Ashford's non-current assets to zero.
13. The pro forma adjustment to stockholders' equity reflects the elimination
of Ashford stockholders' equity ($33.4 million) and the impact of the
issuance of Global Sports common stock ($6.6 million) in connection with
the Ashford merger.
105
COMPARISON OF STOCKHOLDERS' RIGHTS
Both Ashford and Global Sports are Delaware corporations and are governed by
the Delaware General Corporation Law. In addition, the rights of Ashford
stockholders are currently governed by the Ashford third amended and restated
certificate of incorporation and the Ashford amended and restated bylaws, and
the rights of Global Sports stockholders are governed by the Global Sports
amended and restated certificate of incorporation and the Global Sports bylaws.
After the effective time of the merger, the rights of holders of Ashford
capital stock who become holders of Global Sports common stock will be governed
by the Global Sports amended and restated certificate of incorporation, the
Global Sports bylaws and Delaware law. In most respects, the rights of holders
of Ashford capital stock are similar to the rights of holders of Global Sports
common stock. The following is a summary of the material differences between
such rights. This summary does not purport to be a complete discussion of, and
is qualified in its entirety by reference to, Delaware law as well as to the
Ashford third amended and restated certificate of incorporation, the Ashford
amended and restated bylaws, the Global Sports amended and restated certificate
of incorporation and the Global Sports bylaws.
Authorized Capital Stock
Global Sports. The authorized capital stock of Global Sports consists of
90,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Ashford. The authorized capital stock of Ashford consists of 100,000,000
shares of common stock and 10,000,000 shares of preferred stock.
Number of Directors
Global Sports. Global Sports' board of directors currently consists of seven
members.
Ashford. Ashford's board of directors currently consists of six members.
Changes in the Number of Directors
Global Sports. The Global Sports bylaws provide that the setting of the
authorized number of directors and any changes to the authorized number of
directors may be effected only by resolution of Global Sports' board of
directors.
Ashford. Ashford's third amended and restated certificate of incorporation
provides that the number of directors shall be such number, as shall be fixed
from time to time, by a bylaw or amendment thereof duly approved and adopted by
the board of directors. Ashford's amended and restated bylaws provide that the
number of directors shall be fixed from time to time exclusively by Ashford's
board of directors pursuant to a resolution approved and adopted by a vote of
75% of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such
resolution is presented to Ashford's board of directors for approval and
adoption). Ashford's amended and restated bylaws further provide that the
directors shall hold office until the expiration of term for which elected, and
until their respective successors are elected and qualified, except in the case
of the death, resignation or removal of any director.
Election of Directors
Global Sports. Global Sports' board of directors is not divided into
classes. As a result, the entire board of directors is elected each year by a
majority vote of outstanding stock.
Ashford. All members of Ashford's board of directors serve on a staggered
board that is divided into three classes, with each class serving a three-year
term. As a result, a portion of the board of directors is elected each year by
a majority vote of outstanding stock.
106
Special Meeting of Stockholders
Under the Delaware General Corporation Law, a special meeting of
stockholders may be called by the board of directors or any other person
authorized to do so in the corporation's certificate of incorporation or
bylaws.
Global Sports. The Global Sports bylaws state that a special meeting of the
stockholders may be called for any purpose or purposes by the Chairman of the
board of directors, the President, a majority of the board of directors or the
holders of not less than 10% of the shares of capital stock of Global Sports
issued and outstanding and entitled to vote.
Ashford. Ashford's amended and restated bylaws provide that special meetings
of Ashford stockholders, for any purpose or purposes, unless otherwise
prescribed by statute or by the third amended and restated certificate of
incorporation, may be called at any time by Ashford's board of directors
pursuant to a resolution approved by a majority of the whole board of
directors.
Action by Written Consent of Stockholders
Global Sports. The Global Sports bylaws state that any action required or
permitted to be taken at any meeting of the stockholders may be taken without a
meeting and without prior notice if a written consent, setting forth the action
so taken, is signed by the holders of outstanding stock constituting a majority
of the shares that would be entitled to vote on such action at a meeting. The
Global Sports bylaws further state that prompt notice shall be given to the
stockholders who have not consented in writing to such action.
Ashford. Ashford's third amended and restated certificate of incorporation
provides that any action required or permitted to be taken by the stockholders
of the corporation must be effected at an annual or special meeting of the
stockholders of the corporation, and may not be effected by any consent in
writing of such stockholders.
Amendments to Bylaws
The Delaware General Corporation Law states that stockholders entitled to
vote have the power to adopt, amend or repeal the bylaws of a corporation. A
corporation, in its certificate, may also confer this power on the board of
directors in addition to the stockholders.
Global Sports. The Global Sports amended and restated certificate of
incorporation expressly states that Global Sports' board of directors is
authorized to make, alter or repeal the bylaws. The Global Sports bylaws
provide that the board of directors shall have the power to alter and repeal
the bylaws and to adopt new bylaws by an affirmative vote of a majority of the
whole board of directors, provided that notice of the proposal to alter or
repeal the bylaws or to adopt new bylaws must be included in the notice of the
meeting of the board of directors at which such action takes place.
Ashford. Ashford's amended and restated bylaws provide that the bylaws may
be altered, amended or repealed or new bylaws may be approved and adopted by
stockholders holding at least 75% of the corporation's outstanding capital
stock, or the "Amending Stockholders," or by the board of directors at any
regular meeting of the stockholders or of the board of directors or by the
Amending Stockholders at any special meeting of the stockholders or by the
board of directors at any special meeting of the board of directors if notice
of such alteration, amendment, repeal or adoption of new bylaws be contained in
the notice of such special meeting. Ashford's amended and restated bylaws
further provide that the power to adopt, amend and repeal bylaws conferred upon
the board of directors in the third amended and restated certificate of
incorporation does not divest or limit the power of the stockholders to adopt,
amend or repeal bylaws.
107
Issuance of Additional Stock
Global Sports. Subject to limitations prescribed by Delaware law, Global
Sports' board of directors has the authority to issue up to 5,000,000 shares of
preferred stock, including shares of Global Sports preferred stock currently
issued and outstanding, and to fix the rights, preferences, privileges and
restrictions of those shares, and to issue up to a total of 90,000,000 shares
of Global Sports common stock, including shares of Global Sports common stock
currently issued and outstanding, all without any vote or action by Global
Sports stockholders, except as may be required by law or any stock exchange or
automated securities interdealer quotation system on which its common stock may
then be listed or quoted.
Ashford. Subject to limitations prescribed by Delaware law, Ashford's board
of directors has the authority to issue up to 10,000,000 shares of preferred
stock and to fix the rights, preferences, privileges and restrictions of those
shares, and to issue up to a total of 100,000,000 shares of Ashford common
stock, including shares of Ashford common stock currently issued and
outstanding, all without any vote or action by Ashford stockholders, except as
may be required by law or any stock exchange or automated securities
interdealer quotation system on which its common stock may then be listed or
quoted.
108
LEGAL MATTERS
The validity of the Global Sports common stock to be issued in the merger
will be passed upon for Global Sports by Cooley Godward LLP.
EXPERTS
The consolidated financial statements of Global Sports as of December 30,
2000 and January 1, 2000 and for each of the three years in the period ended
December 30, 2000 incorporated in this prospectus/proxy statement by reference
to Global Sports' Annual Report on Form 10-K have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report which is
incorporated herein by reference, and has been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Fogdog, Inc., a wholly owned
subsidiary of Global Sports, and related accountants' reports, incorporated by
reference in Global Sports' Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 12, 2001 and incorporated in this
prospectus/proxy statement by reference, have been audited by
PricewaterhouseCoopers, LLP independent accountants, and given on the authority
of said firm as experts in auditing and accounting.
The consolidated financial statements of Ashford as of March 31, 2000 and
2001 and for each of the three years in the period ended March 31, 2001 in this
prospectus/proxy statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding Ashford's ability to continue as a going concern as
discussed in Note 1 to the consolidated financial statements.
WHERE YOU CAN FIND MORE INFORMATION
Global Sports is a Delaware corporation. Global Sports' principal executive
offices are located 1075 First Avenue, King of Prussia, PA 19406, and its
telephone number is (610) 265-3229.
Ashford is a Delaware corporation. Ashford's principal executive offices are
located at 3800 Buffalo Speedway, Suite 400, Houston, TX 77098, and its
telephone number is (713) 369-1300.
Global Sports and Ashford each file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
that the companies file at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Global Sports' and Ashford's
public filings are also available to the public from commercial document
retrieval services and at the Internet Web site maintained by the Securities
and Exchange Commission at http://www.sec.gov.
Global Sports common stock is listed on the Nasdaq National Market under the
symbol "GSPT." Ashford common stock is listed on the Nasdaq National Market
under the symbol "ASFD." You may inspect reports and other information
concerning Global Sports and Ashford at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20016.
109
Global Sports has filed a Form S-4 registration statement to register with
the Securities and Exchange Commission the offering and sale of the shares of
Global Sports common stock to be issued to Ashford stockholders in the merger.
This prospectus/proxy statement is a part of such registration statement and
constitutes a prospectus of Global Sports and a proxy statement of Ashford for
the special meeting of Ashford stockholders. This prospectus/proxy statement
does not contain all of the information set forth in the registration statement
because certain parts of the registration statement are omitted as provided by
the rules and regulations of the Securities and Exchange Commission. You may
inspect and copy the registration statement at any of the addresses listed
above.
The Securities and Exchange Commission allows Global Sports to "incorporate
by reference" information into this prospectus/proxy statement, which means
that it can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is deemed to be part of this
prospectus/proxy statement, except for any information superseded by
information contained directly in this prospectus/proxy statement. This
prospectus/proxy statement incorporates by reference the documents described
below that Global Sports has previously filed with the Securities and Exchange
Commission. These documents contain important information about Global Sports
and its financial condition.
The following documents listed below that Global Sports has previously filed
with the Securities and Exchange Commission are incorporated by reference:
. Global Sports' Annual Report on Form 10-K for the year ended December 30,
2000;
. Global Sports' Quarterly Reports on Form 10-Q for the respective quarters
ended March 31, 2001 and June 30, 2001;
. Global Sports' Current Reports on Form 8-K as filed on January 12, 2001,
July 24, 2001, August 27, 2001, and September 18, 2001;
. Global Sports' Definitive Proxy Statement on Schedule 14A as filed on
April 27, 2001; and
. The description of Global Sports common stock contained in its
registration statement on Form 8-A dated March 19, 1988, including any
amendments or reports filed for the purpose of updating the description.
All documents that Global Sports files pursuant to Sections 13(a), 13(c), 14
or 15(d) under the Securities Exchange Act of 1934 from the date of this
prospectus/proxy statement to the date of the special meeting of Ashford
stockholders, as it may be adjourned or continued to a later date, shall also
be deemed to be incorporated by reference in this prospectus/proxy statement.
DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE FROM GLOBAL SPORTS WITHOUT
CHARGE UPON REQUEST TO GLOBAL SPORTS, INC., ATTENTION: INVESTOR RELATIONS, 1075
FIRST AVENUE, KING OF PRUSSIA, PA 19406, TELEPHONE NUMBER (610) 265-3229. IN
ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS, YOU MUST MAKE YOUR REQUEST
NO LATER THAN [ ], 2001. IF YOU REQUEST ANY INCORPORATED DOCUMENTS FROM
GLOBAL SPORTS, GLOBAL SPORTS WILL MAIL THEM TO YOU BY FIRST CLASS MAIL, OR
ANOTHER EQUALLY PROMPT MEANS, WITHIN ONE BUSINESS DAY AFTER GLOBAL SPORTS
RECEIVES YOUR REQUEST.
Global Sports has supplied all information contained in this
prospectus/proxy statement relating to Global Sports or Ruby Acquisition Corp.,
and Ashford has supplied all information contained in this prospectus/proxy
statement relating to Ashford.
You should rely only on the information contained in this prospectus/proxy
statement to vote your shares at the special meeting of Ashford stockholders.
Neither Global Sports nor Ashford has authorized anyone to
110
provide you with information that differs from that contained in this
prospectus/proxy statement. This prospectus/proxy statement is dated [ ],
2001. You should not assume that the information contained in this
prospectus/proxy statement is accurate as of any date other than that date, and
neither the mailing of this prospectus/proxy statement to stockholders nor the
issuance of shares of Global Sports common stock in the merger shall create any
implication to the contrary.
Global Sports, Inc., the Global Sports, Inc. logos and all other Global
Sports product and service names are registered trademarks or trademarks of
Global Sports, Inc. in the USA and in other select countries. Ashford.com,
Inc., the Ashford logos and all other Ashford product and service names are
registered trademarks or trademarks of Ashford.com, Inc. in the USA and in
other select countries. "(R)"and "(TM)"indicate USA registration and USA
trademark, respectively. Other third party logos and product/trade names are
registered trademarks or trade names of their respective companies.
111
INDEX TO FINANCIAL STATEMENTS OF ASHFORD.COM, INC.
Page
----
Report of Independent Public Accountants......................... F-2
Ashford.com, Inc. Consolidated Balance Sheets.................... F-3
Ashford.com, Inc. Consolidated Statements of Operations.......... F-4
Ashford.com, Inc. Consolidated Statements of Stockholders' Equity F-5
Ashford.com, Inc. Consolidated Statements of Cash Flows.......... F-7
Notes to Consolidated Financial Statements....................... F-8
Ashford.com, Inc. Consolidated Balance Sheets.................... F-26
Ashford.com, Inc. Consolidated Statements of Operations.......... F-27
Ashford.com, Inc. Consolidated Statements of Cash Flows.......... F-28
Notes to Consolidated Financial Statements....................... F-29
F-1
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-2
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-3
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-4
Ashford.com, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands)
Preferred Common Treasury
Stock Stock Stock
------------- ------------ ----------- Additional
Par Par Paid-In Subscription
Shares Value Shares Value Shares Cost Capital Receivable
------- ----- ------ ----- ------ ---- ---------- ------------
Balance at Inception, March 6, 1998...................... -- $ -- -- $-- -- $-- $ -- $ --
Issuance of common stock for cash upon formation on
March 6, 1998........................................... -- -- 6,313 6 -- -- (5) --
Issuance of common stock for services in April 1998...... -- -- 4,375 4 -- -- 50 --
Issuance of Series A preferred stock in exchange for cash
and conversion of note payable on December 4, 1998...... 9,500 9 -- -- -- -- 3,991 --
Deferred compensation related to grants of options to
purchase common stock................................... -- -- -- -- -- -- 431 --
Amortization of deferred compensation.................... -- -- -- -- -- -- -- --
Net loss................................................. -- -- -- -- -- -- -- --
------- ---- ------ --- -- --- ------- -----
Balance at March 31, 1999................................ 9,500 9 10,688 10 -- -- 4,467 --
Deferred compensation related to grants of options to
purchase common stock................................... -- -- -- -- -- -- 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 --
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 --
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 --
Issuance of warrants in connection with execution of
distribution and marketing agreements................... -- -- -- -- -- -- 4,182 --
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------ ----------- -------------
Balance at Inception, March 6, 1998...................... $ -- $ -- $ --
Issuance of common stock for cash upon formation on
March 6, 1998........................................... -- 1
Issuance of common stock for services in April 1998...... -- -- 54
Issuance of Series A preferred stock in exchange for cash
and conversion of note payable on December 4, 1998...... -- -- 4,000
Deferred compensation related to grants of options to
purchase common stock................................... (431) -- --
Amortization of deferred compensation.................... 17 -- 17
Net loss................................................. -- (1,264) (1,264)
-------- ------- -------
Balance at March 31, 1999................................ (414) (1,264) 2,808
Deferred compensation related to grants of options to
purchase common stock................................... (19,123) -- --
Issuance of Series B preferred stock in exchange for cash
and conversion of note payable on April 17, 1999........ -- -- 30,090
Officer exercise of options to purchase common stock
pursuant to note receivable............................. -- -- --
Issuance of Series C preferred stock in exchange for cash
on July 8, 1999......................................... -- -- 16,304
Conversion of preferred stock into common stock in
connection with initial public offering on September 22,
1999.................................................... -- -- --
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.......... -- -- 73,648
Issuance of warrants in connection with execution of
distribution and marketing agreements................... -- -- 4,182
The accompanying notes are an integral part of these financial statements.
F-5
Ashford.com, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(In Thousands)
Preferred Common Treasury
Stock Stock Stock
------------ ------------ ----------- Additional
Par Par Paid-In Subscription
Shares Value Shares Value Shares Cost Capital Receivable
------ ----- ------ ----- ------ ---- ---------- ------------
Issuance of common stock in connection with Internet
domain and other intangible asset purchases.............. -- $-- 685 $ 1 -- $-- $ 7,374 $ --
Issuance of common stock for cash and marketing
agreement................................................ -- -- 7,407 8 -- -- 104,612 --
Amortization of deferred compensation..................... -- -- -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- -- -- --
-- --- ------ --- --- --- -------- -------
Balance at March 31, 2000................................. -- -- 44,956 45 -- -- 260,563 (780)
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 --
Issuance of warrants in connection with purchases of fixed
assets................................................... -- -- -- -- -- -- 914 --
Issuance of common stock in connection with Internet
domain and other intangible asset purchases.............. -- -- 3,004 3 -- -- 4,238 --
Issuance of common stock in connection with employee
stock purchase plan...................................... -- -- 79 -- -- -- 191 --
Exercise of common stock options.......................... -- -- 510 1 -- -- 161 --
Common stock reacquired for cash.......................... -- -- -- -- 771 -- -- --
Recapture of deferred compensation, net................... -- -- -- -- -- -- (7,196) --
Amortization of deferred compensation..................... -- -- -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- -- -- --
-- --- ------ --- --- --- -------- -------
Balance at March 31, 2001................................. -- $-- 48,692 $49 771 $-- $259,365 $(1,156)
== === ====== === === === ======== =======
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------ ----------- -------------
Issuance of common stock in connection with Internet
domain and other intangible asset purchases.............. $ -- $ -- $ 7,375
Issuance of common stock for cash and marketing
agreement................................................ -- -- 104,620
Amortization of deferred compensation..................... 4,305 -- 4,305
Net loss.................................................. -- (72,062) (72,062)
-------- --------- ----------
Balance at March 31, 2000................................. (15,232) (73,326) 171,270
Director exercise of options to purchase common stock
pursuant to note receivable.............................. -- -- --
Issuance of warrants in connection with execution of
distribution and marketing agreements.................... -- -- 118
Issuance of warrants in connection with purchases of fixed
assets................................................... -- -- 914
Issuance of common stock in connection with Internet
domain and other intangible asset purchases.............. -- -- 4,241
Issuance of common stock in connection with employee
stock purchase plan...................................... -- -- 191
Exercise of common stock options.......................... -- -- 162
Common stock reacquired for cash.......................... -- -- --
Recapture of deferred compensation, net................... 7,196 -- --
Amortization of deferred compensation..................... 3,053 -- 3,053
Net loss.................................................. -- (136,681) (136,681)
-------- --------- ----------
Balance at March 31, 2001................................. $ (4,983) $(210,007) $ 43,268
======== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-6
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-7
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
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.
F-8
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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
F-9
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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.
F-10
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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).
F-11
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
Inception
Year Ended Year Ended through
March 31, March 31, March 31,
2001 2000 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.
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
F-12
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
==== ==== ====
F-13
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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 an online
watch retailer. 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 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 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 online
watch retailer and to resolve litigation between them, the parties began
negotiating a dissolution of that relationship. The online watch retailer
tentatively 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 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 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 the online art retailer'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 the online art retailer was inconsistent with the
level of sales activity and overall Company objectives. In June 2001,
F-14
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
the prior management of the online art retailer made a proposal to the Company,
which the Company has agreed to accept, to assume the prospective operations of
the online art retailer 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 the online art retailer 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.
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
======
F-15
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
Inception
Year Ended through
March 31, March 31,
2000 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.
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
F-16
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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
F-17
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
F-18
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
Common Stock
The holders of the common stock are entitled to receive dividends when and
as declared by the board of directors. Upon the liquidation, dissolution or
winding up of 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.
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.
F-19
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
========== =====
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.
F-20
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
Inception
Year Ended Year Ended through
March 31, March 31, March 31,
2001 2000 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:
Year Ended Year Ended
March 31, March 31,
2001 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
F-21
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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
Year Ended Year Ended through
March 31, March 31, March 31,
2001 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........................... $ -- $ -- $ --
======== ======== =====
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, March 31,
2001 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....................... $ -- $ --
======== ========
F-22
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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.
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.
F-23
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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 our accounting and
disclosures relating to certain marketing activities during fiscal years 2000
and 2001. We have been cooperating with the SEC, and we will continue to do so.
Our audit committee also has completed an internal review of certain matters
related to the SEC review. We do not believe that any of the accounting issues
raised by the SEC will have a material effect on our 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-24
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-25
Ashford.com, Inc.
Consolidated Balance Sheets
(In Thousands, Except Par Value and Share Amounts)
June 30, March 31,
2001 2001
----------- ---------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................................................ $ 4,571 $ 7,095
Restricted cash.................................................................. 1,500 1,500
Accounts receivable, net of allowance for doubtful accounts of $280 and $231,
respectively................................................................... 2,521 2,559
Merchandise inventory............................................................ 18,387 24,066
Prepaid and other................................................................ 1,358 1,535
--------- ---------
Total current assets................................................................ 28,337 36,755
--------- ---------
Property and equipment, net of accumulated depreciation of $7,191 and $5,894,
respectively...................................................................... 6,909 8,441
Purchased intangibles, net of accumulated amortization of $12,871 and $10,483,
respectively...................................................................... 5,438 10,162
Other assets........................................................................ 693 908
--------- ---------
Total assets........................................................................ $ 41,377 $ 56,266
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities......................................... $ 5,039 $ 8,189
Revolving credit facility........................................................ -- 4,705
Net assets acquired in excess of purchase price attributed to discontinued
operations..................................................................... 2,880 --
Other long-term liabilities......................................................... 97 104
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued and
outstanding at June 30, 2001 and March 31, 2001................................... -- --
Common stock, $.001 par value, 100,000,000 shares authorized, 55,833,458 and
48,691,917 shares issued at June 30, 2001 and March 31, 2001, respectively........ 56 49
Treasury stock, at cost, 3,066,726 and 770,893 at June 30, 2001 and March 31, 2001,
respectively...................................................................... (865) --
Additional paid-in capital.......................................................... 260,883 259,365
Subscriptions receivable............................................................ (376) (1,156)
Deferred compensation............................................................... (1,907) (4,983)
Accumulated deficit................................................................. (224,430) (210,007)
--------- ---------
Total stockholders' equity.......................................................... 33,361 43,268
--------- ---------
Total liabilities and stockholders' equity.......................................... $ 41,377 $ 56,266
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
Ashford.com, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three months ended
June 30,
------------------
2001 2000
-------- --------
Net sales............................................................................... $ 12,106 $ 13,105
Cost of sales........................................................................... 10,099 10,666
-------- --------
Gross profit............................................................................ 2,007 2,439
Operating expenses:
Marketing and sales (includes non-cash amortization of $304 and $26,034,
respectively)...................................................................... 3,096 32,823
General and administrative (includes non-cash amortization of $272 and $847,
respectively)...................................................................... 5,470 6,748
Restructuring charge................................................................. 399 --
Settlement loss...................................................................... 2,297 --
Loss on sale of assets............................................................... 620 --
Depreciation and amortization........................................................ 3,882 2,654
-------- --------
Total operating expenses......................................................... 15,764 42,225
-------- --------
Loss from operations.................................................................... (13,757) (39,786)
Interest income, net.................................................................... 1 684
-------- --------
Net loss before discontinued operations................................................. (13,756) (39,102)
Net loss from discontinued operations................................................... 667 --
-------- --------
Net loss................................................................................ $(14,423) $(39,102)
======== ========
Net loss before discontinued operations per share, basic and diluted.................... $ (0.27) $ (0.87)
Net loss from discontinued operations per share, basic and diluted...................... $ (0.01) --
Net loss per share, basic and diluted................................................... $ (0.28) $ (0.87)
Shares used to compute net loss per share, basic and diluted............................ 51,188 45,099
Supplemental Information(1)
Net loss, excluding restructuring charge, settlement loss, loss on sale of assets,
depreciation and amortization, and net loss from discontinued operations........... $ (5,982) $ (9,567)
Net loss per share, excluding restructuring charge, settlement loss, loss on sale of
assets, depreciation and amortization, and net loss from discontinued operations... $ (0.12) $ (0.21)
--------
(1) The accompanying supplemental financial information is presented for
informational purposes only and should not be considered as a substitute
for the historical financial information presented in accordance with
generally accepted accounting principles.
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
Ashford.com, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Three months ended
June 30,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss............................................................................ $(14,423) $(39,102)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................... 4,458 29,535
Restructuring charge related to issuance of options to purchase common stock..... 221 --
Settlement loss.................................................................. 2,297 --
Loss on sale of assets........................................................... 620 --
Changes in assets and liabilities:
Accounts receivable, net..................................................... 38 1,666
Merchandise inventory........................................................ 5,679 2,274
Prepaid and other............................................................ 177 (996)
Other assets................................................................. (200) (63)
Accounts payable and accrued liabilities..................................... (3,894) 1,154
-------- --------
Net cash used in operating activities............................................... (5,027) (5,532)
Cash flows from investing activities:
Purchases of property and equipment................................................. (107) (2,741)
Proceeds from sale of equipment and intangible assets............................... 45 --
Net proceeds from acquisition....................................................... 7,270 --
Internet domain and other intangible asset purchases................................ -- (60)
-------- --------
Net cash provided by (used in) investing activities................................. 7,208 (2,801)
Cash flows from financing activities:
Payments on revolving credit facility............................................... (4,705) --
-------- --------
Net decrease in cash and cash equivalents........................................... (2,522) (8,333)
Cash and cash equivalents:
Beginning of period................................................................. 7,095 46,474
-------- --------
End of period....................................................................... $ 4,571 $ 38,141
======== ========
Supplemental disclosure of noncash investing and financing activities:
Issuance of common stock in connection with marketing agreement..................... $ -- $ 74
Issuance of warrants in connection with purchases of fixed assets................... -- 221
Issuance of common stock in connection with acquisition............................. 3,979 --
Purchase of common stock in connection with employment and consultant agreements.... 865 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
Ashford.com, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been
prepared by Ashford.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, and
disclosures necessary for a fair presentation of these financial statements
have been included. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 2001. Results for the
three months ended June 30, 2001, are not necessarily indicative of the results
that may be expected for any future quarter or for the year ending March 31,
2002.
The Company has suffered significant losses from operations since its
inception. Management is implementing a strategy to significantly reduce costs
and improve operating efficiencies. Management believes that the Company's
current cash balances 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification of Prior Period Balances
Certain prior period balances have been reclassified for consistent
presentation.
Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding. Shares associated with stock options and warrants are not
included because they are antidilutive.
Recent Accounting Pronouncements
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
F-29
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
to earnings. Under the new statements, The Company's purchased intangibles
would continue to be amortized consistent with its current policy. While the
Company has not made a final determination, upon adoption of these standards,
the Company expects to record any goodwill as income or expense.
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 $0.8 million during both
quarters ended June 30, 2001 and 2000.
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, 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.
During the first quarter ended June 30, 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
recorded charges of approximately $0.5 million for headcount reductions.
Headcount reductions consisted of approximately 46 employees, or about 19% of
the Company's workforce, across all areas of the Company.
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 the Company's 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. The remaining $0.1 million of
restructuring costs is expected to be paid through December 31, 2001.
F-30
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
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, 2001..... -- (80) (80)
Amount paid in quarter ended June 30, 2001............ (421) -- (421)
----- ---- -----
Balance at June 30, 2001.............................. $ 88 $ -- $ 88
===== ==== =====
3. 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 $8.9 million on June 30, 2001.
Amounts outstanding under the credit facility bear interest at the prime rate
or LIBOR plus 250 basis points, as elected by the Company. There were no
amounts outstanding under the revolving credit facility as of June 30, 2001.
4. Treasury Stock
During May 2001, the Company repurchased 1,852,500 shares of its 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, the Company entered into a merger agreement with an online
watch retailer. 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 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 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 principals of the online
watch retailer and to resolve litigation between them, the parties began
negotiating a dissolution of that relationship. The Company and 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
F-31
Ashford.com, Inc.
Notes to Consolidated Financial Statements--(continued)
shares of the Company's common stock to settle all potential future claims and
obligations. The Company recorded a charge of approximately $2.3 million in
connection with this settlement during the quarter ended June 30, 2001.
Outsourcing Of Online Art Operations
In May 2001, the Company closed a merger agreement with 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 the online art retailer'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 May 2001, the Company concluded that the operating cost structure of the
online art retailer was inconsistent with the level of sales activity and
overall Company objectives. In June 2001, the prior management of the online
art retailer made a proposal to the Company, which the Company has accepted, to
assume the prospective operations of the online art retailer as a separately
capitalized entity. Pursuant to this agreement, the Company 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, the Company and the new
entity entered 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 of the new entity's products 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 the online art
retailer became employees of the new entity or were terminated.
Activity related to art operations during the period 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) have been reflected as net loss from discontinued
operations in the accompanying financial statements. Losses from the
measurement date through the separation date (July 31, 2001) have been deferred
as there is 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. Total net assets acquired in excess of purchase price related to
discontinued operations was approximately $2.9 million at June 30, 2001. The
Company expects to recognize a net gain on disposal of discontinued operations
of approximately $2.0 million during the quarter ending September 30, 2001.
Sale of Asset
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 majority of the cash proceeds were received during the
quarter ending September 2001. The Company recorded a loss on sale of
approximately $0.5 million during the quarter ending June 2001.
F-32
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
GLOBAL SPORTS, INC.,
a Delaware corporation;
RUBY ACQUISITION CORP.,
a Delaware corporation; and
ASHFORD.COM, INC.,
a Delaware corporation
----------------------------
Dated as of September 13, 2001
----------------------------
================================================================================
TABLE OF CONTENTS
Page
----
SECTION 1. Description of Transaction.................................................... A-1
1.1 Merger of Merger Sub into the Company............................................. A-1
1.2 Effect of the Merger.............................................................. A-1
1.3 Closing; Effective Time........................................................... A-1
1.4 Certificate of Incorporation and Bylaws; Directors and Officers................... A-2
1.5 Conversion of Shares.............................................................. A-2
1.6 Closing of the Company's Transfer Books........................................... A-3
1.7 Exchange of Certificates.......................................................... A-3
1.8 Appraisal Rights.................................................................. A-4
1.9 Further Action.................................................................... A-5
SECTION 2. Representations and Warranties of the Company.................................. A-5
2.1 Subsidiaries; Due Organization; Etc............................................... A-5
2.2 Certificate of Incorporation and Bylaws........................................... A-5
2.3 Capitalization, Etc............................................................... A-5
2.4 SEC Filings; Financial Statements................................................. A-7
2.5 Absence of Changes................................................................ A-7
2.6 Title to Assets................................................................... A-9
2.7 Cash; Receivables; Customers; Inventories......................................... A-9
2.8 Equipment; Real Property; Leasehold............................................... A-9
2.9 Proprietary Assets................................................................ A-10
2.10 Contracts......................................................................... A-11
2.11 Liabilities....................................................................... A-13
2.12 Compliance with Legal Requirements................................................ A-13
2.13 Certain Business Practices........................................................ A-13
2.14 Governmental Authorizations....................................................... A-13
2.15 Tax Matters....................................................................... A-14
2.16 Employee and Labor Matters; Benefit Plans......................................... A-15
2.17 Environmental Matters............................................................. A-17
2.18 Insurance......................................................................... A-18
2.19 Transactions with Affiliates...................................................... A-18
2.20 Legal Proceedings; Orders......................................................... A-18
2.21 Authority; Inapplicability of Anti-takeover Statutes; Binding Nature of Agreement. A-18
2.22 Section 203 of the DGCL Not Applicable............................................ A-19
2.23 Compliance with Nasdaq Listing Requirements....................................... A-19
2.24 No Discussions.................................................................... A-19
2.25 Vote Required..................................................................... A-19
2.26 Non-Contravention; Consents....................................................... A-19
2.27 Fairness Opinion.................................................................. A-20
2.28 Financial Advisor................................................................. A-20
2.29 Full Disclosure................................................................... A-20
SECTION 3. Representations and Warranties of Parent and Merger Sub........................ A-21
3.1 Due Organization; Subsidiaries.................................................... A-21
3.2 Capitalization.................................................................... A-21
3.3 SEC Filings; Financial Statements................................................. A-21
3.4 Absence of Material Adverse Effect................................................ A-21
3.5 Compliance with Legal Requirements................................................ A-21
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Page
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3.6 Governmental Authorizations.................................... A-22
3.7 Financial Advisor.............................................. A-22
3.8 Authority; Binding Nature of Agreement......................... A-22
3.9 Non-Contravention; Consents.................................... A-22
3.10 Valid Issuance................................................. A-22
3.11 Disclosure..................................................... A-22
SECTION 4. Certain Covenants of the Company............................ A-23
4.1 Access and Investigation....................................... A-23
4.2 Operation of the Business of the Acquired Corporations......... A-23
4.3 No Solicitation................................................ A-26
SECTION 5. Additional Covenants of the Parties......................... A-27
5.1 Registration Statement; Prospectus/Proxy Statement............. A-27
5.2 Company Stockholders' Meeting.................................. A-28
5.3 Regulatory Approvals........................................... A-28
5.4 Stock Options.................................................. A-29
5.5 Warrants....................................................... A-29
5.6 Employee Benefits.............................................. A-30
5.7 Indemnification of Officers and Directors...................... A-30
5.8 Additional Agreements.......................................... A-31
5.9 Disclosure..................................................... A-31
5.10 Affiliate Agreements........................................... A-31
5.11 Listing........................................................ A-32
5.12 October Reverse Stock Split.................................... A-32
5.13 Resignation of Officers and Directors.......................... A-32
SECTION 6. Conditions Precedent to Obligations of Parent and Merger Sub A-32
6.1 Accuracy of Representations.................................... A-32
6.2 Performance of Covenants....................................... A-33
6.3 Effectiveness of Registration Statement........................ A-33
6.4 Stockholder Approval........................................... A-33
6.5 Consents....................................................... A-33
6.6 Agreements and Documents....................................... A-33
6.7 No Restraints.................................................. A-33
6.8 No Governmental Litigation..................................... A-33
6.9 No Other Litigation............................................ A-34
SECTION 7. Conditions Precedent to Obligation of the Company........... A-34
7.1 Accuracy of Representations.................................... A-34
7.2 Performance of Covenants....................................... A-35
7.3 Effectiveness of Registration Statement........................ A-35
7.4 Stockholder Approval........................................... A-35
7.5 Documents...................................................... A-35
7.6 Listing........................................................ A-35
7.7 No Restraints.................................................. A-35
SECTION 8. Termination................................................. A-35
8.1 Termination.................................................... A-35
8.2 Effect of Termination.......................................... A-36
8.3 Expenses; Termination Fees..................................... A-36
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Page
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SECTION 9. Miscellaneous Provisions................... A-37
9.1 Amendment..................................... A-37
9.2 Waiver........................................ A-37
9.3 No Survival of Representations and Warranties. A-38
9.4 Entire Agreement; Counterparts................ A-38
9.5 Applicable Law; Jurisdiction.................. A-38
9.6 Disclosure Schedule........................... A-38
9.7 Attorneys' Fees............................... A-38
9.8 Assignability................................. A-38
9.9 Notices....................................... A-38
9.11 Cooperation................................... A-39
9.12 Severability.................................. A-39
9.13 Construction.................................. A-39
A-iii
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization (this "Agreement") is
made and entered into as of September 13, 2001, by and among: Global Sports,
Inc., a Delaware corporation ("Parent"); Ruby Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); and
Ashford.com, Inc., a Delaware corporation (the "Company"). Certain capitalized
terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company (the "Merger") in accordance with this Agreement and the
Delaware General Corporation Law (the "DGCL"). Upon consummation of the Merger,
Merger Sub will cease to exist, and the Company will become a wholly owned
subsidiary of Parent.
B. The respective boards of directors of Parent, Merger Sub and the Company
have approved this Agreement and approved the Merger.
C. In order to induce Parent to enter into this Agreement, concurrently with
the execution and delivery of this Agreement, certain stockholders of the
Company are executing Voting Agreements (the "Company Stockholder Voting
Agreements"), by which such stockholders are agreeing to vote all of the shares
of common stock of the Company owned by them beneficially or of record in favor
of the Merger.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
Section 1. DESCRIPTION OF TRANSACTION
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 3175 Hanover Street, Palo Alto, California, at 10:00
a.m. on a date to be designated by Parent (the "Closing Date"), which shall be
no later than the tenth business day after the satisfaction or waiver of the
last to be satisfied or waived of the conditions set forth in Sections 6 and 7
(other than those conditions that by their nature are to be satisfied at the
Closing, but subject to the satisfaction or waiver of such conditions). Subject
to the provisions of this Agreement, a certificate of merger satisfying the
applicable requirements of the DGCL shall be duly executed by the Company and,
concurrently with or as soon as practicable following the Closing, delivered to
and filed with the Secretary of State of the State of Delaware in accordance
with the DGCL. The Merger shall become effective upon the date and time of the
filing of such certificate of merger with the Secretary of State of the State
of Delaware (the "Effective Time").
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1.4 Certificate of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by Parent prior to the Effective Time:
(a) the Certificate of Incorporation of the Surviving Corporation shall be
amended and restated immediately after the Effective Time to conform to the
Certificate of Incorporation of Merger Sub as in effect immediately prior to
the Effective Time, except that the name of the Surviving Corporation shall be
"Ashford.com, Inc.";
(b) the Bylaws of the Surviving Corporation shall be amended and restated as
of the Effective Time to conform to the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time; and
(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the respective individuals who are directors
and officers of Merger Sub immediately prior to the Effective Time.
1.5 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of Parent, Merger Sub, the Company or any stockholder of the
Company:
(i) any shares of Company Common Stock then held by the Company or any
wholly owned Subsidiary of the Company (or held in the Company's treasury)
shall be canceled and retired and shall cease to exist, and no consideration
shall be delivered in exchange therefor;
(ii) any shares of Company Common Stock then held by Parent, Merger Sub
or any other wholly owned Subsidiary of Parent shall be canceled and retired
and shall cease to exist, and no consideration shall be delivered in
exchange therefor;
(iii) except as provided in clauses "(i)" and "(ii)" above and subject to
Sections 1.5(b), 1.5(c) and 1.8, each share of Company Common Stock then
outstanding shall be converted into the right to receive a combination of
(A) cash in the amount of $0.125 (the "Cash Consideration"), and (B) 0.0076
of a share of Parent Common Stock (the "Exchange Ratio"); and
(iv) each share of the common stock, $0.01 par value per share, of Merger
Sub then outstanding shall be converted into one share of common stock of
the Surviving Corporation.
The Cash Consideration and the Exchange Ratio (as each of them may be
adjusted in accordance with Section 1.5(b)) are collectively referred to as the
"Merger Consideration".
(b) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock are changed into a different number
or class of shares by reason of any stock split, division or subdivision of
shares, stock dividend, reverse stock split (including the October Reverse
Stock Split), consolidation of shares, reclassification, recapitalization or
other similar transaction, then the Cash Consideration and the Exchange Ratio
each shall be appropriately adjusted. If, between the date of this Agreement
and the Effective Time, the outstanding shares of Parent Common Stock are
changed into a different number or class of shares by reason of any stock
split, division or subdivision of shares, stock dividend, reverse stock split,
consolidation of shares, reclassification, recapitalization or other similar
transaction, then the Exchange Ratio (but not the Cash Consideration) shall be
appropriately adjusted.
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates or scrip for any such
fractional shares shall be issued. Any holder of Company Common Stock who would
otherwise be entitled to receive a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock issuable to
such holder) shall, in lieu of such fraction of a share and upon surrender of
such holder's Company Stock Certificate(s) (as defined in Section 1.6), be paid
in cash the
A-2
dollar amount (rounded to the nearest whole cent), without interest, determined
by multiplying such fraction by the closing price of a share of Parent Common
Stock on the Nasdaq National Market on the date the Merger becomes effective.
1.6 Closing of the Company's Transfer Books. At the Effective Time: (a) all
shares of Company Common Stock outstanding immediately prior to the Effective
Time shall automatically be canceled and retired and shall cease to exist, and
all holders of certificates representing shares of Company Common Stock that
were outstanding immediately prior to the Effective Time shall cease to have
any rights as stockholders of the Company, and each certificate representing
any such Company Common Stock (a "Company Stock Certificate") shall thereafter
represent only the right to receive the consideration referred to in Sections
1.5(a) and 1.5(c) (or if applicable, Section 1.8) until surrendered in
accordance with Section 1.7; and (b) the stock transfer books of the Company
shall be closed with respect to all shares of Company Common Stock outstanding
immediately prior to the Effective Time. No further transfer of any such shares
of Company Common Stock shall be made on such stock transfer books after the
Effective Time. If, after the Effective Time, a Company Stock Certificate is
presented to the Exchange Agent (as defined in Section 1.7) or to the Surviving
Corporation or Parent, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.7.
1.7 Exchange of Certificates.
(a) On or prior to the Closing Date, Parent shall select a reputable bank or
trust company to act as exchange agent in the Merger (the "Exchange Agent"). As
soon as practicable, but in no event later than three business days after the
Effective Time, Parent shall deposit with the Exchange Agent (i) cash
sufficient to pay the Cash Consideration payable in accordance with Section
1.5(a)(iii), (ii) certificates representing the shares of Parent Common Stock
issuable pursuant to Section 1.5(a)(iii), and (iii) cash sufficient to make
payments in lieu of fractional shares in accordance with Section 1.5(c). The
shares of Parent Common Stock and cash amounts so deposited with the Exchange
Agent, together with any dividends or distributions received by the Exchange
Agent with respect to such shares, are referred to collectively as the
"Exchange Fund."
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to the record holders of Company Stock Certificates (i) a
letter of transmittal in customary form and containing such provisions as
Parent may reasonably specify (including a provision confirming that delivery
of Company Stock Certificates shall be effected, and risk of loss and title to
Company Stock Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for the Cash
Consideration and certificates representing Parent Common Stock. Upon surrender
of a Company Stock Certificate to the Exchange Agent for exchange, together
with a duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (1) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor (x)
the Cash Consideration that such holder has the right to receive pursuant to
the provisions of Section 1.5(a)(iii), and (y) a certificate representing the
number of whole shares of Parent Common Stock that such holder has the right to
receive pursuant to the provisions of Section 1.5(a)(iii) (and cash in lieu of
any fractional share of Parent Common Stock), and (2) the Company Stock
Certificate so surrendered shall be canceled. If any Company Stock Certificate
shall have been lost, stolen or destroyed, Parent may, in its discretion and as
a condition precedent to the payment of the Cash Consideration and the issuance
of any certificate representing Parent Common Stock, require the owner of such
lost, stolen or destroyed Company Stock Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as Parent may reasonably direct)
as indemnity against any claim that may be made against the Exchange Agent,
Parent or the Surviving Corporation with respect to such Company Stock
Certificate.
(c) Notwithstanding anything to the contrary contained in this Agreement, no
Cash Consideration and no shares of Parent Common Stock (or certificates
therefor) shall be issued in exchange for any Company Stock Certificate to any
Person who may be an "affiliate" (as that term is used in Rule 145 under the
Securities Act) of the Company until such Person shall have delivered to Parent
a duly executed Affiliate Agreement as contemplated by Section 5.10.
A-3
(d) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered Company Stock Certificate with respect to
the shares of Parent Common Stock that such holder has the right to receive in
the Merger until such holder surrenders such Company Stock Certificate in
accordance with this Section 1.7 (at which time such holder shall be entitled,
subject to the effect of applicable escheat or similar laws, to receive all
such dividends and distributions, without interest).
(e) Any portion of the Exchange Fund that remains undistributed to holders
of Company Stock Certificates as of the date 180 days after the date on which
the Merger becomes effective shall be delivered to Parent upon demand, and any
holders of Company Stock Certificates who have not theretofore surrendered
their Company Stock Certificates in accordance with this Section 1.7 shall
thereafter look only to Parent for satisfaction of their claims for the Cash
Consideration, Parent Common Stock, cash in lieu of fractional shares of Parent
Common Stock and any dividends or distributions with respect to Parent Common
Stock.
(f) Each of the Exchange Agent, Parent and the Surviving Corporation shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of
Company Common Stock such amounts as may be required to be deducted or withheld
therefrom under the Code or any provision of state, local or foreign Tax law or
under any other applicable Legal Requirement. To the extent such amounts are so
deducted or withheld, such amounts shall be treated for all purposes under this
Agreement as having been paid to the Person to whom such amounts would
otherwise have been paid.
(g) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock or to any other Person with
respect to the Cash Consideration, any shares of Parent Common Stock (or
dividends or distributions with respect thereto), or for any other cash
amounts, delivered to any public official pursuant to any applicable abandoned
property law, escheat law or similar Legal Requirement.
1.8 Appraisal Rights.
(a) Notwithstanding anything to the contrary contained in this Agreement
(but without limiting the effect of Section 6.4), to the extent that the
provisions of Section 262 of the DGCL are or prior to the Effective Time may
become applicable to the Merger (by reason of a delisting of Company Common
Stock from the Nasdaq National Market or otherwise), any shares of Company
Common Stock that, as of the Effective Time, are held by holders who have as of
the Effective Time preserved appraisal rights under Section 262 of the DGCL
with respect to such shares shall not be converted into or represent the right
to receive Parent Common Stock in accordance with Section 1.5(a) (or cash in
lieu of fractional shares in accordance with Section 1.5(c)), and the holder or
holders of such shares shall be entitled only to such rights as may be granted
to such holder or holders pursuant to Section 262 of the DGCL; provided,
however, that if such appraisal rights shall not be perfected or the holders of
such shares shall otherwise lose their appraisal rights with respect to such
shares, then, as of the later of the Effective Time or the time of the failure
to perfect such status or the loss of such rights, such shares shall
automatically be converted into and shall represent only the right to receive
(upon the surrender of the certificate or certificates representing such
shares) Parent Common Stock in accordance with Section 1.5(a) (and cash in lieu
of fractional shares in accordance with Section 1.5(c)).
(b) The Company shall give Parent (i) prompt notice of any written demand
received by the Company prior to the Effective Time to require the Company to
purchase shares of Company Common Stock pursuant to Section 262 of the DGCL and
of any other demand, notice or instrument delivered to the Company prior to the
Effective Time pursuant to the DGCL, and (ii) the opportunity to participate in
all negotiations and proceedings with respect to any such demand, notice or
instrument. The Company shall not make any payment or settlement offer prior to
the Effective Time with respect to any such demand unless Parent shall have
consented in writing to such payment or settlement offer.
A-4
1.9 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full
right, title and possession of and to all rights and property of Merger Sub and
the Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as follows:
2.1 Subsidiaries; Due Organization; Etc.
(a) The Company has no Subsidiaries, except for the corporations identified
in Part 2.1(a)(i) of the Company Disclosure Schedule; and neither the Company
nor any of the other corporations identified in Part 2.1(a)(i) of the Company
Disclosure Schedule owns any capital stock of, or any equity interest of any
nature in, any other Entity, other than the Entities identified in Part
2.1(a)(ii) of the Company Disclosure Schedule. (The Company and its
Subsidiaries are referred to collectively in this Agreement as the "Acquired
Corporations.") None of the Acquired Corporations has agreed or is obligated to
make, or is bound by any Contract under which it may become obligated to make,
any future investment in or capital contribution to any other Entity. None of
the Acquired Corporations has, at any time, been a general partner of, or has
otherwise been liable for any of the debts or other obligations of, any general
partnership, limited partnership or other Entity.
(b) The Company has never done business under any name other than
"Ashford.com, Inc." or "NewWatch Company".
(c) Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all necessary power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted; (ii)
to own and use its assets in the manner in which its assets are currently owned
and used; and (iii) to perform its obligations under all Contracts by which it
is bound.
(d) Each of the Acquired Corporations is qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification,
except where the failure to be so qualified or in such good standing is not,
when taken together with all such other failures, reasonably likely to have a
Material Adverse Effect on the Acquired Corporations.
2.2 Certificate of Incorporation and Bylaws. The Company has delivered to
Parent accurate and complete copies of the certificate of incorporation, bylaws
and other charter and organizational documents of the respective Acquired
Corporations, including all amendments thereto.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: (i) 100,000,000
shares of Company Common Stock, of which 53,784,256 shares have been issued and
are outstanding as of the date of this Agreement, and of which 3,066,726 have
been issued and are held as treasury shares as of the date of this Agreement;
and (ii) 10,000,000 shares of Preferred Stock, $0.001 par value per share, of
which no shares are issued and outstanding. Except as set forth in Part
2.3(a)(i) of the Company Disclosure Schedule, the Company does not hold any
shares of its capital stock in its treasury. All of the outstanding shares of
Company Common Stock have been duly authorized and validly issued, and are
fully paid and nonassessable. There are no shares of Company Common Stock held
by any of the other Acquired Corporations. Except as set forth in Part
2.3(a)(ii) of the Company Disclosure Schedule: (i) none of the outstanding
shares of Company Common Stock is entitled or subject to any preemptive right,
right of participation, right of maintenance or any similar right; (ii) none of
the outstanding shares of Company Common Stock is subject to any right of first
refusal in favor of the Company;
A-5
and (iii) there is no Acquired Corporation Contract relating to the voting or
registration of, or restricting any Person from purchasing, selling, pledging
or otherwise disposing of (or granting any option or similar right with respect
to), any shares of Company Common Stock. None of the Acquired Corporations is
under any obligation, or is bound by any Contract pursuant to which it may
become obligated, to repurchase, redeem or otherwise acquire any outstanding
shares of Company Common Stock. Part 2.3(a)(iii) of the Company Disclosure
Schedule describes all repurchase rights held by the Company with respect to
shares of Company Common Stock (whether such shares were issued pursuant to the
exercise of Company Options or otherwise).
(b) As of the date of this Agreement: (i) 1,370,350 shares of Company Common
Stock are issuable upon the exercise of stock options granted and outstanding
under the Company's 1998 Stock Incentive Plan; (ii) 4,461,032 shares of Company
Common Stock are issuable upon the exercise of stock options granted and
outstanding under the Company's 1999 Equity Incentive Plan; (iii) 3,233,535
shares of Company Common Stock are issuable upon the exercise of stock options
granted and outstanding under the Company's 2000 Non-Officer Stock Plan; (iv)
1,916,833 shares of Company Common Stock are issuable upon the exercise of
stock options granted and outstanding under the Guild.com, Inc. Stock Option
Plan assumed by the Company in connection with its acquisition of Guild.com,
Inc.; and (v) 1,662,500 shares of Company Common Stock are reserved for
issuance pursuant to the Company's 1999 Employee Stock Purchase Plan (the
"ESPP"). (Options to purchase shares of Company Common Stock (whether granted
by the Company pursuant to the Company's stock option plans, assumed by the
Company in connection with any merger, acquisition or similar transaction or
otherwise issued or granted) are referred to in this Agreement as "Company
Options.") Part 2.3(b) of the Company Disclosure Schedule sets forth the
following information with respect to each Company Option outstanding as of the
date of this Agreement: (i) the particular plan (if any) pursuant to which such
Company Option was granted; (ii) the name of the optionee; (iii) the number of
shares of Company Common Stock subject to such Company Option; (iv) the
exercise price of such Company Option; (v) the date on which such Company
Option was granted; (vi) the applicable vesting schedule, and the extent to
which such Company Option is vested and exercisable as of the date of this
Agreement; and (vii) the date on which such Company Option expires. The Company
has delivered to Parent accurate and complete copies of all stock option plans
pursuant to which any of the Acquired Corporations has ever granted stock
options, and the forms of all stock option agreements evidencing such options.
(c) As of the date of this Agreement, 928,636 shares of Company Common Stock
are reserved for issuance pursuant to Company Warrants. Part 2.3(c) of the
Company Disclosure Schedule sets forth the following information with respect
to each Company Warrant outstanding as of the date of this Agreement: (i) the
name of the holder of such Company Warrant; (ii) the number of shares of
Company Common Stock subject to such Company Warrant; (iii) the exercise price
of such Company Warrant; (iv) the date on which such Company Warrant was
granted; (v) the applicable vesting schedule, and the extent to which such
Company Warrant is vested and exercisable as of the date of this Agreement; and
(vi) the date on which such Company Warrant expires. The Company has delivered
to Parent accurate and complete copies of all Company Warrants.
(d) Except as set forth in Part 2.3(b) or Part 2.3(c) of the Company
Disclosure Schedule, there is no: (i) outstanding subscription, option, call,
warrant or right (whether or not currently exercisable) to acquire any shares
of the capital stock or other securities of any of the Acquired Corporations;
(ii) outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or other
securities of any of the Acquired Corporations; or (iii) stockholder rights
plan (or similar plan commonly referred to as a "poison pill") or Contract
under which any of the Acquired Corporations is or may become obligated to sell
or otherwise issue any shares of its capital stock or any other securities.
(e) All outstanding shares of Company Common Stock, options, warrants and
other securities of the Acquired Corporations have been issued and granted in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts. All
shares of Company Common Stock, options, warrants and other securities of the
Acquired Corporations repurchased or redeemed by any of the Acquired
Corporations have been repurchased or redeemed in compliance with (i) all
A-6
applicable securities laws and other applicable Legal Requirements, and (ii)
all requirements set forth in applicable Contracts.
(f) All of the outstanding shares of capital stock of each of the Company's
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof, and are owned beneficially and of record by
the Company, free and clear of any Encumbrances.
(g) The board of directors and the stockholders of the Company have duly
approved the October Reverse Stock Split.
2.4 SEC Filings; Financial Statements.
(a) The Company has delivered or made available to Parent accurate and
complete copies of all registration statements, proxy statements and other
statements, reports, schedules, forms and other documents filed by the Company
with the SEC since July 14, 1999, and all amendments thereto (the "Company SEC
Documents"), as well as the Unaudited Interim Financial Statements. All
statements, reports, schedules, forms and other documents required to have been
filed by the Company with the SEC since such date have been so filed on a
timely basis. None of the Company's Subsidiaries is required to file any
documents with the SEC. As of the time it was filed with the SEC (or, if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing): (i) each of the Company SEC Documents complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) The financial statements (including any related notes) contained in the
Company SEC Documents (at the time filed with the SEC or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) and the Unaudited Interim Financial Statements: (i) complied as to
form in all material respects with the published rules and regulations of the
SEC applicable thereto (other than the Unaudited Interim Financial Statements);
(ii) were prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered (except as may be indicated in the notes to such
financial statements or, in the case of unaudited financial statements, as
permitted by Form 10-Q of the SEC, and except that the unaudited financial
statements may not contain footnotes and are subject to normal and recurring
year-end adjustments that will not, individually or in the aggregate, be
material in amount under GAAP), and (iii) fairly present the consolidated
financial position of the Company and its consolidated subsidiaries as of the
respective dates thereof and the consolidated results of operations and cash
flows of the Company and its consolidated subsidiaries for the periods covered
thereby.
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Company
Disclosure Schedule, since June 30, 2001:
(a) there has not been any Material Adverse Effect on the Acquired
Corporations, and no event has occurred or circumstance has arisen that, in
combination with any other events or circumstances, could reasonably be
expected to have a Material Adverse Effect on the Acquired Corporations;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the assets of any of the Acquired
Corporations (whether or not covered by insurance) that has had or could
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations;
(c) none of the Acquired Corporations has (i) declared, accrued, set aside
or paid any dividend or made any other distribution in respect of any shares of
capital stock, or (ii) repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;
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(d) none of the Acquired Corporations has sold, issued or granted, or
authorized the issuance of, (i) any capital stock or other security (except for
Company Common Stock issued upon the valid exercise of outstanding Company
Options), (ii) any option, warrant or right to acquire any capital stock or any
other security (except for Company Options identified in Part 2.3(b) of the
Company Disclosure Schedule), or (iii) any instrument convertible into or
exchangeable for any capital stock or other security;
(e) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of any of the
Company's stock option plans, (ii) any provision of any Contract evidencing any
outstanding Company Option, or (iii) any restricted stock purchase agreement;
(f) there has been no amendment to the certificate of incorporation, bylaws
or other charter or organizational documents of any of the Acquired
Corporations, and none of the Acquired Corporations has effected or been a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock split
(other than the October Reverse Stock Split) or similar transaction;
(g) none of the Acquired Corporations has received any Acquisition Proposal;
(h) none of the Acquired Corporations has formed any Subsidiary or acquired
any equity interest or other interest in any other Entity;
(i) the Acquired Corporations have not made any capital expenditures which,
when added to all other capital expenditures made on behalf of the Acquired
Corporations since June 30, 2001, exceeds $50,000 in the aggregate;
(j) except in the ordinary course of business and consistent with past
practices, none of the Acquired Corporations has amended or terminated, or
waived any material right or remedy under, any Material Contract;
(k) none of the Acquired Corporations has (i) acquired, leased or licensed
any material right or other material asset from any other Person, (ii) sold or
otherwise disposed of, or leased or licensed, any material right or other
material asset to any other Person, or (iii) waived or relinquished any right,
except for rights or other assets acquired, leased, licensed or disposed of in
the ordinary course of business and consistent with past practices;
(l) none of the Acquired Corporations has written off as uncollectible, or
established any extraordinary reserve with respect to, any account receivable
or other indebtedness (net of an allowance for doubtful accounts not to exceed
$50,000 in the aggregate);
(m) none of the Acquired Corporations has made any pledge of any of its
assets or otherwise permitted any of its material assets to become subject to
any Encumbrance, except for pledges of immaterial assets made in the ordinary
course of business and consistent with past practices;
(n) none of the Acquired Corporations has (i) lent money to any Person, or
(ii) incurred or guaranteed any indebtedness for borrowed money;
(o) none of the Acquired Corporations has (i) adopted, established or
entered into any Employee Plan (as defined in Section 2.16), (ii) caused or
permitted any Employee Plan to be amended in any material respect, or (iii)
paid any bonus or made any profit-sharing or similar payment to, or materially
increased the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors, officers
or employees;
(p) none of the Acquired Corporations has changed any of its methods of
accounting or accounting practices in any material respect;
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(q) none of the Acquired Corporations has made any material Tax election;
(r) none of the Acquired Corporations has commenced or settled any Legal
Proceeding;
(s) none of the Acquired Corporations has entered into any material
transaction or taken any other material action that has had, or could
reasonably be expected to have, a Material Adverse Effect on the Acquired
Corporations;
(t) none of the Acquired Corporations has entered into any material
transaction or taken any other material action outside the ordinary course of
business or inconsistent with past practices; and
(u) none of the Acquired Corporations has agreed or committed to take any of
the actions referred to in clauses "(c)" through "(t)" above.
2.6 Title to Assets. The Acquired Corporations own, and have good and valid
title to, all assets purported to be owned by them, including: (i) all assets
reflected on the Unaudited Interim Balance Sheet (except for inventory sold or
otherwise disposed of in the ordinary course of business since the date of the
Unaudited Interim Balance Sheet); and (ii) all other assets reflected in the
books and records of the Acquired Corporations as being owned by the Acquired
Corporations. All of said assets are owned by the Acquired Corporations free
and clear of any Encumbrances, except for (1) any lien for current Taxes not
yet due and payable, (2) minor liens that have arisen in the ordinary course of
business and that do not and could not reasonably be expected to have a
Material Adverse Effect on the Acquired Corporations, and (3) liens described
in Part 2.6 of the Company Disclosure Schedule.
2.7 Cash; Receivables; Customers; Inventories.
(a) The fair market value of the cash, cash equivalents and short-term
investments held by the Acquired Corporations (i) at July 31, 2001 was
$5,108,271, and (ii) as of the date of this Agreement is not less than
$4,750,000 determined after deducting the amount of all checks written on or
before the date of this Agreement and after deducting the amount of all
payments described in Part 2.7(a) of the Company Disclosure Schedule.
(b) All existing accounts receivable of the Acquired Corporations (including
those accounts receivable reflected on the Unaudited Interim Balance Sheet that
have not yet been collected and those accounts receivable that have arisen
since August 31, 2001 and have not yet been collected) (a) represent valid
obligations of customers of the Acquired Corporations arising from bona fide
transactions entered into in the ordinary course of business, (b) are current
and, to the best of the Company's knowledge, will be collected in full when
due, without any counterclaim or set off (net of an allowance for doubtful
accounts not to exceed $360,000 in the aggregate).
(c) Part 2.7(c) of the Company Disclosure Schedule contains an accurate and
complete list as of the date of this Agreement of all loans and advances made
by any of the Acquired Corporations to any employee, director, consultant or
independent contractor, other than routine travel advances made to employees in
the ordinary course of business.
(d) The inventory of the Acquired Corporations reflected on the balance
sheet forming a part of the Audited Financial Statements was, and the current
inventory (the "Inventory") of the Acquired Corporations is, in usable and
saleable condition in the ordinary course of business and in the case of
inventory reflected on such balance sheet at an amount not less than the
amounts carried therein. The Inventory is not excessive and is reasonable in
relation to the current trading requirements of the business of each of the
Acquired Corporations, and none of the Inventory is obsolete, unmarketable, or
unrelated to the current business of such Acquired Corporations.
2.8 Equipment; Real Property; Leasehold. All material items of equipment and
other tangible assets owned by or leased to the Acquired Corporations are
adequate for the uses to which they are being put, are in
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good and safe condition and repair (ordinary wear and tear excepted) and are
adequate for the conduct of the business of the Acquired Corporations in the
manner in which such business is currently being conducted. None of the
Acquired Corporations own any real property, and none of the Acquired
Corporations owns any interest in real property except for the leaseholds
created under the real property leases identified in Part 2.8 of the Company
Disclosure Schedule.
2.9 Proprietary Assets.
(a) Part 2.9(a)(i) of the Company Disclosure Schedule sets forth, with
respect to each Proprietary Asset owned by any of the Acquired Corporations and
registered with any Governmental Body or for which an application has been
filed with any Governmental Body, (i) a brief description of such Proprietary
Asset, and (ii) the names of the jurisdictions covered by the applicable
registration or application. Part 2.9(a)(ii) of the Company Disclosure Schedule
identifies and provides a brief description of each Proprietary Asset owned by
any of the Acquired Corporations that is material to the business of the
Acquired Corporations. Part 2.9(a)(iii) of the Company Disclosure Schedule
identifies and provides a brief description of, and identifies any ongoing
royalty or payment obligations in excess of $10,000 with respect to, each
Proprietary Asset that is licensed or otherwise made available to any of the
Acquired Corporations by any Person, and identifies the Contract under which
such Proprietary Asset is being licensed or otherwise made available to such
Acquired Corporation. The Acquired Corporations have good and valid title to
all of the Acquired Corporation Proprietary Assets identified or required to be
identified in Parts 2.9(a)(i) and 2.9(a)(ii) of the Company Disclosure
Schedule, free and clear of all Encumbrances, except for (i) any lien for
current Taxes not yet due and payable, and (ii) minor liens that have arisen in
the ordinary course of business and that do not (individually or in the
aggregate) materially detract from the value of the Acquired Corporation
Proprietary Asset subject thereto or materially impair the operations of any of
the Acquired Corporations. The Acquired Corporations have a valid right to use,
license and otherwise exploit all Proprietary Assets identified in Part
2.9(a)(iii) of the Company Disclosure Schedule in the manner in which the
Acquired Corporations have used, licensed or otherwise exploited such
Proprietary Assets prior to the date of this Agreement. The Company has the
sole and exclusive right to use of the name "Ashford" and the internet domain
names "Ashford.com" and those set forth on Part 2.9(a)(iv) of the Company
Disclosure Schedule. Except as set forth in Part 2.9(a)(v) of the Company
Disclosure Schedule, none of the Acquired Corporations has developed jointly
with any other Person any Acquired Corporation Proprietary Asset with respect
to which such other Person has any rights. Except as set forth in Part
2.9(a)(vi) of the Company Disclosure Schedule, there is no Acquired Corporation
Contract pursuant to which any Person has any right (whether or not currently
exercisable) to use, license or otherwise exploit any Acquired Corporation
Proprietary Asset.
(b) The Acquired Corporations have taken reasonable measures and precautions
to protect and maintain the confidentiality, secrecy and value of all material
Acquired Corporation Proprietary Assets (except Acquired Corporation
Proprietary Assets whose value would be unimpaired by disclosure). Without
limiting the generality of the foregoing, except as set forth in Part 2.9(b) of
the Company Disclosure Schedule, (i) each current or former employee of any of
the Acquired Corporations who is or was involved in, or who has contributed to,
the creation or development of any material Acquired Corporation Proprietary
Asset has executed and delivered to such Acquired Corporation an agreement
(containing no exceptions to or exclusions from the scope of its coverage) that
is substantially identical to the form of Confidential Information and
Invention Assignment Agreement previously delivered by the Company to Parent,
and (ii) each current and former consultant and independent contractor to any
Acquired Corporation who is or was involved in, or who has contributed to, the
creation or development of any material Acquired Corporation Proprietary Asset
has executed and delivered to the Company an agreement (containing no
exceptions to or exclusions from the scope of its coverage) that is
substantially identical to the form of Consultant Confidential Information and
Invention Assignment Agreement previously delivered to Parent. To the knowledge
of the Company, no current or former employee, officer, director, stockholder,
consultant or independent contractor has any right, claim or interest in or
with respect to any Acquired Corporation Proprietary Asset.
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(c) To the knowledge of the Company: (i) all patents, trademarks, service
marks and copyrights owned by or exclusively licensed to any of the Acquired
Corporations are valid, enforceable and subsisting; (ii) none of the Acquired
Corporation Proprietary Assets and no Proprietary Asset that is currently being
developed by any of the
Acquired Corporations (either by itself or with any other Person) infringes,
misappropriates or conflicts with any Proprietary Asset owned or used by any
other Person; (iii) none of the products, systems, software, computer programs,
source code, models, algorithm, formula, compounds, inventions, designs,
technology, proprietary rights or other intellectual property rights or
intangible assets that is or has been designed, created, developed, assembled,
manufactured or sold by any of the Acquired Corporations is infringing,
misappropriating or making any unlawful or unauthorized use of any Proprietary
Asset owned or used by any other Person, and none of such products has at any
time infringed, misappropriated or made any unlawful or unauthorized use of any
such Proprietary Asset; (iv) none of the Acquired Corporations has received any
notice or other communication (in writing or otherwise) of any actual, alleged,
possible or potential infringement, misappropriation or unlawful or
unauthorized use of, any Proprietary Asset owned or used by any other Person;
and (v) no other Person is infringing, misappropriating or making any unlawful
or unauthorized use of, and no Proprietary Asset owned or used by any other
Person infringes or conflicts with, any material Acquired Corporation
Proprietary Asset.
(d) The Acquired Corporation Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Acquired Corporations to conduct
their business in the manner in which such business has been and is being
conducted. None of the Acquired Corporations has (i) licensed any of the
material Acquired Corporation Proprietary Assets to any Person on an exclusive
basis, or (ii) entered into any covenant not to compete or Contract limiting or
purporting to limit the ability of any Acquired Corporation to exploit fully
any material Acquired Corporation Proprietary Assets or to transact business in
any market or geographical area or with any Person.
2.10 Contracts.
(a) Part 2.10(a) of the Company Disclosure Schedule identifies each Acquired
Corporation Contract that constitutes a "Material Contract." For purposes of
this Agreement, each of the following shall be deemed to constitute a "Material
Contract":
(i) any Contract (A) relating to the employment of, or the performance of
services by, any employee or consultant, (B) pursuant to which any of the
Acquired Corporations is or may become obligated to make any severance,
termination or similar payment to any current or former employee or
director, or (C) pursuant to which any of the Acquired Corporations is or
may become obligated to make any bonus or similar payment (other than
payments constituting base salary) in excess of $25,000 to any current or
former employee or director;
(ii) any Contract relating to the acquisition, transfer, development,
sharing or license of any Proprietary Asset (except for any Contract
pursuant to which (A) any Proprietary Asset is licensed to the Acquired
Corporations under any third party software license generally available to
the public, or (B) any Proprietary Asset is licensed by any of the Acquired
Corporations to any Person on a non-exclusive basis);
(iii) any Contract that provides for indemnification of any officer,
director, employee or agent;
(iv) any Contract imposing any material restriction on the right or
ability of any Acquired Corporation (A) to compete with any other Person,
(B) to acquire any product or other asset or any services from any other
Person, (C) to solicit, hire or retain any Person as an employee, consultant
or independent contractor (except for ordinary course third party consulting
agreements prohibiting the Acquired Corporations from hiring employees of
such consultants), or (D) to develop, sell, supply, distribute, offer,
support or service any product or any technology or other asset to or for
any other Person necessary for the conduct of the business of the Acquired
Corporations;
(v) any Contract that provides for revenue or profit sharing between any
of the Acquired Corporations and any third party;
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(vi) any Contract (other than Contracts evidencing Company Options
granted to employees in the ordinary course of business) (A) relating to the
acquisition, issuance, voting, registration, sale or transfer of any
securities, (B) providing any Person with any preemptive right, right of
participation, right of maintenance or similar right with respect to any
securities, or (C) providing any of the Acquired Corporations with any right
of first refusal with respect to, or right to repurchase or redeem, any
securities;
(vii) any Contract constituting or creating any guaranty of any material
obligation or indebtedness of any third party;
(viii) any Contract relating to any currency hedging;
(ix) any Contract containing "standstill", nonsolicitation, "no-shop",
"no-talk" or similar provisions;
(x) any Contract requiring that any of the Acquired Corporations give any
notice or provide any information to any Person prior to considering or
accepting any Acquisition Proposal, or prior to entering into any
discussions, agreement, arrangement or understanding relating to any
Acquisition Transaction;
(xi) any Contract that has a term of more than 60 days and that may not
be terminated by an Acquired Corporation (without penalty) within 60 days
after the delivery of a termination notice by such Acquired Corporation;
(xii) any Contract that contemplates or involves the payment or delivery
of cash or other consideration in an amount or having a value in excess of
$100,000 in the aggregate, or contemplates or involves the performance of
services having a value in excess of $100,000 in the aggregate;
(xiii) any Contract relating to the hosting of any Web sites owned or
maintained by the Company ("Company Sites"), relating to the fulfillment of
orders placed through any Company Sites, relating to the advertising or
marketing of any goods or services offered or otherwise available through
any Company Sites, relating to the collection or use of customer or other
data collected through any Company Sites, or otherwise relating to or
evidencing any strategic alliance between any of the Acquired Corporations
and any third party; and
(xiv) any other Contract, if a breach of such Contract could reasonably
be expected to have a Material Adverse Effect on the Acquired Corporations.
The Company has delivered to Parent an accurate and complete copy of each
Acquired Corporation Contract that constitutes a Material Contract.
(b) To the knowledge of the Company, each Acquired Corporation Contract that
constitutes a Material Contract is valid and in full force and effect, and is
enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
(c) Except as set forth in Part 2.10(c) of the Company Disclosure Schedule:
(i) none of the Acquired Corporations has violated or breached, or committed
any default under, any Acquired Corporation Contract, except for violations,
breaches and defaults that have not had and could not reasonably be expected to
have a Material Adverse Effect on the Acquired Corporations; and, to the
knowledge of the Company, no other Person has violated or breached, or
committed any default under, any Acquired Corporation Contract, except for
violations, breaches and defaults that have not had and would not reasonably be
expected to have a Material Adverse Effect on the Acquired Corporations; (ii)
to the knowledge of the Company, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) could
reasonably be expected to (A) result in a violation or breach of any of the
provisions of any Acquired Corporation Contract, (B) give any Person the right
to declare a default or exercise any remedy under any Acquired Corporation
Contract, (C) give any Person the right to receive or require a rebate,
chargeback, penalty or change in delivery schedule under any Acquired
Corporation Contract, (D) give any Person the right to accelerate the maturity
or performance of any Acquired Corporation Contract, or (E) give any Person the
right to cancel, terminate or modify any Acquired
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Corporation Contract, except (with respect to each of the subparagraphs of this
clause "(ii)") for defaults, acceleration rights, termination rights and other
rights that have not had and could not reasonably be expected to have a
Material Adverse Effect on the Acquired Corporations; and (iii) none of the
Acquired Corporations has received any notice or other communication regarding
any actual or possible violation or breach of, or default under, any Acquired
Corporation Contract, except in each such case for defaults, acceleration
rights, termination rights and other rights that have not had and would not
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations.
(d) The Company has delivered to Parent copies of the contracts set forth in
Part 2.10(d) of the Company Disclosure Schedule (the "Terminated Contracts").
None of the Terminated Contracts remains in effect as of the date of this
Agreement, and none of the Acquired Corporations has or will have any accrued,
contingent or other liabilities or obligations of any nature under any of the
Terminated Contracts, or under any contract, arrangement or understanding with
any Person who is or was a party to any of the Terminated Contracts (except for
Material Contracts set forth on Part 2.10(a) of the Company Disclosure
Schedule).
(e) The Company has delivered to Parent copies of selected written
communications ("Communications") between the Company and one or more third
parties to each of the Material Contracts identified in Part 2.10(e) of the
Company Disclosure Schedule (the "Designated Contracts"). The Acquired
Corporations are not obligated to pay any liability or other amount or fulfill
any obligation under any of the Designated Contracts which the Company has
asserted is not owed, or with respect to which the Company has otherwise denied
responsibility, in any of the Communications.
2.11 Liabilities. None of the Acquired Corporations has any accrued,
contingent or other liabilities of any nature, either matured or unmatured (and
including liabilities for warranty claims or the return of merchandise), except
for: (a) liabilities identified as such in the "liabilities" column of the
Unaudited Interim Balance Sheet; (b) normal and recurring current liabilities
that have been incurred by the Acquired Corporations since August 31, 2001 in
the ordinary course of business consistent with past practices, and which were
not incurred or generated in violation of (or in connection with any violation
of) any provision of this Agreement or any Material Contract; and (c)
liabilities described in Part 2.11 of the Company Disclosure Schedule.
2.12 Compliance with Legal Requirements. Each of the Acquired Corporations
is and has at all times since July 1, 1999 been in compliance in all material
respects with all applicable Legal Requirements. None of the Acquired
Corporations has received any notice or other communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any material Legal Requirement.
2.13 Certain Business Practices. None of the Acquired Corporations, and (to
the knowledge of the Company) no director, officer, agent or employee of any of
the Acquired Corporations, has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or
(iii) made any other unlawful payment.
2.14 Governmental Authorizations.
(a) The Acquired Corporations hold all Governmental Authorizations necessary
to enable the Acquired Corporations to conduct their respective businesses in
the manner in which such businesses are currently being conducted, except where
the failure to hold such Governmental Authorizations has not had and would not
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations. All such Governmental Authorizations are valid and in full force
and effect. Each Acquired Corporation is and at all times has been in
substantial compliance with the terms and requirements of such Governmental
Authorizations, except where the failure to be in compliance with the terms and
requirements of such Governmental Authorizations has not had and would not
reasonably be expected to have a Material Adverse Effect on the Acquired
Corporations. None of
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the Acquired Corporations has received any notice or other communication from
any Governmental Body regarding (a) any actual or possible violation of or
failure to comply with any term or requirement of any material Governmental
Authorization, or (b) any actual or possible revocation, withdrawal,
suspension, cancellation, termination or modification of any material
Governmental Authorization. No Governmental Body has at any time challenged in
writing the right of any of the Acquired Corporations to design, manufacture,
offer or sell any of its respective products or services.
(b) Part 2.14(b) of the Company Disclosure Schedule describes the terms of
each grant, incentive or subsidy provided or made available to or for the
benefit of any of the Acquired Corporations by any U.S. or foreign Governmental
Body or otherwise. Each of the Acquired Corporations is in full compliance in
all material respects with all of the terms and requirements of each grant,
incentive and subsidy identified or required to be identified in Part 2.14(b)
of the Company Disclosure Schedule. Neither the execution, delivery or
performance of this Agreement, nor the consummation of the Merger or any of the
other transactions contemplated by this Agreement, will (with or without notice
or lapse of time) give any Person the right to revoke, withdraw, suspend,
cancel, terminate or modify any grant, incentive or subsidy identified or
required to be identified in Part 2.14(b) of the Company Disclosure Schedule.
2.15 Tax Matters.
(a) Each of the Tax Returns required to be filed by or on behalf of the
respective Acquired Corporations with any Governmental Body with respect to any
taxable period ending on or before the Closing Date (the "Acquired Corporation
Returns") (i) has been or will be filed on or before the applicable due date
(including any extensions of such due date), and (ii) has been, or will be when
filed, prepared in all material respects in compliance with all applicable
Legal Requirements. All amounts shown on the Acquired Corporation Returns to be
due on or before the Closing Date have been or will be paid, or duly and fully
reserved for on the Company's books consistent with prior practices, on or
before the Closing Date.
(b) The Unaudited Interim Balance Sheet fully accrues all actual and
contingent liabilities for Taxes with respect to all periods through August 31,
2001 in accordance with GAAP. Each Acquired Corporation will establish, in the
ordinary course of business and consistent with its past practices, reserves
adequate for the payment of all Taxes for the period from August 31, 2001
through the Closing Date.
(c) No Acquired Corporation Return has ever been examined or audited by any
Governmental Body. No extension or waiver of the limitation period applicable
to any of the Acquired Corporation Returns has been granted (by the Company or
any other Person), and no such extension or waiver has been requested from any
Acquired Corporation.
(d) No claim or Legal Proceeding is pending or, to the knowledge of the
Company, has been threatened against or with respect to any Acquired
Corporation in respect of any material Tax. There are no unsatisfied
liabilities for material Taxes (including liabilities for interest, additions
to Tax and penalties thereon and related expenses) with respect to any notice
of deficiency or similar document received by any Acquired Corporation with
respect to any material Tax (other than liabilities for Taxes asserted under
any such notice of deficiency or similar document which are being contested in
good faith by the Acquired Corporations and with respect to which adequate
reserves for payment have been established on the Unaudited Interim Balance
Sheet). There are no liens for material Taxes upon any of the assets of any of
the Acquired Corporations except liens for current Taxes not yet due and
payable. None of the Acquired Corporations has entered into or become bound by
any agreement or consent pursuant to Section 341(f) of the Code (or any
comparable provision of state or foreign Tax laws). None of the Acquired
Corporations has been, and none of the Acquired Corporations will be, required
to include any adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code (or any comparable
provision of state or foreign Tax laws) as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing. None of the
Acquired Corporations has made any distribution of stock of any controlled
corporation, as that term is defined in Code Section 355(a)(1).
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(e) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent contractor
of any of the Acquired Corporations that, considered individually or considered
collectively with any other such Contracts, will, or could reasonably be
expected to, give rise directly or indirectly to the payment of any amount that
would not be deductible pursuant to Section 280G or Section 162 of the Code (or
any comparable provision under state or foreign Tax laws). None of the Acquired
Corporations is, or has ever been, a party to or bound by any tax indemnity
agreement, tax sharing agreement, tax allocation agreement, agreement to
compensate any service provider for Taxes incurred under Code Section 4999 or
similar Contract.
(f) Except as set forth in Part 2.15(f) of the Company Disclosure Schedule,
none of the Acquired Corporations is required to pay, collect or withhold any
sales taxes, use taxes or similar taxes in connection with its sales of
merchandise or other products.
2.16 Employee and Labor Matters; Benefit Plans.
(a) Part 2.16(a) of the Company Disclosure Schedule identifies each salary,
bonus, vacation, deferred compensation, incentive compensation, stock purchase,
stock option, severance pay, termination pay, death and disability benefits,
hospitalization, medical, life or other insurance, flexible benefits,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement and each other employee benefit plan or arrangement
(collectively, the "Employee Plans"), including the Transition Plan, sponsored,
maintained, contributed to or required to be contributed to by any of the
Acquired Corporations for the benefit of any current or former employee of any
of the Acquired Corporations. Part 2.16(a) also identifies each Legal
Requirement pursuant to which any of the Acquired Corporations is required to
establish any reserve or make any contribution for the benefit of any current
or former employee located in any foreign jurisdiction.
(b) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
none of the Acquired Corporations maintains, sponsors or contributes to, and
none of the Acquired Corporations has at any time in the past maintained,
sponsored or contributed to, any employee pension benefit plan (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any similar pension benefit plan under the laws of any foreign
jurisdiction, whether or not excluded from coverage under specific Titles or
Subtitles of ERISA for the benefit of employees or former employees of any of
the Acquired Corporations (a "Pension Plan").
(c) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
none of the Acquired Corporations maintains, sponsors or contributes to any
employee welfare benefit plan (as defined in Section 3(1) of ERISA or any
similar welfare benefit plan under the laws of any foreign jurisdiction,
whether or not excluded from coverage under specific Titles or Subtitles of
ERISA), for the benefit of any current or former employees or directors of any
of the Acquired Corporations (a "Welfare Plan").
(d) With respect to each Employee Plan, the Company has delivered to Parent:
(i) an accurate and complete copy of such Employee Plan (including all
amendments thereto); (ii) an accurate and complete copy of the annual report,
if required under ERISA, with respect to such Employee Plan for the last three
years; (iii) an accurate and complete copy of the most recent summary plan
description, together with each summary of material modifications, if required
under ERISA, with respect to such Employee Plan; (iv) if such Employee Plan is
funded through a trust or any third party funding vehicle, an accurate and
complete copy of the trust or other funding agreement (including all amendments
thereto) and accurate and complete copies the most recent financial statements
thereof; (v) accurate and complete copies of all Contracts relating to such
Employee Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and recordkeeping
agreements; and (vi) an accurate and complete copy of the most recent
determination letter received from the Internal Revenue Service with respect to
such Employee Plan (if such Employee Plan is intended to be qualified under
Section 401(a) of the Code).
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(e) None of the Acquired Corporations is or has ever been required to be
treated as a single employer with any other Person under Section 4001(b)(1) of
ERISA or Section 414(b), (c), (m) or (o) of the Code, except for the Acquired
Corporations. None of the Acquired Corporations has ever been a member of an
"affiliated service group" within the meaning of Section 414(m) of the Code.
None of the Employee Plans identified in Part 2.16(a) of the Company Disclosure
Schedule is a multiemployer plan (within the meaning of Section 3(37) of
ERISA). None of the Acquired Corporations has ever made a complete or partial
withdrawal from a multiemployer plan, as such term is defined in Section 3(37)
of ERISA, resulting in "withdrawal liability," as such term is defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
(f) None of the Acquired Corporations has any plan or commitment to create
any Welfare Plan or any Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in a
manner that would affect any current or former employee or director of any of
the Acquired Corporations.
(g) No Employee Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee or director of any
of the Acquired Corporations after any termination of service of such employee
or director (other than benefit coverage mandated by applicable law, including
coverage provided pursuant to Section 4980B of the Code).
(h) With respect to any Employee Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of
Section 4980B of the Code ("COBRA") have been complied with in all material
respects. Part 2.16(h) of the Company Disclosure Schedule describes all
obligations of the Acquired Corporations as of the date of this Agreement under
any of the provisions of COBRA.
(i) Each of the Employee Plans has been operated and administered in all
material respects in accordance with its terms and with applicable Legal
Requirements, including without limitation ERISA and the Code, except to the
extent that any violation of the applicable Legal Requirements has not had and
would not be reasonably likely to have a Material Adverse Effect on the
Acquired Corporations. The Acquired Corporations have performed in all material
respects all of their respective obligations under the Employee Plans.
(j) Each of the Employee Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service, and to the knowledge of the Company, nothing has occurred that
would adversely affect such determination.
(k) Neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any bonus, golden parachute, severance or other
payment or obligation to any current or former employee or director of any of
the Acquired Corporations (whether or not under any Employee Plan), or
materially increase the benefits payable or provided under any Employee Plan,
or result in any acceleration of the time of payment or vesting of any such
benefits. Without limiting the generality of the foregoing (and except as set
forth in Part 2.16(k) of the Company Disclosure Schedule), the consummation of
the Merger will not result in the acceleration of vesting of any unvested
Company Options.
(l) Part 2.16(l) of the Company Disclosure Schedule contains a list of all
salaried employees of each of the Acquired Corporations as of the date of this
Agreement, and correctly reflects, in all material respects, their salaries,
any other compensation payable to them (including compensation payable pursuant
to bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. None of the Acquired Corporations is a party to
any collective bargaining contract or other Contract with a labor union
involving any of its employees. All of the employees of the Acquired
Corporations are "at will" employees, and except as set forth in Part 2.16(l)
of the Company Disclosure Schedule, may be terminated without any of the
Acquired Corporations being required to make any payment to any such employee.
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(m) Part 2.16(m) of the Company Disclosure Schedule identifies each employee
of any of the Acquired Corporations who is not fully available to perform work
because of disability or other leave and sets forth the basis of such
disability or leave and the anticipated date of return to full service.
(n) Part 2.16(n) of the Company Disclosure Schedule identifies each employee
or former employee of any of the Acquired Corporations who has been terminated
or who has received notice of termination since July 1, 2000, and the
respective dates with respect to each such individual of such notice and (if
applicable) such termination.
(o) Each of the Acquired Corporations is in compliance in all material
respects with all applicable Legal Requirements and Contracts relating to
employment, employment practices, wages, bonuses and terms and conditions of
employment, including employee compensation matters.
(p) Each of the Acquired Corporations has good labor relations, and none of
the Acquired Corporations has any knowledge of any facts indicating that (i)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement will have a material adverse effect on the labor relations of
any of the Acquired Corporations, or (ii) any of the employees of any of the
Acquired Corporations intends to terminate his or her employment with the
Acquired Corporation with which such employee is employed.
(q) The headcount reductions effected by the Acquired Corporations in 2001
were effected in compliance with all applicable Legal Requirements and
Contracts. The Company has delivered to Parent true and correct copies of all
correspondence, documents and other written materials relating to such
reductions.
2.17 Environmental Matters. Each of the Acquired Corporations (i) is in
compliance in all material respects with all applicable Environmental Laws, and
(ii) possesses all permits and other Governmental Authorizations required under
applicable Environmental Laws, and is in compliance with the terms and
conditions thereof. None of the Acquired Corporations has received any notice
or other communication (in writing or otherwise), whether from a Governmental
Body, citizens group, Employee or otherwise, that alleges that any of the
Acquired Corporations is not in compliance with any Environmental Law, and, to
the knowledge of the Company, there are no circumstances that may prevent or
interfere with the compliance by any of the Acquired Corporations with any
Environmental Law in the future. To the knowledge of the Company, (a) all
property that is leased to, controlled by or used by any of the Acquired
Corporations, and all surface water, groundwater and soil associated with or
adjacent to such property, is free of any material environmental contamination
of any nature, (b) none of the property leased to, controlled by or used by any
of the Acquired Corporations contains any underground storage tanks, asbestos,
equipment using PCBs, underground injection wells, and (c) none of the property
leased to, controlled by or used by any of the Acquired Corporations contains
any septic tanks in which process wastewater or any Materials of Environmental
Concern have been disposed of. No Acquired Corporation has ever sent or
transported, or arranged to send or transport, any Materials of Environmental
Concern to a site that, pursuant to any applicable Environmental Law, (i) has
been placed on the "National Priorities List" of hazardous waste sites or any
similar state list, (ii) is otherwise designated or identified as a potential
site for remediation, cleanup, closure or other environmental remedial
activity, or (iii) is subject to a Legal Requirement to take "removal" or
"remedial" action as detailed in any applicable Environmental Law or to make
payment for the cost of cleaning up any site. (For purposes of this Section
2.17: (A) "Environmental Law" means any federal, state, local or foreign Legal
Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface
or subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (B) "Materials of Environmental Concern" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is now or hereafter regulated
by any Environmental Law or that is otherwise a danger to health, reproduction
or the environment.)
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2.18 Insurance. Part 2.18 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of any
of the Acquired Corporations and describes any material claims made thereunder.
The Company has delivered to Parent accurate and complete copies of the
insurance policies identified on Part 2.18 of the Disclosure Schedule. Each of
such insurance policies is in full force and effect. None of the Acquired
Corporations has received any notice or other communication regarding any
actual or possible (a) cancellation or invalidation of any insurance policy,
(b) refusal of any coverage or rejection of any material claim under any
insurance policy, or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy. Except as set forth in Part 2.18
of the Company Disclosure Schedule, there is no pending workers' compensation
or other claim under or based upon any insurance policy of any of the Acquired
Corporations. With respect to each Legal Proceeding that has been filed against
the Company by or in the names of one or more stockholders of the Company, the
Company has provided written notice of such Legal Proceeding to the appropriate
insurance carrier(s), and no such carrier has issued a denial of coverage or a
reservation of rights with respect to any such Legal Proceeding, or informed
the Company of its intent to do so.
2.19 Transactions with Affiliates. Except as set forth in the Company SEC
Documents filed prior to the date of this Agreement, between the date of the
Company's last proxy statement filed with the SEC and the date of this
Agreement, no event has occurred that would be required to be reported by the
Company pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part
2.19 of the Company Disclosure Schedule identifies each Person who is (or who
may be deemed to be) an "affiliate" (as that term is used in Rule 145 under the
Securities Act) of the Company as of the date of this Agreement.
2.20 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.20(a) of the Company Disclosure Schedule
or as described with reasonable specificity in the Company SEC Documents, there
is no pending Legal Proceeding, and (to the knowledge of the Company) no Person
has threatened to commence any Legal Proceeding: (i) that involves any of the
Acquired Corporations or any of the assets owned or used by any of the Acquired
Corporations; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the
knowledge of the Company, no event has occurred, and no claim, dispute or other
condition or circumstance exists that could reasonably be expected to give rise
to or serve as a basis for the commencement of any such Legal Proceeding. The
Company has furnished to Parent true and correct copies of all non-privileged
pleadings, correspondence and other written materials relating to the Legal
Proceedings referred to in Part 2.20(a) of the Company Disclosure Schedule.
Neither the SEC investigation referred to in Part 2.20(a) of the Company
Disclosure Schedule, nor any of the other Legal Proceedings referred to in Part
2.20(a) of the Company Disclosure Schedule, will or could reasonably be
expected to result in a material liability, penalty, payment, judgment or
restriction affecting any of the Acquired Corporations.
(b) There is no order, writ, injunction, judgment or decree to which any of
the Acquired Corporations, or any of the assets owned or used by any of the
Acquired Corporations, is subject. To the knowledge of the Company, no officer
or key employee of any of the Acquired Corporations is subject to any order,
writ, injunction, judgment or decree that prohibits such officer or other
employee from engaging in or continuing any conduct, activity or practice
relating to the business of any of the Acquired Corporations.
2.21 Authority; Inapplicability of Anti-takeover Statutes; Binding Nature of
Agreement. The Company has all necessary corporate power and authority to enter
into and to perform its obligations under this Agreement. The board of
directors of the Company (at a meeting duly called and held) has (a)
unanimously determined that the Merger is advisable and fair and in the best
interests of the Company and its stockholders, (b) unanimously authorized and
approved the execution, delivery and performance of this Agreement by the
Company and unanimously approved the Merger, (c) unanimously recommended the
adoption of this Agreement by the holders of Company Common Stock and directed
that this Agreement and the Merger be submitted for consideration by the
Company's stockholders at the Company Stockholders' Meeting (as defined in
Section 5.2), and (d) to the
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extent necessary, adopted a resolution having the effect of causing the Company
not to be subject to any state takeover law or similar Legal Requirement that
might otherwise apply to the Merger or any of the other transactions
contemplated by this Agreement. This Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
Prior to the execution of the Company Stockholder Voting Agreements, the Board
of Directors of the Company approved the Company Stockholder Voting Agreements
and the transactions contemplated thereby. No state takeover statute or similar
Legal Requirement applies or purports to apply to the Merger, this Agreement or
any of the transactions contemplated hereby.
2.22 Section 203 of the DGCL Not Applicable. As of the date hereof and at
all times on or prior to the Effective Time, the board of directors of the
Company has taken and will take all actions so that the restrictions applicable
to business combinations contained in Section 203 of the DGCL are, and will be,
inapplicable to the execution, delivery and performance of this Agreement and
to the consummation of the Merger and the other transactions contemplated by
this Agreement.
2.23 Compliance with Nasdaq Listing Requirements. The Company is in full
compliance with all listing requirements applicable to companies listed on the
Nasdaq National Market, and (other than with respect to the decline in the
market price for or the market value of the public float of the Company Common
Stock) has no reason to believe that it will for any reason cease to be in full
compliance with such requirements at any time (or for any period) prior to the
Effective Time. The Company has provided to Parent true and correct copies of
all correspondence and other documents relating to the proposed delisting by
the Nasdaq National Market of the Company Common Stock.
2.24 No Discussions. None of the Acquired Corporations, and no
Representative of any of the Acquired Corporations, is engaged, directly or
indirectly, in any discussions or negotiations with any other Person relating
to any Acquisition Proposal. None of the Acquired Corporations has waived, and
none of the Acquired Corporations will waive, any rights of any of the Acquired
Corporations under any confidentiality, "standstill," nonsolicitation or
similar agreement with any third party to which any of the Acquired
Corporations is a party or under which any of the Acquired Corporations has any
rights.
2.25 Vote Required. The affirmative vote of the holders of a majority of the
shares of Company Common Stock outstanding on the record date for the Company
Stockholders' Meeting (the "Required Company Stockholder Vote") is the only
vote of the holders of any class or series of the Company's capital stock
necessary to adopt this Agreement and approve the Merger and the other
transactions contemplated by this Agreement.
2.26 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement, nor (2) the consummation by the Company of the
Merger or any of the other transactions contemplated by this Agreement, will
directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the articles or certificate of incorporation, bylaws or other
charter or organizational documents of any of the Acquired Corporations, or
(ii) any resolution adopted by the stockholders, the board of directors or any
committee of the board of directors of any of the Acquired Corporations;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any of
the other transactions contemplated by this Agreement or to exercise any remedy
or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which any of the Acquired Corporations, or
any of the assets owned or used by any of the Acquired Corporations, is
subject;
(c) contravene, conflict with or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental
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Authorization that is held by any of the Acquired Corporations or that
otherwise relates to the business of any of the Acquired Corporations or to any
of the assets owned or used by any of the Acquired Corporations;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Acquired Corporation Contract
that constitutes a Material Contract, or give any Person the right to (i)
declare a default or exercise any remedy under any such Material Contract, (ii)
a rebate, chargeback, penalty or change in delivery schedule under any such
Material Contract, (iii) accelerate the maturity or performance of any such
Material Contract, or (iv) cancel, terminate or modify any term of such
Material Contract;
(e) result in the imposition or creation of any Encumbrance upon or with
respect to any asset owned or used by any of the Acquired Corporations (except
for minor liens that will not, in any case or in the aggregate, materially
detract from the value of the assets subject thereto or materially impair the
operations of any of the Acquired Corporations); or
(f) result in, or increase the likelihood of, the transfer of any material
asset of any of the Acquired Corporations to any Person.
Except as may be required by the Exchange Act, the DGCL and any antitrust law
or regulation, none of the Acquired Corporations was, is or will be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with (x) the execution, delivery or performance of this
Agreement by the Company, or (y) the consummation by the Company of the Merger
or any of the other transactions contemplated by or referred to in this
Agreement.
2.27 Fairness Opinion. The Company's board of directors has received the
written opinion of U.S. Bancorp Piper Jaffray, financial advisor to the
Company, dated the date of this Agreement, to the effect that the Merger
Consideration is fair to the stockholders of the Company from a financial point
of view. The Company has furnished an accurate and complete copy of said
written opinion to Parent.
2.28 Financial Advisor. Except for U.S. Bancorp Piper Jaffray, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
any of the Acquired Corporations. The total of all fees, commissions and other
amounts that have been paid by the Company to U.S. Bancorp Piper Jaffray and
all fees, commissions and other amounts that may become payable to U.S. Bancorp
Piper Jaffray by the Company if the Merger is consummated will not exceed
$250,000 plus reasonable expenses. The Company has furnished to Parent accurate
and complete copies of all agreements under which any such fees, commissions or
other amounts have been paid to may become payable and all indemnification and
other agreements related to the engagement of U.S. Bancorp Piper Jaffray.
2.29 Full Disclosure.
(a) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the Form S-4
Registration Statement will, at the time the Form S-4 Registration Statement is
filed with the SEC or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading.
(b) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the Prospectus/Proxy
Statement will, at the time the Prospectus/Proxy Statement is mailed to the
stockholders of the Company or at the time of the Company Stockholders' Meeting
(or any adjournment or postponement thereof), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
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(c) The Prospectus/Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
promulgated by the SEC thereunder.
Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Due Organization; Subsidiaries. Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Each of Parent and Merger Sub
has all necessary power and authority: (a) to conduct its business in the
manner in which its business is currently being conducted; (b) to own and use
its assets in the manner in which its assets are currently owned and used; and
(c) to perform its obligations under all Contracts by which it is bound.
3.2 Capitalization. The authorized capital stock of Parent consists of
90,000,000 shares of Parent Common Stock and 5,000,000 shares of preferred
stock of Parent. As of August 17, 2001, 36,994,879 shares of Parent Common
Stock were issued and outstanding, and 600 shares of preferred stock of Parent
were issued and outstanding. All of the outstanding shares of Parent Common
Stock have been duly authorized and validly issued, and are fully paid and
nonassessable. As of August 17, 2001, 5,770,411 shares of Parent Common Stock
were reserved for future issuance pursuant to outstanding stock options.
3.3 SEC Filings; Financial Statements.
(a) Parent has delivered or made available to the Company accurate and
complete copies (excluding copies of exhibits) of each report, registration
statement and definitive proxy statement filed by Parent with the SEC since
July 1, 1999 (the "Parent SEC Documents"). All statements, reports, schedules,
forms and other documents required to have been filed by Parent with the SEC
since such date have been so filed on a timely basis. As of the time it was
filed with the SEC (or, if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing): (i) each of the Parent SEC
Documents complied in all material respects with the applicable requirements of
the Securities Act or the Exchange Act (as the case may be); and (ii) none of
the Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such financial statements
and, in the case of unaudited statements, as permitted by Form 10-Q of the SEC,
and except that unaudited financial statements may not contain footnotes and
are subject to normal and recurring year-end audit adjustments which will not,
individually or in the aggregate, be material in amount); and (iii) fairly
present the consolidated financial position of Parent and its consolidated
subsidiaries as of the respective dates thereof and the consolidated results of
operations of Parent and its consolidated subsidiaries for the periods covered
thereby.
3.4 Absence of Material Adverse Effect. Except as expressly contemplated by
this Agreement, between June 30, 2001 and the date of this Agreement, there was
no Material Adverse Effect on Parent, and no event occurred or circumstance
arose that, in combination with any other events or circumstances, could
reasonably be expected to have a Material Adverse Effect on Parent.
3.5 Compliance with Legal Requirements. Parent is and has at all times since
July 1, 1999 been in compliance in all material respects with all applicable
Legal Requirements.
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3.6 Governmental Authorizations.
(a) Parent holds all Governmental Authorizations necessary to enable Parent
to conduct its business in the manner in which such business is currently being
conducted, except where the failure to hold such Governmental Authorizations
has not had and would not reasonably be expected to have a Material Adverse
Effect on Parent. All such Governmental Authorizations are valid and in full
force and effect. Parent is and at all times has been in substantial compliance
with the terms and requirements of such Governmental Authorizations, except
where the failure to be in compliance with the terms and requirements of such
Governmental Authorizations has not had and would not reasonably be expected to
have a Material Adverse Effect on Parent. No Governmental Body has at any time
and in any material respect challenged in writing the right of Parent to
design, manufacture, offer or sell any of its respective products or services.
(b) Parent is in compliance in all material respects with all of the terms
and requirements of each grant, incentive and subsidy provided or made
available to or for the benefit of Parent by any U.S. or foreign Governmental
Body or otherwise. Neither the execution, delivery or performance of this
Agreement, nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will (with or without notice or lapse of time)
give any Person the right to revoke, withdraw, suspend, cancel, terminate or
modify any such grant, incentive or subsidy.
3.7 Financial Advisor. Except for CIBC World Markets Corp. no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent.
3.8 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
absolute and unrestricted right, power and authority to perform their
obligations under this Agreement, and the execution, delivery and performance
by Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of Parent, Merger Sub and their respective boards
of directors. This Agreement constitutes the legal, valid and binding
obligation of Parent and Merger Sub, enforceable against them in accordance
with its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.9 Non-Contravention; Consents. Neither the execution and delivery of this
Agreement by Parent and Merger Sub nor the consummation by Parent and Merger
Sub of the Merger will (a) conflict with or result in any breach of any
provision of the certificate of incorporation or bylaws of Parent or Merger
Sub, (b) result in a default by Parent or Merger Sub under any Contract to
which Parent or Merger Sub is a party, except for any default that has not had
and will not have a Material Adverse Effect on Parent, or (c) result in a
violation by Parent or Merger Sub of any order, writ, injunction, judgment or
decree to which Parent or Merger Sub is subject, except for any violation that
has not had and will not have a Material Adverse Effect on Parent. Except as
may be required by the Securities Act, the Exchange Act, state securities or
"blue sky" laws, the DGCL, any antitrust law or regulation and the NASD Bylaws
(as they relate to the Form S-4 Registration Statement and the Prospectus/Proxy
Statement), Parent is not and will not be required to make any filing with or
give any notice to, or to obtain any Consent from, any Person in connection
with the execution, delivery or performance by Parent and Merger Sub of this
Agreement or the consummation by Merger Sub of the Merger.
3.10 Valid Issuance. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
3.11 Disclosure. None of the information to be supplied by or on behalf of
Parent for inclusion in the Form S-4 Registration Statement will, at the time
the Form S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. None of the information to be supplied by or on behalf of Parent
for inclusion in
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the Prospectus/Proxy Statement will, at the time the Prospectus/Proxy Statement
is mailed to the stockholders of the Company or at the time of the Company
Stockholders' Meeting (or any adjournment or postponement thereof), contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. The
Prospectus/Proxy Statement will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations promulgated by
the SEC thereunder, except that no representation or warranty is made by Parent
with respect to statements made or incorporated by reference therein based on
information supplied by the Company for inclusion or incorporation by reference
in the Prospectus/Proxy Statement.
Section 4. CERTAIN COVENANTS OF THE COMPANY
4.1 Access and Investigation. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause the respective Representatives of the Acquired
Corporations to: (a) provide Parent and Parent's Representatives with
reasonable access to the Acquired Corporations' Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to the Acquired Corporations; and (b)
provide Parent and Parent's Representatives with such copies of the existing
books, records, Tax Returns, work papers and other documents and information
relating to the Acquired Corporations, and with such additional financial,
operating and other data and information regarding the Acquired Corporations,
as Parent may reasonably request. Without limiting the generality of the
foregoing, during the Pre-Closing Period, the Company shall promptly provide
Parent with copies of:
(i) all material operating and financial reports prepared by the Acquired
Corporations for the Company's senior management, including (A) copies of
the unaudited monthly consolidated balance sheets of the Acquired
Corporations and the related unaudited monthly consolidated statements of
operations, statements of stockholders' equity and statements of cash flows
and (B) copies of any sales forecasts, marketing plans, development plans,
discount reports, write-off reports, hiring reports and capital expenditure
reports prepared for the Company's senior management;
(ii) any written materials or communications sent by or on behalf of the
Company to its stockholders;
(iii) any material notice, document or other communication sent by or on
behalf of any of the Acquired Corporations to any party to any Acquired
Corporation Contract or sent to any of the Acquired Corporations by any
party to any Acquired Corporation Contract (other than any communication
that relates solely to routine commercial transactions between an Acquired
Corporation and the other party to any such Acquired Corporation Contract
and that is of the type sent in the ordinary course of business and
consistent with past practices);
(iv) any notice, report or other document filed with or sent to any
Governmental Body on behalf of any of the Acquired Corporations in
connection with the Merger or any of the other transactions contemplated by
this Agreement; and
(v) any material notice, report or other document received by any of the
Acquired Corporations from any Governmental Body.
4.2 Operation of the Business of the Acquired Corporations.
(a) During the Pre-Closing Period: (i) the Company shall ensure that each of
the Acquired Corporations conducts its business and operations (A) in the
ordinary course, prudently and in accordance with past practices and (B) in
compliance with all applicable Legal Requirements and the requirements of all
Acquired Corporation Contracts that constitute Material Contracts; (ii) except
as expressly contemplated by this Agreement, the Company shall use all
reasonable efforts to ensure that each of the Acquired Corporations preserves
intact its current business organization, keeps available the services of its
current officers and employees and maintains its relations and goodwill with
all suppliers, customers, landlords, creditors, licensors, licensees, employees
and
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other Persons having business relationships with the respective Acquired
Corporations; (iii) the Company shall keep in full force all insurance policies
referred to in Section 2.18; (iv) the Company shall promptly notify Parent of
(A) any notice or other communication from any Person alleging that the Consent
of such Person is or may be required in connection with any of the transactions
contemplated by this Agreement, and (B) any Legal Proceeding commenced, or, to
its knowledge threatened against, relating to or involving or otherwise
affecting any of the Acquired Corporations that relates to the consummation of
the transactions contemplated by this Agreement; and (v) the Company shall (to
the extent requested by Parent) cause its officers and the officers of its
Subsidiaries to report regularly to Parent concerning the status of the
Company's business, and consult with Parent prior to taking any action, whether
or not in the ordinary course of business, that could reasonably be expected to
have a Material Adverse Effect on the business of the Acquired Corporations or
the transition of the business of the Acquired Corporations to Parent in
accordance with this Agreement.
(b) During the Pre-Closing Period, the Company shall not (without the prior
written consent of Parent, which in the case of Sections 4.2.(b)(ii), (vi),
(vii), (xiii) and (xvii) below shall not be unreasonably withheld), and shall
not permit any of the other Acquired Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities (other than the October Reverse Stock Split);
(ii) sell, issue, grant or authorize the issuance or grant of (A) any
capital stock or other security, (B) any option, call, warrant or right to
acquire any capital stock or other security, or (C) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company may issue shares of Company Common Stock (x) upon
the valid exercise of Company Options or Company Warrants outstanding as of
the date of this Agreement, and (y) pursuant to the ESPP);
(iii) amend or waive any of its rights under, or accelerate the vesting
under, any provision of any of the Company's stock option plans, any
provision of any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement, or otherwise modify any of the terms of
any outstanding option, warrant or other security or any related Contract;
(iv) amend or permit the adoption of any amendment to its certificate of
incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, amalgamation, recapitalization, reclassification of
shares, stock split, reverse stock split (except the October Reverse Stock
Split), division or subdivision of shares, consolidation of shares or
similar transaction;
(v) form any Subsidiary or acquire any equity interest or other interest
in any other Entity;
(vi) take or permit to be taken any action other than in accordance with
the Operating Budget, or fail to take or cause to be taken any action
required to be taken or otherwise contemplated by the Operating Budget, or
make or permit to be made any capital expenditure or other cash expenditure
which, when aggregated with other such expenditures, exceeds the aggregate
dollar amount of the Operating Budget;
(vii) enter into, renew or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Contract, or amend or
terminate, or waive or exercise any material right or remedy under, any
Material Contract;
(viii) enter into, renew or become bound by, or permit any of the assets
owned or used by it to become bound by, any insurance policy, or amend or
terminate, or waive or exercise any material right or remedy under, any
insurance policy; provided, however, that without Parent's further consent,
the Company shall be entitled to (1) convert its existing policy of
directors' and officers' liability insurance as of the date of this
Agreement into run-off coverage having an aggregate coverage limit of
$20,000,000 for a premium not to exceed $404,000, and (2) purchase a new
policy of directors' and officers' liability insurance (the "New D&O
Policy") for a one-year period commencing September 23, 2001 having an
aggregate coverage limit of $5,000,000 for a premium not to exceed $225,000
(the "New Policy Premium");
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(ix) enter into or become bound by any new marketing agreements, other
than marketing agreements under which the payments for which the Acquired
Corporations are obligated are solely performance-based and do not involve
(A) revenue guaranties or (B) revenue sharing arrangements requiring the
Acquired Corporations to share over 15% of the applicable revenues with
third parties;
(x) publish or otherwise make available any coupons or comparable
promotions applicable to the purchase of the products sold by the Acquired
Corporations outside the ordinary course of business or inconsistent with
past practices;
(xi) acquire, lease or license any right or other asset from any other
Person or sell or otherwise dispose of, or lease or license, any right or
other asset to any other Person (except in each case for immaterial assets
acquired, leased, licensed or disposed of by the Company in the ordinary
course of business and consistent with past practices), or waive or
relinquish any material right;
(xii) lend money to any Person, or incur or guarantee any indebtedness;
(xiii) establish, adopt or amend any employee benefit plan, pay any bonus
(other than bonuses due and payable under any binding agreement entered into
by the Company prior to the date of this Agreement) or make any
profit-sharing or similar payment to, or increase the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees;
(xiv) hire or promote any employee or (except as expressly contemplated
by this Agreement) terminate any employee;
(xv) change any of its pricing policies, product return policies, product
maintenance polices, service policies, product modification or upgrade
policies, personnel policies or other business policies, or any of its
methods of accounting or accounting practices in any respect;
(xvi) make any Tax election;
(xvii) commence any Legal Proceeding or enter into any settlement
agreement with respect to any Legal Proceeding (other than (1) Legal
Proceedings commenced by the Company against Parent to enforce the Company's
rights under this Agreement and (2) Legal Proceedings that the board of
directors of the Company, after consulting with outside legal counsel,
determines in good faith must be commenced in order for the board of
directors of the Company to comply with its fiduciary obligations to the
Company's stockholders under applicable law);
(xviii) cause or permit any of the Acquired Corporations to fail to
comply with any term of any Employee Plan, including the Transition Plan;
(xix) enter into any transaction or take any other action outside the
ordinary course of business or inconsistent with past practices; or
(xx) agree or commit to take any of the actions described in clauses
"(i)" through "(xix)" of this Section 4.2(b).
(c) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of: (i) the discovery by the Company of any event, condition, fact
or circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in any
representation or warranty made by the Company in this Agreement; (ii) any
event, condition, fact or circumstance that occurs, arises or exists after the
date of this Agreement and that would cause or constitute a material inaccuracy
in any representation or warranty made by the Company in this Agreement if (A)
such representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or (B)
such event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement; (iii) any material breach of any
covenant or obligation of the Company; and (iv) any event, condition, fact or
circumstance that would make the timely satisfaction of any of the conditions
set forth in Section 6 or Section 7
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impossible or unlikely or that has had or could reasonably be expected to have
a Material Adverse Effect on the Acquired Corporations. Without limiting the
generality of the foregoing, the Company shall promptly advise Parent in
writing of any Legal Proceeding or material claim threatened, commenced or
asserted against or with respect to any of the Acquired Corporations. No
notification given to Parent pursuant to this Section 4.2(c) shall limit or
otherwise affect any of the representations, warranties, covenants or
obligations of the Company contained in this Agreement.
4.3 No Solicitation.
(a) The Company shall not directly or indirectly, and shall not authorize or
permit any of the other Acquired Corporations or any Representative of any of
the Acquired Corporations directly or indirectly to, (i) solicit, initiate,
encourage, induce or facilitate the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding any of
the Acquired Corporations to any Person in connection with or in response to an
Acquisition Proposal or an inquiry or indication of interest that could lead to
an Acquisition Proposal, (iii) engage in discussions or negotiations with any
Person with respect to any Acquisition Proposal, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any Contract contemplating or otherwise relating to any
Acquisition Transaction; provided, however, that this Section 4.3 shall not be
deemed to prevent the Company or its board of directors from complying with its
legal obligations under Rules 14d-9 and 14c-2 under the Exchange Act with
regard to an Acquisition Proposal (it being understood that such compliance may
constitute a Triggering Event under certain circumstances); and provided,
further, that prior to the adoption of this Agreement by the Required Company
Stockholder Vote, this Section 4.3(a) shall not prohibit the Company from
furnishing nonpublic information regarding the Acquired Corporations to, or
entering into discussions with, any Person in response to a Superior Offer that
is submitted to the Company by such Person (and not withdrawn) if (1) neither
the Company nor any Representative of any of the Acquired Corporations shall
have breached or taken any action inconsistent with any of the provisions set
forth in this Section 4.3, (2) the board of directors of the Company concludes
in good faith, after having consulted with its outside legal counsel, that such
action is required in order for the board of directors of the Company to comply
with its fiduciary obligations to the Company's stockholders under applicable
law, (3) at least two business days prior to furnishing any such nonpublic
information to, or entering into discussions with, such Person, the Company
gives Parent written notice of the identity of such Person and of the Company's
intention to furnish nonpublic information to, or enter into discussions with,
such Person, and the Company receives from such Person an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
Person by or on behalf of the Company, and (4) at least two business days prior
to furnishing any such nonpublic information to such Person, the Company
furnishes such nonpublic information to Parent (to the extent such nonpublic
information has not been previously furnished by the Company to Parent).
Without limiting the generality of the foregoing, the Company acknowledges and
agrees that any action inconsistent with any of the provisions set forth in the
preceding sentence by any Representative of any of the Acquired Corporations,
whether or not such Representative is purporting to act on behalf of any of the
Acquired Corporations, shall be deemed to constitute a breach of this Section
4.3 by the Company.
(b) The Company shall promptly (and in no event later than 24 hours after
receipt of any Acquisition Proposal, any inquiry or indication of interest that
could reasonably be expected to lead to an Acquisition Proposal or any request
for nonpublic information) advise Parent orally and in writing of any
Acquisition Proposal, any inquiry or indication of interest that could
reasonably be expected to lead to an Acquisition Proposal or any request for
nonpublic information relating to any of the Acquired Corporations (including
the identity of the Person making or submitting such Acquisition Proposal,
inquiry, indication of interest or request, and the terms thereof) that is made
or submitted by any Person during the Pre-Closing Period. The Company shall
keep Parent fully informed with respect to the status of any such Acquisition
Proposal, inquiry, indication of interest or request and any modification or
proposed modification thereto.
A-26
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
(d) The Company agrees not to release or permit the release of any Person
from, or to waive or permit the waiver of any provision of, any
confidentiality, "standstill," nonsolicitation or similar agreement to which
any of the Acquired Corporations is a party or under which any of the Acquired
Corporations has any rights, and will use its commercially reasonable best
efforts to enforce or cause to be enforced each such agreement at the request
of Parent. The Company also will promptly request each Person that has executed
a confidentiality agreement in connection with its consideration of a possible
Acquisition Transaction or equity investment to return all confidential
information heretofore furnished to such Person by or on behalf of any of the
Acquired Corporations.
Section 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Registration Statement; Prospectus/Proxy Statement.
(a) As promptly as practicable after the date of this Agreement, Parent and
the Company shall prepare and cause to be filed with the SEC the
Prospectus/Proxy Statement and Parent shall prepare and cause to be filed with
the SEC the Form S-4 Registration Statement, in which the Prospectus/Proxy
Statement will be included as a prospectus. Each of Parent and the Company
shall use all reasonable efforts to cause the Form S-4 Registration Statement
and the Prospectus/Proxy Statement to comply with the rules and regulations
promulgated by the SEC, to respond promptly to any comments of the SEC or its
staff and to have the Form S-4 Registration Statement declared effective under
the Securities Act as promptly as practicable after it is filed with the SEC.
The Company will use all reasonable efforts to cause the Prospectus/Proxy
Statement to be mailed to the Company's stockholders as promptly as practicable
after the Form S-4 Registration Statement is declared effective under the
Securities Act. The Company shall promptly furnish to Parent all information
concerning the Acquired Corporations and the Company's stockholders that may be
required or reasonably requested in connection with any action contemplated by
this Section 5.1. The Company shall ensure that: (1) none of the information
supplied or to be supplied by or on behalf of the Company for inclusion or
incorporation by reference in the Form S-4 Registration Statement will, at the
time the Form S-4 Registration Statement is filed with the SEC or at the time
it becomes effective under the Securities Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading; (2) none of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Prospectus/Proxy Statement will,
at the time the Prospectus/Proxy Statement is mailed to the stockholders of the
Company or at the time of the Company Stockholders' Meeting (or any adjournment
or postponement thereof), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading; and (3) the Prospectus/Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated by the SEC thereunder.
If any event relating to any of the Acquired Corporations or Parent occurs, or
if either the Company or Parent becomes aware of any information, that should
be disclosed in an amendment or supplement to the Form S-4 Registration
Statement or the Prospectus/Proxy Statement, then the Company or Parent shall
promptly inform the other thereof and shall cooperate with each other in filing
such amendment or supplement with the SEC and, if appropriate, in mailing such
amendment or supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock
to be issued in the Merger will be registered or qualified under the securities
law of every jurisdiction of the United States in which any registered holder
of Company Common Stock has an address of record on the record date for
determining the stockholders entitled to notice of and to vote at the Company
Stockholders' Meeting; provided, however, that Parent shall not be required (i)
to qualify to do business as a foreign corporation in any jurisdiction in which
it is not now qualified or (ii) to file a general consent to service of process
in any jurisdiction.
A-27
5.2 Company Stockholders' Meeting.
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of and hold a meeting of the holders of
Company Common Stock to vote on the adoption of this Agreement (the "Company
Stockholders' Meeting"). The Company Stockholders' Meeting shall be held (on a
date selected by the Company in consultation with Parent) as promptly as
reasonably practicable after the Form S-4 Registration Statement is declared
effective under the Securities Act. The Company shall ensure that all proxies
solicited in connection with the Company Stockholders' Meeting are solicited in
compliance with all applicable Legal Requirements.
(b) Subject to Section 5.2(c): (i) the Proxy Statement shall include a
statement to the effect that the board of directors of the Company recommends
that the Company's stockholders vote to adopt this Agreement at the Company
Stockholders' Meeting (the recommendation of the Company's board of directors
that the Company's stockholders vote to adopt this Agreement being referred to
as the "Company Board Recommendation"); and (ii) the Company Board
Recommendation shall not be withdrawn or modified in a manner adverse to
Parent, and no resolution by the board of directors of the Company or any
committee thereof to withdraw or modify the Company Board Recommendation in a
manner adverse to Parent shall be adopted or proposed.
(c) Notwithstanding anything to the contrary contained in Section 5.2(b), at
any time prior to the adoption of this Agreement by the Required Company
Stockholder Vote, the Company Board Recommendation may be withdrawn or modified
in a manner adverse to Parent if: (i) an unsolicited, bona fide written offer
to directly or indirectly purchase all or substantially all of the outstanding
shares of Company Common Stock (by way of merger, reorganization,
consolidation, tender offer, acquisition or business combination, or otherwise)
or all or substantially all of the assets of the Company is made to the Company
and is not withdrawn; (ii) the Company provides Parent with at least five
business days prior notice of any meeting of the Company's board of directors
at which such board of directors will consider and determine whether such offer
is a Superior Offer; (iii) the Company's board of directors determines in good
faith (after consultation with an independent financial advisor of nationally
recognized reputation) that such offer constitutes a Superior Offer; (iv) the
Company's board of directors determines in good faith, after having consulted
with the Company's outside legal counsel, that, in light of such Superior
Offer, the withdrawal or modification of the Company Board Recommendation is
required in order for the Company's board of directors to comply with its
fiduciary obligations to the Company's stockholders under applicable law; (v)
the Company Board Recommendation is not withdrawn or modified in a manner
adverse to Parent at any time within two business days after Parent receives
written notice from the Company confirming that the Company's board of
directors has determined that such offer is a Superior Offer; and (vi) neither
the Company nor any of its Representatives shall have breached or taken any
action inconsistent with any of the provisions set forth in Section 4.3;
provided, however, that nothing contained in this Section 5.2(c) shall limit
the right or authority of the Company's board of directors to make any
disclosures to the Company's stockholders that are required in order to fulfill
its disclosure obligations to the Company's stockholders under applicable law.
(d) The Company's obligation to call, give notice of and hold the Company
Stockholders' Meeting in accordance with Section 5.2(a) shall not be limited or
otherwise affected by the commencement, disclosure, announcement or submission
of any Superior Offer or other Acquisition Proposal, or by any withdrawal or
modification of the Company Board Recommendation.
5.3 Regulatory Approvals. Each party shall (i) use all reasonable efforts to
file, as soon as practicable after the date of this Agreement, all notices,
reports and other documents required to be filed by such party with any
Governmental Body with respect to the Merger and the other transactions
contemplated by this Agreement, and to submit promptly any additional
information requested by any such Governmental Body, and (ii) cooperate with
the other parties hereto and, subject to Section 5.8(b), use its reasonable
efforts to take or cause to be taken all actions, and do or cause to be done
all things necessary, proper or advisable on its part under this Agreement and
applicable Legal Requirements to consummate and make effective the Merger and
the other transactions
A-28
contemplated hereby. Each of the Company and Parent shall (1) give the other
party prompt notice of the commencement or threat of commencement of any Legal
Proceeding by or before any Governmental Body with respect to the Merger or any
of the other transactions contemplated by this Agreement, (2) keep the other
party informed as to the status of any such Legal Proceeding or threat thereof,
and (3) promptly inform the other party of any communication to or from any
Governmental Body regarding the Merger. Except as may be prohibited by any
Governmental Body or by any Legal Requirement, (a) the Company and Parent will
consult and cooperate with one another, and will consider in good faith the
views of one another, in connection with any analysis, appearance,
presentation, memorandum, brief, argument, opinion or proposal made or
submitted in connection with any Legal Proceeding under or relating to any
Legal Requirement, and (b) in connection with any such Legal Proceeding, each
of the Company and Parent will permit authorized Representatives of the other
party to be present at each meeting or conference with governmental
representatives relating to any such Legal Proceeding and to have access to and
be consulted in connection with any document, opinion or proposal made or
submitted to any Governmental Body in connection with any such Legal
Proceeding.
5.4 Stock Options.
(a) Parent will not assume any Company Options, or any of the obligations of
any of the Acquired Corporations with respect thereto, in connection with the
Merger. Accordingly, no Company Options will, at the Effective Time or at any
other time, be converted into or become options to purchase Parent Common
Stock. Each outstanding Company Option shall terminate immediately prior to the
Effective Time, and the Company hereby covenants and agrees to take all actions
necessary or appropriate to effectuate such termination, and to provide all
notices required to be delivered to the holders of such Company Options
necessary or appropriate (under the plans and option agreements pursuant to
which Company Options are outstanding and otherwise) in connection therewith,
including such notices as may be necessary to enable such holders to exercise
such Company Options on a timely basis prior to the Effective Time.
(b) Prior to the Effective Time, the Company shall take all action that may
be necessary (under the plans and option agreements pursuant to which Company
Options are outstanding and otherwise) to effectuate the provisions of this
Section 5.4 and to ensure that, from and after the Effective Time, holders of
Company Options have no rights with respect thereto other than those
specifically provided in this Section 5.4.
(c) Immediately prior to the Effective Time, the ESPP shall be terminated.
The rights of participants in the ESPP with respect to any offering period then
underway under the ESPP shall be determined by treating the last business day
prior to the Effective Time as the last day of such offering period and by
making such other pro-rata adjustments as may be necessary to reflect the
shortened offering period but otherwise treating such shortened offering period
as a fully effective and completed offering period for all purposes under the
ESPP. Prior to the Effective Time, the Company shall take all actions
(including, if appropriate, amending the terms of the ESPP) that are necessary
to give effect to the transactions contemplated by this Section 5.4(e).
5.5 Warrants. At the Effective Time, each Company Warrant (if any) that is
outstanding and unexercised immediately prior to the Effective Time, and that
does not by its terms terminate as of the Effective Time (or otherwise as a
result of the Merger), shall be converted into and become a warrant to purchase
cash and Parent Common Stock (as more fully described below), and Parent shall
assume each such Company Warrant in accordance with the terms (as in effect as
of the date of this Agreement) of the applicable warrant agreement by which it
is evidenced. Accordingly, from and after the Effective Time:
(a) each such Company Warrant assumed by Parent may be exercised solely for
cash and shares of Parent Common Stock;
(b) the amount of cash payable upon the exercise of each such Company
Warrant shall be equal to the number of shares of Company Common Stock issuable
upon the exercise of such Company Warrant immediately prior to the Effective
Time multiplied by the Cash Consideration, rounding down to the nearest whole
cent;
A-29
(c) the number of shares of Parent Common Stock issuable upon the exercise
of each such Company Warrant shall be equal to the number of shares of Company
Common Stock issuable upon the exercise of such Company Warrant immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounding to the
nearest whole share; and
(d) any restriction on the exercise of any such Company Warrant shall
continue in full force and effect and the term, exercisability and other
provisions of such Company Warrant shall otherwise remain unchanged.
5.6 Employee Benefits.
(a) Nothing in this Agreement shall be construed to create a right in any
employee to employment with Parent, the Surviving Corporation or any other
Subsidiary of the Surviving Corporation and the employment of each employee of
the Acquired Corporations who continues employment with Parent, the Surviving
Corporation or any Subsidiary of the Surviving Corporation after the Effective
Time shall be "at will" employment.
(b) If requested by Parent, the Company agrees to take (or cause to be
taken) all actions necessary or appropriate to terminate, effective immediately
prior to the Effective Time, any employee benefit plan sponsored by any of the
Acquired Corporations (or in which any of the Acquired Corporations
participate) that contains a cash or deferred arrangement intended to qualify
under section 401(k) of the Code.
(c) From and after the Effective Time, employees of the Acquired
Corporations whose employment with the Acquired Corporations has been continued
following the Effective Time shall be provided with either of the following, at
Parent's sole option: (i) employee benefits that are substantially as favorable
in the aggregate as those currently provided by the Acquired Corporations to
such employees; or (ii) employee benefits that are substantially as favorable
in the aggregate as those currently provided by Parent to its employees who are
similarly situated to such continuing employees (giving such continuing
employees credit for years of service with the Company for purposes of
eligibility and vesting, but not benefit accrual to the extent permitted by
applicable law and by the terms of applicable employee benefit plans of
Parent). Nothing in this Section 5.6 shall prevent Parent from or limit
Parent's ability to amend or alter its employee benefit plans or the benefits
payable thereunder following the Effective Time.
5.7 Indemnification of Officers and Directors.
(a) All rights to indemnification existing in favor of those Persons who are
directors and officers of the Company as of the date of this Agreement (the
"Indemnified Persons") for their acts and omissions occurring prior to the
Effective Time, as provided in the Company's bylaws (as in effect as of the
date of this Agreement) and as provided in the indemnification agreements
between the Company and said Indemnified Persons (as in effect as of the date
of this Agreement) in the forms disclosed by the Company to Parent prior to the
date of this Agreement, shall survive the Merger and shall be observed by the
Surviving Corporation to the fullest extent available under Delaware law for a
period of six years from the Effective Time.
(b) Promptly following the Closing, the Surviving Corporation shall convert
the New D&O Policy (as defined in Section 4.2(b)(viii)) into run-off coverage
(the "Run-Off Policy") having an aggregate coverage limit of $5,000,000 for a
premium that, together with the New Policy Premium (as defined in Section
4.2(b)(viii)), and any additional premium paid to obtain retrospective coverage
under the New D&O Policy back to the date of the Company's initial public
offering, does not exceed $496,000 (the "Maximum Premium"). In the event that
the sum of the New Policy Premium and the additional premium for the Run-Off
Policy would exceed the Maximum Premium, the Surviving Corporation shall be
entitled to reduce the amount of coverage of the Run-Off Policy to the amount
of coverage that can be obtained for a premium equal to the Maximum Premium.
Without limiting the foregoing, in no event will the aggregate premiums paid or
required to be paid by the Company for directors' and officers' liability
insurance exceed $900,000.
(c) The covenant set forth in this Section 5.7 is intended to be for the
benefit of, and shall be enforceable by, each of the Indemnified Persons and
their respective heirs and successors. The indemnification provided for
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herein shall not be deemed exclusive of any other rights to which an
Indemnified Party is entitled, whether pursuant to law, contract or otherwise.
(d) In the event that the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties
and assets to any Person, then, and in each such case to the extent necessary
to effectuate the purpose of this Section 5.7, Parent shall cause the Surviving
Corporation to make proper provision so that the successors and assigns of the
Surviving Corporation shall succeed to the obligations set forth in this
Section 5.7.
5.8 Additional Agreements.
(a) Subject to Section 5.8(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject
to Section 5.8(b), each party to this Agreement (i) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, (ii) shall use all reasonable efforts to obtain each Consent (if
any) required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) shall use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger. The Company shall promptly deliver to Parent a copy of each such filing
made, each such notice given and each such Consent obtained by the Company
during the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in this Agreement,
Parent shall not have any obligation under this Agreement: (i) to dispose of or
transfer or cause any of its Subsidiaries to dispose of or transfer any assets,
or to commit to cause any of the Acquired Corporations to dispose of any
assets; (ii) to discontinue or cause any of its Subsidiaries to discontinue
offering any product or service, or to commit to cause any of the Acquired
Corporations to discontinue offering any product or service; (iii) to license
or otherwise make available, or cause any of its Subsidiaries to license or
otherwise make available, to any Person, any technology, software or other
Proprietary Asset, or to commit to cause any of the Acquired Corporations to
license or otherwise make available to any Person any technology, software or
other Proprietary Asset; (iv) to hold separate or cause any of its Subsidiaries
to hold separate any assets or operations (either before or after the Closing
Date), or to commit to cause any of the Acquired Corporations to hold separate
any assets or operations; (v) to make or cause any of its Subsidiaries to make
any commitment (to any Governmental Body or otherwise) regarding its future
operations or the future operations of any of the Acquired Corporations; or
(vi) to contest any Legal Proceeding relating to the Merger if Parent
determines in good faith that contesting such Legal Proceeding might not be
advisable.
5.9 Disclosure. Parent and the Company shall consult with each other before
issuing any press release or otherwise making any public statement with respect
to the Merger or any of the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, (i) the Company shall not,
and shall not permit any of its Subsidiaries or any Representative of any of
the Acquired Corporations to, make any disclosure regarding the Merger or any
of the other transactions contemplated by this Agreement unless (a) Parent
shall have approved such disclosure or (b) the Company shall have been advised
by outside legal counsel that such disclosure is required by applicable law,
and (ii) Parent shall not, and shall not permit any of its Subsidiaries or any
Representative of any of them to, make any disclosure regarding the Merger or
any of the other transactions contemplated by this Agreement unless the Company
shall first have been provided with a copy of such disclosure.
5.10 Affiliate Agreements. The Company shall use all reasonable efforts to
cause each Person identified in Part 2.19 of the Company Disclosure Schedule
and each other Person who is or becomes (or may be deemed to
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be) an "affiliate" (as that term is used in Rule 145 under the Securities Act)
of the Company to execute and deliver to Parent, prior to the date of the
mailing of the Prospectus/Proxy Statement to the Company's stockholders, an
Affiliate Agreement in the form of Exhibit C. The Company shall not register,
or allow its transfer agent to register, on its books any transfer of any
shares of Company Common Stock of any "affiliate" of the Company who has not
provided a signed Affiliate Agreement in accordance with this Section 5.10.
5.11 Listing. Parent shall use commercially reasonable efforts to cause the
shares of Parent Common Stock being issued in the Merger to be approved for
listing (subject to notice of issuance) on the Nasdaq National Market.
5.12 October Reverse Stock Split. The Company shall take such actions as may
be necessary or appropriate to cause the October Reverse Stock Split not to be
implemented or made effective, unless the board of directors of the Company
determines in good faith, as evidenced by a written notice delivered to Parent,
that the failure to implement or effectuate the October Reverse Stock Split
would be reasonably likely to result in a delisting of the Company Common Stock
from the Nasdaq National Market prior to the Effective Time.
5.13 Resignation of Officers and Directors. The Company shall use all
reasonable efforts to obtain and deliver to Parent on or prior to the Closing
the resignation of each officer and director of each of the Acquired
Corporations from such positions.
Section 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
6.1 Accuracy of Representations.
(a) The representations and warranties of the Company contained in this
Agreement that are qualified by "Material Adverse Effect" or otherwise
qualified as to materiality shall have been accurate in all respects as of the
date of this Agreement, except for any such representations and warranties made
as of a specific date, which shall have been accurate in all respects as of
such date (it being understood that, for purposes of determining the accuracy
of such representations and warranties, any update of or modification to the
Company Disclosure Schedule made or purported to have been made after the date
of this Agreement shall be disregarded).
(b) The representations and warranties of the Company contained in this
Agreement that are not qualified by "Material Adverse Effect" or otherwise
qualified as to materiality shall have been accurate in all material respects
as of the date of this Agreement, except for any such representations and
warranties made as of a specific date, which shall have been accurate in all
material respects as of such date (it being understood that, for purposes of
determining the accuracy of such representations and warranties, any update of
or modification to the Company Disclosure Schedule made or purported to have
been made after the date of this Agreement shall be disregarded).
(c) The representations and warranties of the Company contained in Sections
2.1, 2.2, 2.3 and 2.7 shall be accurate in all material respects as of the
Closing Date as if made on and as of the Closing Date (it being understood
that, for purposes of determining the accuracy of such representations and
warranties, (i) all materiality qualifications contained in such
representations and warranties shall be disregarded and (ii) any update of or
modification to the Company Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded).
(d) The representations and warranties of the Company contained in this
Agreement (other than the representations and warranties of the Company
contained in Sections 2.1, 2.2, 2.3 and 2.7) shall be accurate in all respects
as of the Closing Date as if made on and as of the Closing Date, except for
those representations and
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warranties made as of a specific date, which shall have been accurate in all
material respects as of such date, and except that any inaccuracies in such
representations and warranties will be disregarded if, after aggregating all
inaccuracies in such representations and warranties as of such specific date or
the Closing Date (as the case may be and without duplication), such
inaccuracies and the circumstances giving rise to all such inaccuracies do not
constitute and could not reasonably be expected to result in a Material Adverse
Effect on the Acquired Corporations determined as of such specific date or the
Closing Date (as the case may be) (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
"Material Adverse Effect" qualifications and other materiality qualifications
contained in such representations and warranties shall be disregarded and (ii)
any update of or modification to the Company Disclosure Schedule made or
purported to have been made after the date of this Agreement shall be
disregarded).
6.2 Performance of Covenants.
(a) The covenant set forth in Section 4.2(b)(vi) of this Agreement shall
have been complied with and performed in all respects.
(b) Each other covenant or obligation that the Company is required to comply
with or to perform at or prior to the Closing pursuant to this Agreement shall
have been complied with and performed in all material respects.
6.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued and still be pending,
and no proceeding for that purpose shall have been initiated and still be
pending or shall then be threatened, by the SEC with respect to the Form S-4
Registration Statement.
6.4 Stockholder Approval. This Agreement shall have been duly adopted by the
Required Company Stockholder Vote, and holders of less than fifteen percent
(15%) in the aggregate of Company Common Stock entitled to vote thereon shall
have perfected their appraisal rights under Section 262 of the DGCL with
respect to their shares of Company Common Stock or shall otherwise continue to
have appraisal rights under any applicable law.
6.5 Consents. All Consents identified in Part 6.5 of the Company Disclosure
Schedule, and any other Consents the failure to obtain which by the Closing
Date would likely have a Material Adverse Effect on the Acquired Corporations
or a Material Adverse Effect on Parent, shall have been obtained and shall be
in full force and effect.
6.6 Agreements and Documents. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) a certificate executed on behalf of the Company by its Chief
Executive Officer and Chief Financial Officer confirming that the conditions
set forth in Sections 6.1, 6.2, 6.4, 6.5, 6.7, 6.8 and 6.9 have been duly
satisfied; and
(b) the written resignations of all officers and directors of each of the
Acquired Corporations, effective as of the Effective Time.
6.7 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and no
material Legal Requirement shall have been enacted since the date of this
Agreement that makes consummation of the Merger illegal.
6.8 No Governmental Litigation. There shall not be pending or threatened any
Legal Proceeding in which a Governmental Body is or is threatened to become a
party or is otherwise involved, and neither Parent nor the Company shall have
received any communication from any Governmental Body in which such
Governmental Body indicates that the commencement of any Legal Proceeding or
taking of any other action is reasonably
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likely: (a) challenging or seeking to restrain or prohibit the consummation of
the Merger or any of the other transactions contemplated by this Agreement; (b)
relating to the Merger and seeking to obtain from Parent or any of the Acquired
Corporations, any damages or other relief that could reasonably be expected to
have a Material Adverse Effect on Parent or a Material Adverse Effect on the
Acquired Corporations; (c) seeking to prohibit or limit in any material respect
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; (d) that could materially and adversely affect the right of Parent
or any of the Acquired Corporations to own the assets or operate the business
of the Acquired Corporations; or (e) seeking to compel any of the Acquired
Corporations, Parent or any Subsidiary of Parent to dispose of or hold separate
any material assets as a result of the Merger or any of the other transactions
contemplated by this Agreement.
6.9 No Other Litigation. There shall not be pending any Legal Proceeding in
which, in the reasonable good faith judgment of Parent, there is a reasonable
possibility of an outcome that could have a Material Adverse Effect on the
Acquired Corporations or a Material Adverse Effect on Parent: (a) challenging
or seeking to restrain or prohibit the consummation of the Merger or any of the
other transactions contemplated by this Agreement; (b) relating to the Merger
and seeking to obtain from Parent or any of the Acquired Corporations, any
damages or other relief that could reasonably be expected to have a Material
Adverse Effect on the Acquired Corporations or a Material Adverse Effect on
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of any of the Acquired Corporations;
(d) that would materially and adversely affect the right of Parent, or any of
the Acquired Corporations, to own the assets or operate the business of any of
the Acquired Corporations; or (e) seeking to compel any of the Acquired
Corporations, Parent or any Subsidiary of Parent to dispose of or hold separate
any material assets as a result of the Merger or any of the other transactions
contemplated by this Agreement.
Section 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY
The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations.
(a) The representations and warranties of Parent and Merger Sub contained in
this Agreement that are qualified by "Material Adverse Effect" or otherwise
qualified as to materiality shall have been accurate in all respects as of the
date of this Agreement, except for any such representations and warranties made
as of a specific date, which shall have been accurate in all respects as of
such date.
(b) The representations and warranties of Parent and Merger Sub contained in
this Agreement that are not qualified by "Material Adverse Effect" or otherwise
qualified as to materiality shall have been accurate in all material respects
as of the date of this Agreement, except for any such representations and
warranties made as of a specific date, which shall have been accurate in all
material respects as of such date.
(c) The representations and warranties of Parent and Merger Sub contained in
this Agreement shall be accurate in all respects as of the Closing Date as if
made on and as of the Closing Date, except for any such representations and
warranties made as of a specific date, which shall have been accurate in all
respects as of such date, and except that any inaccuracies in such
representations and warranties as of the Closing Date will be disregarded if,
after aggregating all inaccuracies of such representations and warranties as of
the Closing Date (without duplication), such inaccuracies and the circumstances
giving rise to all such inaccuracies do not constitute a Material Adverse
Effect on Parent determined as of the Closing Date (it being understood that,
for purposes of determining the accuracy of such representations and
warranties, all materiality qualifications contained in such representations
and warranties shall be disregarded).
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7.2 Performance of Covenants. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing pursuant to this Agreement shall have been complied with and
performed in all material respects.
7.3 Effectiveness of Registration Statement. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued and still be pending,
and no proceeding for that purpose shall have been initiated and still be
pending or shall then be threatened, by the SEC with respect to the Form S-4
Registration Statement.
7.4 Stockholder Approval. This Agreement shall have been duly adopted by the
Required Company Stockholder Vote.
7.5 Documents. The Company shall have received a certificate executed on
behalf of Parent by an executive officer of Parent, confirming that the
conditions set forth in Sections 7.1, 7.2, 7.6 and 7.7 have been duly
satisfied.
7.6 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.
7.7 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger by the
Company shall have been issued by any court of competent jurisdiction and
remain in effect, and no material Legal Requirement shall have been enacted
since the date of this Agreement that makes consummation of the Merger by the
Company illegal.
Section 8. TERMINATION
8.1 Termination. This Agreement may be terminated prior to the Effective
Time (whether before or after the adoption of this Agreement by the Required
Company Stockholder Vote):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by March 31, 2002; provided, however, that (i) a party shall not be
permitted to terminate this Agreement pursuant to this Section 8.1(b) if the
failure to consummate the Merger by March 31, 2002 is attributable to a failure
on the part of such party to perform any covenant in this Agreement required to
be performed by such party at or prior to the Effective Time, and (ii) the
Company shall not be permitted to terminate this Agreement pursuant to this
Section 8.1(b) unless the Company shall have made any payment required to be
made to Parent pursuant to Section 8.3(a);
(c) by either Parent or the Company if a court of competent jurisdiction or
other Governmental Body shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger;
provided, however, that prior to termination the party seeking termination of
this Agreement shall have used commercially reasonable efforts to have such
order, decree or ruling vacated;
(d) by either Parent or the Company if (i) the Company Stockholders' Meeting
(including any adjournments and postponements thereof) shall have been held and
completed and the Company's stockholders shall have taken a final vote on a
proposal to adopt this Agreement, and (ii) this Agreement shall not have been
adopted at the Company Stockholders' Meeting (and shall not have been adopted
at any adjournment or postponement thereof) by the Required Company Stockholder
Vote; provided, however, that (A) a party shall not be permitted to terminate
this Agreement pursuant to this Section 8.1(d) if the failure to have this
Agreement adopted by the Required Company Stockholder Vote is attributable to a
failure on the part of such party to perform any covenant
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in this Agreement required to be performed by such party at or prior to the
Effective Time, and (B) the Company shall not be permitted to terminate this
Agreement pursuant to this Section 8.1(d) unless the Company shall have made
the payment required to be made to Parent pursuant to Section 8.3(a);
(e) by Parent (at any time prior to the adoption of this Agreement by the
Required Company Stockholder Vote) if a Triggering Event shall have occurred;
(f) by Parent if (i) any of the Company's representations and warranties
contained in this Agreement shall be inaccurate as of the date of this
Agreement, or shall have become inaccurate as of a date subsequent to the date
of this Agreement (as if made on such subsequent date), such that the condition
set forth in Section 6.1 would not be satisfied (it being understood that, for
purposes of determining the accuracy of such representations and warranties as
of any date subsequent to the date of this Agreement, (A) all "Material Adverse
Effect" qualifications and other materiality qualifications, and any similar
qualifications, contained in such representations and warranties shall be
disregarded and (B) any update of or modification to the Company Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded), or (ii) any of the Company's covenants contained in this
Agreement shall have been breached such that the condition set forth in Section
6.2 would not be satisfied; provided, however, that if an inaccuracy in any of
the Company's representations and warranties as of a date subsequent to the
date of this Agreement or a breach of a covenant by the Company is curable by
the Company and the Company is continuing to exercise all reasonable efforts to
cure such inaccuracy or breach, then Parent may not terminate this Agreement
under this Section 8.1(f) on account of such inaccuracy or breach; or
(g) by the Company if (i) any of Parent's representations and warranties
contained in this Agreement shall be inaccurate as of the date of this
Agreement, or shall have become inaccurate as of a date subsequent to the date
of this Agreement (as if made on such subsequent date), such that the condition
set forth in Section 7.1 would not be satisfied (it being understood that, for
purposes of determining the accuracy of such representations and warranties as
of any date subsequent to the date of this Agreement, all "Material Adverse
Effect" qualifications and other materiality qualifications, and any similar
qualifications, contained in such representations and warranties shall be
disregarded), or (ii) if any of Parent's covenants contained in this Agreement
shall have been breached such that the condition set forth in Section 7.2 would
not be satisfied; provided, however, that if an inaccuracy in any of Parent's
representations and warranties as of a date subsequent to the date of this
Agreement or a breach of a covenant by Parent is curable by Parent and Parent
is continuing to exercise all reasonable efforts to cure such inaccuracy or
breach, then the Company may not terminate this Agreement under this Section
8.1(g) on account of such inaccuracy or breach.
8.2 Effect of Termination. In the event of the termination of this Agreement
as provided in Section 8.1, this Agreement shall be of no further force or
effect; provided, however, that (i) this Section 8.2, Section 8.3 and Section 9
shall survive the termination of this Agreement and shall remain in full force
and effect, and (ii) the termination of this Agreement shall not relieve any
party from any liability for any breach of any representation, warranty,
covenant, obligation or other provision contained in this Agreement.
8.3 Expenses; Termination Fees.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not
the Merger is consummated; provided, however, that:
(i) Parent and the Company shall share equally all fees and expenses,
other than attorneys' fees, incurred in connection with the filing, printing
and mailing of the Form S-4 Registration Statement and the Prospectus/Proxy
Statement and any amendments or supplements thereto; and
(ii) if this Agreement is terminated by Parent or the Company pursuant to
Section 8.1(b) and between the date of this Agreement and the time of the
termination of this Agreement an Acquisition Proposal shall
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have been disclosed, announced, commenced, submitted or made, or if this
Agreement is terminated by Parent or the Company pursuant to Section 8.1(d)
or by Parent pursuant to Section 8.1(e), then (without limiting any
obligation of the Company to pay any fee payable pursuant to Section 8.3(b),
the Company shall make a nonrefundable cash payment to Parent in an amount
equal to the aggregate amount of all fees and expenses (including all
attorneys' fees, accountants' fees, financial advisory fees and filing fees)
that have been paid or that may become payable by or on behalf of Parent in
connection with the preparation and negotiation of this Agreement and
otherwise in connection with the Merger. In the case of termination of this
Agreement by the Company pursuant to Section 8.1(b) or Section 8.1(d), such
nonrefundable cash payment shall be made by the Company prior to the time of
such termination; and in the case of termination of this Agreement by Parent
pursuant to Section 8.1(b), Section 8.1(d) or Section 8.1(e), such
nonrefundable cash payment shall be made by the Company within two business
days after such termination.
(b) If (i) (A) this Agreement is terminated by Parent or the Company
pursuant to Section 8.1(b) or Section 8.1(d), (B) between the date of this
Agreement and the time of the termination of this Agreement an Acquisition
Proposal shall have been disclosed, announced, commenced, submitted or made,
and (C) the Company consummates or is subject to an Acquisition Transaction
within one year of such termination or the Company or the Company or any of its
Representatives signs a definitive agreement or letter of intent within one
year of such termination providing for an Acquisition Transaction, or (ii) this
Agreement is terminated by Parent pursuant to Section 8.1(e), then the Company
shall pay to Parent, in cash (and in addition to the amounts payable pursuant
to Section 8.3(a)), a nonrefundable fee in the amount equal to $750,000. In the
case of termination of this Agreement by the Company or Parent pursuant to
Section 8.1(b) or Section 8.1(d), the fee referred to in the preceding sentence
shall be paid by the Company on or prior to the closing date of the Acquisition
Transaction described in clause (i) (C) above; and in the case of termination
of this Agreement by Parent pursuant to Section 8.1(e), the fee referred to in
the preceding sentence shall be paid by the Company within two business days
after such termination.
(c) If the Company fails to pay when due any amount payable under this
Section 8.3, then (i) the Company shall reimburse Parent for all costs and
expenses (including fees and disbursements of counsel) incurred in connection
with the collection of such overdue amount and the enforcement by Parent of its
rights under this Section 8.3, and (ii) the Company shall pay to Parent
interest on such overdue amount (for the period commencing as of the date such
overdue amount was originally required to be paid and ending on the date such
overdue amount is actually paid to Parent in full) at a rate per annum equal to
the "prime rate" (as announced by Bank of America or any successor thereto) in
effect on the date such overdue amount was originally required to be paid plus
three percent (3%).
Section 9. MISCELLANEOUS PROVISIONS
9.1 Amendment. This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after the adoption of this Agreement by the Company's stockholders);
provided, however, that after any such adoption of this Agreement by the
Company's stockholders, no amendment shall be made which by law requires
further approval of the stockholders of the Company without the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
9.2 Waiver.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege
or remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is
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expressly set forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
9.3 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any
certificate delivered pursuant to this Agreement shall survive the Merger.
9.4 Entire Agreement; Counterparts. This Agreement and the other agreements
referred to herein constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among or between any of
the parties with respect to the subject matter hereof and thereof; provided,
however, that the Confidentiality Agreement shall not be superseded and shall
remain in full force and effect. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
9.5 Applicable Law; Jurisdiction. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof. In any action between any of the parties arising out of or
relating to this Agreement or any of the transactions contemplated by this
Agreement: (a) each of the parties irrevocably and unconditionally consents and
submits to the exclusive jurisdiction and venue of the state and federal courts
located in the State of Delaware; (b) if any such action is commenced in a
state court, then, subject to applicable law, no party shall object to the
removal of such action to any federal court located in Delaware; (c) each of
the parties irrevocably waives the right to trial by jury; and (d) each of the
parties irrevocably consents to service of process by first class certified
mail, return receipt requested, postage prepaid, to the address at which such
party is to receive notice in accordance with Section 9.9.
9.6 Disclosure Schedule. The Company Disclosure Schedule shall be arranged
in separate parts corresponding to the numbered and lettered sections contained
in Section 2, and the information disclosed in any numbered or lettered part
shall be deemed to relate to and to qualify only the particular representation
or warranty set forth in the corresponding numbered or lettered section in
Section 2, and any other section where it is reasonably apparent, upon a
reading of such disclosure without any independent knowledge on the part of the
reader regarding the matter disclosed, that the disclosure was intended to
apply to such other section.
9.7 Attorneys' Fees. In any action at law or suit in equity to enforce this
Agreement or the rights of any of the parties hereunder, the prevailing party
in such action or suit shall be entitled to receive a reasonable sum for its
attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.8 Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights hereunder may be assigned by the Company or
Parent without the prior written consent of the other party, and any attempted
assignment of this Agreement or any of such rights without such consent shall
be void and of no effect. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any Person (other than the parties hereto) any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
9.9 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received (a) upon receipt when delivered
by hand, or (b) two business days after being sent by registered mail or by
courier or express delivery service or by facsimile, provided that in each case
the notice or other communication is sent to the address or facsimile telephone
number set forth beneath the name of such party below (or to such other address
or facsimile telephone number as such party shall have specified in a written
notice given to the other parties hereto):
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9.10 if to Parent or Merger Sub:
Global Sports, Inc.
1075 First Avenue
King of Prussia, PA 19406
Attention: General Counsel
Facsimile: 610-265-2866
if to the Company:
Ashford.com, Inc.
3800 Buffalo Speedway
Houston, TX 77098
Attention: Chief Financial Officer
Facsimile: 713-623-0444
9.11 Cooperation. The Company agrees to cooperate fully with Parent and to
execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
Parent to evidence or reflect the transactions contemplated by this Agreement
and to carry out the intent and purposes of this Agreement.
9.12 Severability. In the event that any provision of this Agreement, or the
application of any such provision to any Person or set of circumstances, shall
be determined to be invalid, unlawful, void or unenforceable to any extent, the
remainder of this Agreement, and the application of such provision to Persons
or circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be impaired or otherwise affected
and shall continue to be valid and enforceable to the fullest extent permitted
by law.
9.13 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections," "Exhibits" and "Schedules" are intended to refer to Sections of
this Agreement and Exhibits or Schedules to this Agreement.
(e) The bold-faced headings contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of
this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
GLOBAL SPORTS, INC.
/s/ MICHAEL R. CONN
By: _________________________________
Michael R. Conn
Senior Vice President, Business
Development
RUBY ACQUISITION CORP.
/s/ MICHAEL R. CONN
By: _________________________________
Michael R. Conn
Senior Vice President
ASHFORD.COM, INC.
/s/ DAVID F. GOW
By: _________________________________
David F. Gow
Chief Executive Officer
A-40
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquired Corporation Contract. "Acquired Corporation Contract" shall mean
any Contract: (a) to which any of the Acquired Corporations is a party; (b) by
which any of the Acquired Corporations or any asset of any of the Acquired
Corporations is or may become bound or under which any of the Acquired
Corporations has, or may become subject to, any obligation; or (c) under which
any of the Acquired Corporations has or may acquire any right or interest.
Acquired Corporation Proprietary Asset. "Acquired Corporation Proprietary
Asset" shall mean any Proprietary Asset owned by or licensed to any of the
Acquired Corporations or otherwise used by any of the Acquired Corporations.
Acquisition Proposal. "Acquisition Proposal" shall mean any offer, proposal,
inquiry or indication of interest (other than an offer, proposal, inquiry or
indication of interest made or submitted by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction or series of transactions involving:
(a) any merger, consolidation, amalgamation, share exchange, business
combination, issuance of securities, acquisition of securities,
recapitalization, tender offer, exchange offer or other similar transaction
(i) in which any of the Acquired Corporations is a constituent corporation,
(ii) in which a Person or "group" (as defined in the Exchange Act and the
rules promulgated thereunder) of Persons directly or indirectly acquires
beneficial or record ownership of securities representing more than 15% of
the outstanding securities of any class of voting securities of any of the
Acquired Corporations, or (iii) in which any of the Acquired Corporations
issues securities representing more than 15% of the outstanding securities
of any class of voting securities of any of the Acquired Corporations;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or businesses or assets that constitute or
account for 15% or more of the consolidated net revenues, net income or
assets of any of the Acquired Corporations; or
(c) any liquidation or dissolution of any of the Acquired Corporations.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
Company Common Stock. "Company Common Stock" shall mean the Common Stock,
$0.001 par value per share, of the Company.
Company Disclosure Schedule. "Company Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by the Company in accordance with
the requirements of Section 9.6 of the Agreement and that has been delivered by
the Company to Parent on the date of the Agreement and signed by the President
of the Company.
Company Warrants. "Company Warrants" shall mean those certain warrants to
purchase shares of Company Common Stock described in Section 2.3(c).
A-41
Confidentiality Agreement. "Confidentiality Agreement" shall mean that
certain letter agreement containing confidentiality provisions dated as of
September 4, 2001, between the Company and Parent.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
For purposes of this Agreement, a Consent shall be deemed to be "required to be
obtained" in connection with the Merger if the failure to obtain such Consent
would subject the Company or Parent to actual or potential liability, penalty
or loss of rights or benefits, or would otherwise have an adverse effect on the
Company or Parent.
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option,
warranty, purchase order, license, sublicense, insurance policy, benefit plan
or legally binding commitment or undertaking of any nature.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on
the voting of any security, any restriction on the transfer of any security or
other asset, any restriction on the receipt of any income derived from any
asset, any restriction on the use of any asset and any restriction on the
possession, exercise or transfer of any other attribute of ownership of any
asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any company
limited by shares, limited liability company or joint stock company), firm,
society or other enterprise, association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
Form S-4 Registration Statement. "Form S-4 Registration Statement" shall
mean the registration statement on Form S-4 to be filed with the SEC by Parent
in connection with issuance of Parent Common Stock in the Merger, as said
registration statement may be amended prior to the time it is declared
effective by the SEC.
GAAP. "GAAP" shall mean United States generally accepted accounting
principles.
Governmental Authorization. "Governmental Authorization" shall mean any: (a)
permit, license, certificate, franchise, permission, variance, clearance,
registration, qualification or authorization issued, granted, given or
otherwise made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement; or (b) right under any Contract with any
Governmental Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, ministry, fund, foundation, center, organization,
unit, body or Entity and any court or other tribunal).
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry,
audit, examination or investigation commenced, brought, conducted or heard by
or before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state, local,
municipal, foreign or other law, statute, constitution, principle of common
law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Body (or under the
authority of the Nasdaq National Market).
A-42
Material Adverse Effect. An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the Acquired
Corporations if such event, violation, inaccuracy, circumstance or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties of the Company set forth in the Agreement,
disregarding any "Material Adverse Effect" or other materiality qualifications,
or any similar qualifications, in such representations and warranties) had or
could reasonably be expected to have a material adverse effect on (i) the
business, financial condition, capitalization, assets, liabilities, operations
or financial performance of the Acquired Corporations taken as a whole, (ii)
the ability of the Company to consummate the Merger or any of the other
transactions contemplated by the Agreement or to perform any of its obligations
under the Agreement, or (iii) Parent's ability to vote, receive dividends with
respect to or otherwise exercise ownership rights with respect to the stock of
the Surviving Corporation; provided, however, that: (A) any adverse effect that
results from general economic, business or industry conditions, the taking by
the Company of any action permitted or required by the Agreement, or the
announcement or pendency of the Merger or any of the other transactions
contemplated by the Agreement, shall not, in and of itself, constitute a
"Material Adverse Effect" on the Acquired Corporations, and shall not be
considered in determining whether there has been or would be a "Material
Adverse Effect" on the Acquired Corporations; (B) the failure of the Company to
meet published or internal earnings or revenue estimates or projections shall
not, in and of itself, constitute a "Material Adverse Effect" on the Acquired
Corporations, and shall not be considered in determining whether there has been
or would be a "Material Adverse Effect" on the Acquired Corporations; and (C) a
decline in the Company's stock price shall not, in and of itself, constitute a
"Material Adverse Effect" on the Acquired Corporations and shall not be
considered in determining whether there has been or would be a "Material
Adverse Effect" on the Acquired Corporations. An event, violation, inaccuracy,
circumstance or other matter will be deemed to have a "Material Adverse Effect"
on Parent if such event, violation, inaccuracy, circumstance or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties of Parent set forth in the Agreement,
disregarding any "Material Adverse Effect" or other materiality qualifications,
or any similar qualifications, in such representations and warranties) had or
could reasonably be expected to have a material adverse effect on (i) the
business, financial condition, capitalization, assets, liabilities, operations
or financial performance of Parent and its Subsidiaries taken as a whole or
(ii) the ability of Parent to consummate the Merger or any of the other
transactions contemplated by the Agreement or to perform any of its obligations
under the Agreement; provided, however, that: (A) any adverse effect that
results from general economic, business or industry conditions, the taking by
Parent of any action permitted or required by the Agreement, or the
announcement or pendency of the Merger or any of the other transactions
contemplated by the Agreement, shall not, in and of itself, constitute a
"Material Adverse Effect" on Parent, and shall not be considered in determining
whether there has been or would be a "Material Adverse Effect" on Parent; (B)
the failure of Parent to meet published or internal earnings or revenue
estimates or projections shall not, in and of itself, constitute a "Material
Adverse Effect" on Parent, and shall not be considered in determining whether
there has been or would be a "Material Adverse Effect" on Parent; and (C) a
decline in Parent's stock price shall not, in and of itself, constitute a
"Material Adverse Effect" on Parent and shall not be considered in determining
whether there has been or would be a "Material Adverse Effect" on Parent.
October Reverse Stock Split. "October Reverse Stock Split" shall mean that
certain one-for-ten reverse split of the outstanding shares of Company Common
Stock, which has been duly approved by the board of directors and the
stockholders of the Company, and which subject to Section 5.12, would become
effective immediately prior to the opening of the trading of Company Common
Stock on October 15, 2001.
Operating Budget. "Operating Budget" shall mean that certain Operating Plan
and Budget for the Acquired Corporations for the period from the date of the
Agreement through the Effective Time in the form of Exhibit B.
Parent Common Stock. "Parent Common Stock" shall mean the Common Stock,
$0.01 par value per share, of Parent.
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Person. "Person" shall mean any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, domain name, service mark
(whether registered or unregistered), service mark application, copyright
(whether registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, source code, model, algorithm, formula, compound,
invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or
intangible asset; or (b) right to use or exploit any of the foregoing.
Prospectus/Proxy Statement. "Prospectus/Proxy Statement" shall mean the
proxy statement to be sent to the Company's stockholders in connection with the
Company Stockholders' Meeting.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Subsidiary. An entity shall be deemed to be a "Subsidiary" of another Person
if such Person directly or indirectly owns or purports to own, beneficially or
of record, (a) an amount of voting securities of other interests in such Entity
that is sufficient to enable such Person to elect at least a majority of the
members of such Entity's board of directors or other governing body, or (b) at
least 50% of the outstanding equity or financial interests or such Entity.
Superior Offer. "Superior Offer" shall mean an unsolicited, bona fide
written offer made by a third party to purchase all or substantially all of the
outstanding shares of Company Common Stock (by way of merger, reorganization,
consolidation, tender offer, acquisition, business combination or otherwise) or
all or substantially all of the assets of the Company on terms that the board
of directors of the Company determines, in its reasonable judgment, after
consultation with an independent financial advisor of nationally recognized
reputation, to be more favorable to the Company's stockholders than the terms
of the Merger; provided, however, that any such offer shall not be deemed to be
a "Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not reasonably capable of being obtained by such
third party.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, estimated tax,
unemployment tax, national health insurance tax, excise tax, ad valorem tax,
transfer tax, stamp tax, sales tax, use tax, property tax, business tax,
withholding tax or payroll tax), levy, assessment, tariff, duty (including any
customs duty), deficiency or fee, and any related charge or amount (including
any fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
Transition Plan. "Transition Plan" shall mean that certain written plan
adopted by the Company, a copy of which has been provided to Parent prior to
the date of this Agreement, providing for the payment of certain employment and
severance benefits to employees of the Company during and following the
Pre-Closing Period.
A-44
Triggering Event. A "Triggering Event" shall be deemed to have occurred if:
(i) the board of directors of the Company shall have failed to recommend that
the Company's stockholders vote to adopt the Agreement, or shall have withdrawn
or modified in a manner adverse to Parent the Company Board Recommendation;
(ii) the Company shall have failed to include in the Proxy Statement the
Company Board Recommendation or a statement to the effect that the board of
directors of the Company has determined and believes that the Merger is in the
best interests of the Company's stockholders; (iii) the board of directors of
the Company fails to reaffirm the Company Board Recommendation, or fails to
reaffirm its determination that the Merger is in the best interests of the
Company's stockholders, within five business days after Parent requests in
writing that such recommendation or determination be reaffirmed; (iv) the board
of directors of the Company shall have approved, endorsed or recommended any
Acquisition Proposal; (v) the Company shall have entered into any letter of
intent or similar document or any Contract relating to any Acquisition
Proposal, other than the confidentiality agreement permitted under Section 4.3;
(vi) the Company shall have failed to hold the Company Stockholders' Meeting
within 45 days after the Form S-4 Registration Statement is declared effective
under the Securities Act; (vii) a tender or exchange offer relating to
securities of the Company shall have been commenced and the Company shall not
have sent to its securityholders, within ten business days after the
commencement of such tender or exchange offer, a statement disclosing that the
Company recommends rejection of such tender or exchange offer; (viii) an
Acquisition Proposal is publicly announced, and the Company (A) fails to issue
a press release announcing its opposition to such Acquisition Proposal within
five business days after such Acquisition Proposal is announced or (B)
otherwise fails to actively oppose such Acquisition Proposal; (ix) any Person
or "group" (as defined in the Exchange Act and the rules promulgated
thereunder) of Persons directly or indirectly acquires or agrees to acquire,
from the Company, beneficial or record ownership of securities representing
more than 10% of the outstanding securities of any class of voting securities
of the Company; or (x) any of the Acquired Corporations or any Representative
of any of the Acquired Corporations shall have breached any of the provisions
set forth in Section 4.3.
Unaudited Interim Balance Sheet. "Unaudited Interim Balance Sheet" shall
mean the unaudited consolidated balance sheet of the Company included in the
Unaudited Interim Financial Statements.
Unaudited Interim Financial Statements. "Unaudited Interim Financial
Statements" shall mean the unaudited consolidated balance sheet of the Company
as of August 31, 2001, and the related unaudited consolidated income statement,
statement of stockholders' equity and statement of cash flows of the Company
for the two-month period ended August 31, 2001, together with the notes
thereto, as delivered to Parent prior to the date of the Agreement.
A-45
ANNEX B
FORM OF
VOTING AGREEMENT
THIS VOTING AGREEMENT ("Agreement") is entered into as of September 13,
2001, by and between GLOBAL SPORTS, INC., a Delaware corporation ("Parent"),
and ("Stockholder").
RECITALS
A. Stockholder is a holder of record and the "beneficial owner" (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of certain
shares of common stock of Ashford.com, Inc., a Delaware corporation (the
"Company").
B. Parent, Ruby Acquisition Corp., a Delaware corporation ("Merger Sub"),
and the Company are entering into an Agreement and Plan of Merger and
Reorganization, of even date herewith (the "Reorganization Agreement"), which
provides (subject to the conditions set forth therein) for the merger of Merger
Sub into the Company (the "Merger").
C. In the Merger, the outstanding shares of common stock of the Company are
to be converted into the right to receive cash and shares of common stock of
Parent.
D. In order to induce Parent to enter into the Reorganization Agreement,
Stockholder is entering into this Agreement. Even though Stockholder may be a
director or officer of the Company, Stockholder is executing this Agreement
solely in Stockholder's individual capacity and not in Stockholder's capacity
as a director or officer of the Company.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. CERTAIN DEFINITIONS
For purposes of this Agreement:
(a) The terms "Acquisition Proposal" and "Acquisition Transaction" shall
have the respective meanings assigned to those terms in the Reorganization
Agreement.
(b) "Company Common Stock" shall mean the common stock, par value $.001
per share, of the Company.
(c) Stockholder shall be deemed to "Own" or to have acquired "Ownership"
of a security if Stockholder: (i) is the record owner of such security; or
(ii) is the "beneficial owner" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) of such security.
(d) "Person" shall mean any: (i) individual; (ii) corporation, limited
liability company, partnership or other entity; or (iii) governmental
authority.
(e) "Subject Securities" shall mean: (i) all securities of the Company
(including all shares of Company Common Stock (whether or not subject to
repurchase rights) and all options, warrants and other rights to acquire
shares of Company Common Stock) Owned by Stockholder as of the date of this
Agreement; and (ii) all additional securities of the Company (including all
additional shares of Company Common Stock (whether or not subject to
repurchase rights) and all additional options, warrants and other rights to
acquire shares of Company Common Stock) of which Stockholder acquires
Ownership during the period from the date of this Agreement through the
Voting Covenant Expiration Date.
B-1
(f) A Person shall be deemed to have effected a "Transfer" of a security
if such Person directly or indirectly: (i) sells, pledges, encumbers, grants
an option with respect to, transfers or disposes of such security or any
interest in such security to any Person other than Parent; (ii) enters into
an agreement or commitment contemplating the possible sale of, pledge of,
encumbrance of, grant of an option with respect to, transfer of or
disposition of such security or any interest therein to any Person other
than Parent; or (iii) reduces such Person's beneficial ownership (or risks
of ownership) of such security.
(g) "Voting Covenant Expiration Date" shall mean the earlier of the date
upon which the Reorganization Agreement is validly terminated, or the date
upon which the Merger is consummated.
SECTION 2. TRANSFER OF SUBJECT SECURITIES AND VOTING RIGHTS
2.1 Restriction on Transfer of Subject Securities. Subject to Section 2.3,
during the period from the date of this Agreement through the Voting Covenant
Expiration Date, Stockholder shall not, directly or indirectly, cause or permit
any Transfer of any of the Subject Securities to be effected.
2.2 Restriction on Transfer of Voting Rights. During the period from the
date of this Agreement through the Voting Covenant Expiration Date, Stockholder
shall ensure that: (a) none of the Subject Securities is deposited into a
voting trust; and (b) no proxy is granted, and no voting agreement or similar
agreement is entered into, with respect to any of the Subject Securities.
2.3 Permitted Transfers. Section 2.1 shall not prohibit a transfer of
Company Common Stock by Stockholder (i) to any member of Stockholder's
immediate family, or to a trust for the benefit of Stockholder or any member of
Stockholder's immediate family, (ii) upon the death of Stockholder, or (iii) if
Stockholder is a partnership or limited liability company, as a distribution to
the partners or members of Stockholder; provided, however, that a transfer
referred to in clause "(i)", "(ii)" or "(iii)" of this sentence shall be
permitted only if, as a precondition to such transfer, each transferee agrees
in a writing, reasonably satisfactory in form and substance to Parent, to be
bound by the terms of this Agreement.
SECTION 3. VOTING OF SHARES
3.1 Voting Covenant. Stockholder hereby agrees that during the period from
the date of this Agreement through the Voting Covenant Expiration Date, at any
meeting of the stockholders of the Company, however called, and in any written
action by consent of stockholders of the Company, unless otherwise directed in
writing by Parent, Stockholder shall cause the Subject Securities to be voted:
(a) in favor of the Merger, the execution and delivery by the Company of
the Reorganization Agreement and the adoption and approval of the
Reorganization Agreement and the terms thereof, in favor of each of the
other actions contemplated by the Reorganization Agreement and in favor of
any action in furtherance of any of the foregoing;
(b) against any action or agreement that would or could reasonably result
in a breach of any representation, warranty, covenant or obligation of the
Company in the Reorganization Agreement; and
(c) against the following actions (other than the Merger and the
transactions contemplated by the Reorganization Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Company or any subsidiary of the
Company; (B) any sale, lease or transfer of a material amount of assets of
the Company or any subsidiary of the Company; (C) any reorganization,
recapitalization, dissolution or liquidation of the Company or any
subsidiary of the Company; (D) any change in a majority of the board of
directors of the Company; (E) any amendment to the Company's certificate of
incorporation or bylaws; (F) any material change in the capitalization of
the Company or the Company's corporate structure; and (G) any other action
which is intended, or could reasonably be expected, to impede, interfere
with, delay, postpone, discourage or adversely affect the Merger or any of
the other transactions contemplated by the Reorganization Agreement or this
Agreement. Stockholder shall not enter into any agreement or understanding
with any Person prior to the earlier of the
B-2
date upon which the Reorganization Agreement is validly terminated or the
date upon which the Merger is consummated to vote or give instructions in
any manner inconsistent with clause "(a)", "(b)", or "(c)" of the preceding
sentence.
3.2 Proxy; Further Assurances.
(a) Contemporaneously with the execution of this Agreement: (i)
Stockholder shall deliver to Parent a proxy in the form attached to this
Agreement as Exhibit A, which shall be irrevocable to the fullest extent
permitted by law (at all times prior to the Voting Covenant Expiration Date)
with respect to the shares referred to therein (the "Proxy"); and (ii)
Stockholder shall cause to be delivered to Parent an additional proxy (in
the form attached hereto as Exhibit A) executed on behalf of the record
owner of any outstanding shares of Company Common Stock that are owned
beneficially (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934), but not of record, by Stockholder.
(b) Stockholder shall, at Stockholder's own expense, perform such further
acts and execute such further proxies and other documents and instruments as
may reasonably be required to vest in Parent the power to carry out and give
effect to the provisions of this Agreement.
3.3 Fiduciary Duties. This Agreement is intended to bind Stockholder only
with respect to the specific matters set forth herein, and shall not prohibit
Stockholder from acting in Stockholder's capacity as an officer or director of
the Company in the manner required by Stockholder's fiduciary duties as an
officer or director of the Company.
SECTION 4. WAIVER OF APPRAISAL RIGHTS
Stockholder hereby irrevocably and unconditionally waives, and agrees to
cause to be waived and to prevent the exercise of, any rights of appraisal and
any similar rights relating to the Merger or any related transaction that
Stockholder or any other Person may have by virtue of the ownership of any
shares of Company Common Stock Owned by Stockholder.
SECTION 5. NO SOLICITATION
Subject to Section 3.3, Stockholder agrees that, during the period from the
date of this Agreement through the Voting Covenant Expiration Date, Stockholder
shall not, directly or indirectly, and Stockholder shall ensure that
Stockholder's Representatives (as defined in the Reorganization Agreement) do
not, directly or indirectly: (i) solicit, initiate, encourage, induce or
facilitate the making, submission or announcement of any Acquisition Proposal
or take any action that could reasonably be expected to lead to an Acquisition
Proposal; (ii) furnish any information regarding the Company or any subsidiary
of the Company to any Person in connection with or in response to an
Acquisition Proposal or an inquiry or indication of interest that could
reasonably be expected to lead to an Acquisition Proposal; (iii) engage in
discussions or negotiations with any Person with respect to any Acquisition
Proposal; (iv) approve, endorse or recommend any Acquisition Proposal; or (v)
enter into any letter of intent or similar document or any agreement or
understanding contemplating or otherwise relating to any Acquisition
Transaction. Stockholder shall immediately cease and discontinue, and
Stockholder shall ensure that Stockholder's Representatives immediately cease
and discontinue, any existing discussions with any Person that relate to any
Acquisition Proposal.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER
Stockholder hereby represents and warrants to Parent as follows:
6.1 Authorization, etc. Stockholder has all necessary legal right, power,
authority and capacity to execute and deliver this Agreement and the Proxy and
to perform Stockholder's obligations hereunder and thereunder. This Agreement
and the Proxy have been duly executed and delivered by Stockholder and
constitute legal, valid and binding obligations of Stockholder, enforceable
against Stockholder in accordance with their terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors and (ii) rules of law
B-3
governing specific performance, injunctive relief and other equitable remedies.
If Stockholder is a general or limited partnership, then Stockholder is a
partnership duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it was organized. If Stockholder is a limited
liability company, then Stockholder is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was organized.
6.2 No Conflicts or Consents.
(a) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not: (i) conflict with or violate any law, rule,
regulation, order, decree or judgment applicable to Stockholder or by which
he or any of Stockholder's properties is or may be bound or affected; or
(ii) result in or constitute (with or without notice or lapse of time) any
breach of or default under, or give to any other Person (with or without
notice or lapse of time) any right of termination, amendment, acceleration
or cancellation of, or result (with or without notice or lapse of time) in
the creation of any encumbrance or restriction on any of the Subject
Securities pursuant to, any contract to which Stockholder is a party or by
which Stockholder or any of Stockholder's affiliates or properties is or may
be bound or affected.
(b) The execution and delivery of this Agreement and the Proxy by
Stockholder do not, and the performance of this Agreement and the Proxy by
Stockholder will not, require any consent or approval of any Person.
6.3 Title to Securities. As of the date of this Agreement: (a) Stockholder
holds of record (free and clear of any encumbrances or restrictions) the number
of outstanding shares of Company Common Stock set forth under the heading
"Shares Held of Record" on the signature page hereof; (b) Stockholder holds
(free and clear of any encumbrances or restrictions) the options, warrants and
other rights to acquire shares of Company Common Stock set forth under the
heading "Options and Other Rights" on the signature page hereof; (c)
Stockholder Owns the additional securities of the Company set forth under the
heading "Additional Securities Beneficially Owned" on the signature page
hereof; and (d) Stockholder does not directly or indirectly Own any shares of
capital stock or other securities of the Company, or any option, warrant or
other right to acquire (by purchase, conversion or otherwise) any shares of
capital stock or other securities of the Company, other than the shares and
options, warrants and other rights set forth on the signature page hereof.
6.4 Accuracy of Representations. The representations and warranties
contained in this Agreement are accurate in all respects as of the date of this
Agreement, will be accurate in all respects at all times through the Voting
Covenant Expiration Date and will be accurate in all respects as of the date of
the consummation of the Merger as if made on that date.
SECTION 7. ADDITIONAL COVENANTS OF STOCKHOLDER
7.1 Further Assurances. From time to time and without additional
consideration, Stockholder shall (at Stockholder's sole expense) execute and
deliver, or cause to be executed and delivered, such additional transfers,
assignments, endorsements, proxies, consents and other instruments, and shall
(at Stockholder's sole expense) take such further actions, as Parent may
request for the purpose of carrying out and furthering the intent of this
Agreement.
7.2 Legends. If requested by Parent, immediately after the execution of this
Agreement (and from time to time upon the acquisition by Stockholder of
Ownership of any shares of Company Common Stock prior to the Voting Covenant
Expiration Date), Stockholder shall cause each certificate evidencing any
outstanding shares of Company Common Stock or other securities of the Company
Owned by Stockholder to be surrendered so that the transfer agent for such
securities may affix thereto a legend in the following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
EXCHANGED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE
B-4
WITH THE TERMS AND PROVISIONS OF A VOTING AGREEMENT DATED AS OF SEPTEMBER
13, 2001, AS IT MAY BE AMENDED, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE ISSUER.
SECTION 8. MISCELLANEOUS
8.1 Survival of Representations, Warranties and Agreements. All
representations, warranties, covenants and agreements made by Stockholder in
this Agreement shall survive (i) the consummation of the Merger, (ii) any
termination of the Reorganization Agreement and (iii) the Voting Covenant
Expiration Date.
8.2 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party
incurring such costs and expenses.
8.3 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other party):
if to Stockholder:
at the address set forth on the signature page hereof; and
if to Parent:
Global Sports, Inc.
1075 First Avenue
King of Prussia, PA 19406
Attn: General Counsel
Fax: (610) 265-1730
8.4 Severability. If any provision of this Agreement or any part of any such
provision is held under any circumstances to be invalid or unenforceable in any
jurisdiction, then the invalidity or unenforceability of such provision or part
thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
Agreement. Each provision of this Agreement is separable from every other
provision of this Agreement, and each part of each provision of this Agreement
is separable from every other part of such provision.
8.5 Entire Agreement. This Agreement, the Proxy and any other documents
delivered by the parties in connection herewith constitute the entire agreement
between the parties with respect to the subject matter hereof and thereof and
supersede all prior agreements and understandings between the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon either party unless made in writing and signed
by both parties.
8.6 Assignment; Binding Effect. Except as provided herein, neither this
Agreement nor any of the interests or obligations hereunder may be assigned or
delegated by Stockholder, and any attempted or purported assignment or
delegation of any of such interests or obligations shall be void. Subject to
the preceding sentence, this Agreement shall be binding upon Stockholder and
Stockholder's heirs, estate, executors and personal representatives and
Stockholder's successors and assigns, and shall inure to the benefit of Parent
and its successors and assigns. Without limiting any of the restrictions set
forth in Section 2 or elsewhere in this Agreement, this Agreement shall be
binding upon any Person to whom any Subject Securities are transferred. Nothing
in this Agreement is intended to confer on any Person (other than Parent and
its successors and assigns) any rights or remedies of any nature.
B-5
8.7 Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the Proxy
were not performed in accordance with its specific terms or were otherwise
breached. Stockholder agrees that, in the event of any breach or threatened
breach by Stockholder of any covenant or obligation contained in this Agreement
or in the Proxy, Parent shall be entitled (in addition to any other remedy that
may be available to it, including monetary damages) to seek and obtain (a) a
decree or order of specific performance to enforce the observance and
performance of such covenant or obligation and (b) an injunction restraining
such breach or threatened breach. Stockholder further agrees that neither
Parent nor any other Person shall be required to obtain, furnish or post any
bond or similar instrument in connection with or as a condition to obtaining
any remedy referred to in this Section 8.7, and Stockholder irrevocably waives
any right he may have to require the obtaining, furnishing or posting of any
such bond or similar instrument.
8.8 Non-Exclusivity. The rights and remedies of Parent under this Agreement
are not exclusive of or limited by any other rights or remedies which it may
have, whether at law, in equity, by contract or otherwise, all of which shall
be cumulative (and not alternative). Without limiting the generality of the
foregoing, the rights and remedies of Parent under this Agreement, and the
obligations and liabilities of Stockholder under this Agreement, are in
addition to their respective rights, remedies, obligations and liabilities
under common law requirements and under all applicable statutes, rules and
regulations. Nothing in this Agreement shall limit any of Stockholder's
obligations, or the rights or remedies of Parent, under any Affiliate Agreement
between Parent and Stockholder; and nothing in any such Affiliate Agreement
shall limit any of Stockholder's obligations, or any of the rights or remedies
of Parent, under this Agreement.
8.9 Governing Law; Venue.
(a) This Agreement and the Proxy shall be construed in accordance with,
and governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating to this Agreement
or the Proxy or the enforcement of any provision of this Agreement or the
Proxy may be brought or otherwise commenced in any state or federal court
located in the State of Delaware. Stockholder:
(i) expressly and irrevocably consents and submits to the
jurisdiction of each state and federal court located in the State of
Delaware in connection with any such legal proceeding;
(ii) agrees that service of any process, summons, notice or document
by U.S. mail addressed to him at the address set forth on the signature
page hereof shall constitute effective service of such process, summons,
notice or document for purposes of any such legal proceeding;
(iii) agrees that each state and federal court located in the State
of Delaware shall be deemed to be a convenient forum; and
(iv) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or
federal court located in the State of Delaware, any claim that
Stockholder is not subject personally to the jurisdiction of such court,
that such legal proceeding has been brought in an inconvenient forum,
that the venue of such proceeding is improper or that this Agreement or
the subject matter of this Agreement may not be enforced in or by such
court.
Nothing contained in this Section 8.9 shall be deemed to limit or otherwise
affect the right of Parent to commence any legal proceeding or otherwise
proceed against Stockholder in any other forum or jurisdiction.
(c) STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN
CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR THE PROXY
OR THE ENFORCEMENT OF ANY PROVISION OF THIS AGREEMENT OR THE PROXY.
B-6
8.10 Counterparts. This Agreement may be executed in separate counterparts,
each of which when so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same instrument.
8.11 Captions. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of
this Agreement.
8.12 Attorneys' Fees. If any legal action or other legal proceeding relating
to this Agreement or the enforcement of any provision of this Agreement is
brought against Stockholder, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
8.13 Waiver. No failure on the part of Parent to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of Parent in
exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege
or remedy. Parent shall not be deemed to have waived any claim available to
Parent arising out of this Agreement, or any power, right, privilege or remedy
of Parent under this Agreement, unless the waiver of such claim, power, right,
privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of Parent; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
8.14 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include masculine and feminine genders.
(b) The parties agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
B-7
IN WITNESS WHEREOF, Parent and Stockholder have caused this Agreement to be
executed as of the date first written above.
GLOBAL SPORTS, INC.
By: _________________________________
STOCKHOLDER
--------------------------------------
Stockholder Name:
--------------------------------------
Address:
--------------------------------------
Facsimile:
--------------------------------------
Additional Securities
Shares Held of Record Options and Other Rights Beneficially Owned
--------------------- ------------------------ ---------------------
B-8
EXHIBIT A
FORM OF IRREVOCABLE PROXY
The undersigned stockholder (the "Stockholder") of ASHFORD.COM, INC., a
Delaware corporation (the "Company"), hereby irrevocably (to the fullest extent
permitted by law) appoints and constitutes MICHAEL G. RUBIN, KENNETH J.
ADELBERG and GLOBAL SPORTS, INC., a Delaware corporation ("Parent"), and each
of them, the attorneys and proxies of the Stockholder with full power of
substitution and resubstitution, to the full extent of the Stockholder's rights
with respect to (i) the outstanding shares of capital stock of the Company
owned of record by the Stockholder as of the date of this proxy, which shares
are specified on the final page of this proxy, and (ii) any and all other
shares of capital stock of the Company which the Stockholder may acquire on or
after the date hereof. (The shares of the capital stock of the Company referred
to in clauses "(i)" and "(ii)" of the immediately preceding sentence are
collectively referred to as the "Shares.") Upon the execution hereof, all prior
proxies given by the Stockholder with respect to any of the Shares are hereby
revoked, and the Stockholder agrees that no subsequent proxies will be given
with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between
Parent and the Stockholder (the "Voting Agreement"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Ruby Acquisition
Corp. and the Company (the "Reorganization Agreement"). This proxy will
terminate on the Voting Covenant Expiration Date (as defined in the Voting
Agreement).
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the earlier to occur of the
valid termination of the Reorganization Agreement or the effective time of the
merger contemplated thereby (the "Merger") at any meeting of the stockholders
of the Company, however called, and in connection with any written action by
consent of stockholders of the Company:
(i) in favor of the Merger, the execution and delivery by the Company of
the Reorganization Agreement and the adoption and approval of the
Reorganization Agreement and the terms thereof, in favor of each of the
other actions contemplated by the Reorganization Agreement and in favor of
any action in furtherance of any of the foregoing;
(ii) against any action or agreement that would or could reasonably
result in a breach of any representation, warranty, covenant or obligation
of the Company in the Reorganization Agreement; and
(iii) against or otherwise with respect to the following actions (other
than the Merger and the other transactions contemplated by the
Reorganization Agreement): (A) any extraordinary corporate transaction, such
as a merger, consolidation or other business combination involving the
Company or any subsidiary of the Company; (B) any sale, lease or transfer of
a material amount of assets of the Company or any subsidiary of the Company;
(C) any reorganization, recapitalization, dissolution or liquidation of the
Company or any subsidiary of the Company; (D) any change in a majority of
the board of directors of the Company; (E) any amendment to the Company's
certificate of incorporation or bylaws; (F) any material change in the
capitalization of the Company or the Company's corporate structure; and (G)
any other action which is intended, or could reasonably be expected to
impede, interfere with, delay, postpone, discourage or adversely affect the
Merger or any of the other transactions contemplated by the Reorganization
Agreement or the Voting Agreement.
The Stockholder may vote the Shares on all other matters not referred to in
this proxy, and the attorneys and proxies named above may not exercise this
proxy with respect to such other matters.
This proxy shall be binding upon the heirs, estate, executors, personal
representatives, successors and assigns of the Stockholder (including any
transferee of any of the Shares).
B-9
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction,
then the invalidity or unenforceability of such provision or part thereof shall
not affect the validity or enforceability of the remainder of such provision or
the validity or enforceability of any other provision of this proxy. Each
provision of this proxy is separable from every other provision of this proxy,
and each part of each provision of this proxy is separable from every other
part of such provision.
Dated: September 13, 2001
--------------------------------------
Name
Number of shares of common stock of
the Company owned of record as of the
date of this proxy:
--------------------------------------
B-10
ANNEX C
OPINION OF U.S. BANCORP PIPER JAFFRAY INC.
800 Nicollet Mall
Minneapolis, MN 55402-7020
612 303-6000
September 12, 2001
Personal and Confidential
Board of Directors
Ashford.com, Inc.
3800 Buffalo Speedway, Suite 400
Houston, TX 77098
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders (other than Global Sports (as defined below)) of
Ashford.com, Inc. ("Ashford. com") of the consideration to be received pursuant
to the terms of the Agreement and Plan of Merger and Reorganization (the
"Merger Agreement"), by and among Ashford.com, Global Sports, Inc. ("Global
Sports"), and Ruby Acquisition Corp., a wholly owned subsidiary of Global
Sports ("Merger Sub"). Pursuant to the Merger Agreement, the Merger Sub will
merge (the "Merger") with and into Ashford.com and at the effective time of the
Merger each outstanding share of common stock, $0.001 par value, of Ashford.com
("Ashford.com Common Stock) will be converted into 0.0076 shares of common
stock, $0.01 par value, of Global Sports ("Global Sports Common Stock") and
$0.125 in cash (the "Merger Consideration"). The amount of cash consideration
and number of shares of Global Sports Common Stock issuable in connection with
the Merger are subject to certain adjustments in the event of stock splits as
provided in the Merger Agreement. The terms of the Merger are set forth more
fully in the Merger Agreement.
U.S. Bancorp Piper Jaffray Inc. ("U.S. Bancorp Piper Jaffray"), as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
underwriting and secondary distributions of securities, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to Ashford.com in connection with the Merger, for which Ashford.com
will pay a fee that is contingent upon the consummation of the Merger. For our
services in rendering this opinion, Ashford.com will pay us a fee that is not
contingent upon the consummation of the Merger. Ashford.com has also agreed to
indemnify us against certain liabilities in connection with our services. In
the ordinary course of our business, we and our affiliates may actively trade
securities of Ashford.com or Global Sports for our own account or the account
of our customers and, accordingly, we may at any time hold a long or short
position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. We
have reviewed the draft of the Merger Agreement dated September 12, 2001. We
also have reviewed financial and other information that was publicly available
or furnished to us by Global Sports and Ashford.com, including information
provided during discussions with the management of each company. We have
analyzed the historical reported market prices and trading activity of the
common stock of Global Sports and Ashford.com. In addition, we have compared
certain financial data and stock market information of Global Sports and
Ashford.com with various other companies whose securities are traded in public
markets, reviewed prices and premiums paid in certain other business
combinations and conducted other financial studies, analyses and investigations
as we deemed appropriate for purposes of this opinion.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Global Sports and
Ashford.com or otherwise made available to us and have not assumed
responsibility independently to verify such information. We have further relied
upon the statements of Global Sports' and Ashford.com's management that the
information provided has been prepared on a reasonable basis in
C-1
accordance with industry practice, and, with respect to financial planning data
of Ashford, reflects the best currently available estimates and judgment of
Ashford.com's management. We have relied upon the assurances of Ashford.com's
management that they are not aware of any information or facts that would make
the information provided to us by Ashford.com or Global Sports incomplete or
misleading in light of the circumstances under which it was provided. Without
limiting the generality of the foregoing, for the purpose of this opinion, we
have assumed that neither Global Sports nor Ashford.com is party to any pending
transaction, including external financing, recapitalizations, acquisitions or
merger discussions, other than the Merger or in the ordinary course of
business. In arriving at our opinion, we have assumed that all the necessary
regulatory approvals and consents required for the Merger will be obtained in a
manner that will not change the purchase price for Ashford.com. We have assumed
that the final form of the Merger Agreement will be substantially similar to
the last draft reviewed by us, without modification of material terms or
conditions.
In arriving at our opinion, we have not performed any appraisals or
valuations of any specific assets or liabilities of Ashford.com, and have not
been furnished with any such appraisals or valuations. We have assumed that the
liquidation analysis furnished by Ashford.com's management is correct and
accurate in all respects. We were not retained to, and we did not, advise
Ashford.com in the negotiation of the Merger Consideration or any other terms
of the Merger or with respect to alternatives available to the Merger. In
addition, the Board of Directors did not request that we solicit, and we did
not solicit, any indications of interest from any third party that may be
interested in the purchase of all or any part of Ashford.com's shares or
assets. Our opinion as to the fairness of the Merger Consideration to the
stockholders of Ashford.com from a financial point of view is based, among
other things, on the value of Global Sports Common Stock as of the date hereof
We are not expressing any opinion as to the actual value of Global Sports
Common Stock when issued to Ashford.com's stockholders in connection with the
effectiveness of the Merger or the prices at which such stock will trade
subsequent to the Merger.
Without limiting the generality of the foregoing, we have undertaken no
independent analysis of Rand Allen Mintzer vs. Ashford.com, Inc., Daniel Karas
vs. Ashford.com, Inc., Congregation Mitzva Meals Inc. vs. Ashford.com, Inc. or
any other pending or threatened litigation to which Ashford.com or any of its
affiliates is a party or may be subject, or the existing investigation by the
staff of the Securities Exchange Commission concerning Ashford.com or any other
governmental investigation of possible unasserted claims or other contingent
liabilities, to which Global Sports, Ashford.com or any of their respective
affiliates is a party or may be subject. At Ashford.com's direction and with
its consent, our opinion makes no assumption concerning, and therefore does not
consider, the potential effects of such litigation, investigations or possible
assertions of claims, or the outcomes or damages arising out of any such
matters.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the date
hereof, events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon any events occurring after the
date hereof and do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is directed to the Board of Directors of Ashford.com and is not
intended to be and does not constitute a recommendation to any stockholder of
Ashford.com. We were not requested to opine as to, and this opinion does not
address, the basic business decision to proceed with or effect the Merger.
Except with respect to the use of this opinion in connection with the
prospectus/proxy statement or information statement relating to the Merger,
this opinion shall not be published or otherwise used, nor shall any public
references to us be made, without our prior written approval.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that, as of the date hereof, the Merger
Consideration to be received by the holders (other than Global Sports) of
shares of Ashford.com Common Stock pursuant to the Merger Agreement is fair to
such holders from a financial point of view.
Sincerely,
/s/ U.S. BANCORP PIPER JAFFRAY INC.
_____________________________________
U.S. BANCORP PIPER JAFFRAY INC.
C-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As permitted by Delaware law, Global Sports' amended and restated
certificate of incorporation provides that no director of Global Sports will be
personally liable to Global Sports or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability:
. for any breach of duty of loyalty to Global Sports or to its stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Global Sports' amended and restated certificate of incorporation further
provides that Global Sports must indemnify its directors and executive officers
and may indemnify its other officers, employees and agents to the fullest
extent permitted by Delaware law. Global Sports believes that indemnification
under its amended and restated certificate of incorporation covers negligence
and gross negligence on the part of indemnified parties.
Global Sports has entered into indemnification agreements with each of its
directors and certain officers. These agreements, among other things, require
Global Sports to indemnify each director and officer for certain expenses
including attorneys' fees, judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of Global Sports, arising out of the person's services as a director or
officer to Global Sports, any subsidiary of Global Sports or to any other
company or enterprise for which the person provides services at Global Sports'
request.
Item 21. Exhibits and Financial Statement Schedules
Exhibits:
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger and Reorganization, dated as of September 13, 2001, by and among
Global Sports, Inc., Ruby Acquisition Corp. and Ashford.com, Inc. (included as Annex A to the
prospectus/proxy statement which is a part of this Registration Statement on Form S-4)
2.2 Form of Voting Agreement, dated as of September 13, 2001, between Global Sports, Inc. and certain
stockholders of Ashford.com, Inc. (included as Annex B to the prospectus/proxy statement which
is a part of this Registration Statement on Form S-4)
4.1 Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed as Appendix B to
Global Sports, Inc.'s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and
incorporated herein by reference)
4.2 Bylaws, as amended, of Global Sports, Inc. (filed with Global Sports, Inc.'s Registration Statement
No. 33-33754 and incorporated herein by reference)
4.3 Specimen Common Stock Certificate (filed with Global Sports, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 30, 2000 and incorporated herein by reference)
5.1* Opinion of Cooley Godward LLP
23.1 Independent Auditors' Consent (Deloitte & Touche LLP)
II-1
Exhibit
Number Description
------ -----------
23.2 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.3 Consent of Independent Public Accountants (Arthur Andersen LLP)
23.4* Consent of Cooley Godward LLP (included in Exhibit 5.1 to this Registration Statement on Form S-4)
24.1 Power of Attorney (included on Signature Page to this Registration Statement on Form S-4)
99.1 Form of Ashford.com, Inc. Proxy
99.2 Consent of U.S. Bancorp Piper Jaffray Inc.
--------
* To be filed by amendment
Financial Statement Schedules:
No schedules are included in the foregoing financial statements because the
required information is inapplicable or is presented in the financial
statements or related notes thereto.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(5)(a) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an
II-2
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form;
(5)(b) That every prospectus (i) that is filed pursuant to paragraph
(5)(a) immediately preceding, or (ii) that purports to meet the requirements
of section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue;
(7) To respond to requests for information that is incorporated by
reference in the prospectus pursuant to items 4, 10(b), 11 or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in the documents filed subsequently to
the effective date of the registration statement through the date of
responding to the request; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in King of Prussia,
Pennsylvania, on October 9, 2001.
GLOBAL SPORTS, INC.
/s/ MICHAEL G. RUBIN
By: _________________________________
Michael G. Rubin
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Rubin and Jordan M. Copland, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement on Form S-4, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL G. RUBIN Chairman of the Board and Chief October 9, 2001
----------------------- Executive Officer (Principal
Michael G. Rubin Executive Officer)
/s/ JORDAN M. COPLAND Executive Vice President and Chief October 9, 2001
----------------------- Financial Officer (Principal
Jordan M. Copland Financial and Accounting Officer)
/s/ KENNETH J. ADELBERG Director October 9, 2001
-----------------------
Kenneth J. Adelberg
/s/ HARVEY LAMM Director October 9, 2001
-----------------------
Harvey Lamm
/s/ MICHAEL S. PERLIS Director October 9, 2001
-----------------------
Michael S. Perlis
/s/ RONALD D. FISHER Director October 9, 2001
-----------------------
Ronald D. Fisher
/s/ JEFFREY RAYPORT Director October 9, 2001
-----------------------
Jeffrey Rayport
/s/ MARK S. MENELL Director October 9, 2001
-----------------------
Mark S. Menell
II-4
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger and Reorganization, dated as of September 13, 2001, by and among
Global Sports, Inc., Ruby Acquisition Corp. and Ashford.com, Inc. (included as Annex A to the
prospectus/proxy statement which is a part of this Registration Statement on Form S-4)
2.2 Form of Voting Agreement, dated as of September 13, 2001, between Global Sports, Inc. and certain
stockholders of Ashford.com, Inc. (included as Annex B to the prospectus/proxy statement which
is a part of this Registration Statement on Form S-4)
4.1 Amended and Restated Certificate of Incorporation of Global Sports, Inc. (filed as Appendix B to
Global Sports, Inc.'s Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and
incorporated herein by reference)
4.2 Bylaws, as amended, of Global Sports, Inc. (filed with Global Sports, Inc.'s Registration Statement
No. 33-33754 and incorporated herein by reference)
4.3 Specimen Common Stock Certificate (filed with Global Sports, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 30, 2000 and incorporated herein by reference)
5.1* Opinion of Cooley Godward LLP
23.1 Independent Auditors' Consent (Deloitte & Touche LLP)
23.2 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.3 Consent of Independent Public Accountants (Arthur Andersen LLP)
23.4* Consent of Cooley Godward LLP (included in Exhibit 5.1 to this Registration Statement on Form S-4)
24.1 Power of Attorney (included on Signature Page to this Registration Statement on Form S-4)
99.1 Form of Ashford.com, Inc. Proxy
99.2 Consent of U.S. Bancorp Piper Jaffray Inc.
--------
* To be filed by amendment
EX-23.1
3
dex231.txt
CONSENT OF DELOITTE & TOUCHE LLP
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Global Sports, Inc. on Form S-4 of our report dated March 23, 2001, appearing
in the Annual Report on Form 10-K of Global Sports, Inc. for the year ended
December 30, 2000 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of the Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 9, 2001
EX-23.2
4
dex232.txt
CONSENT OF PRICEWATERHOUSECOOPERS LLP
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of Global Sports, Inc. of our report dated January 31,
2000 relating to the financial statements of Fogdog, Inc., which appears in the
Current Report on Form 8-K of Global Sports, Inc. filed January 12, 2001.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 9, 2001
EX-23.3
5
dex233.txt
CONSENT OF ARTHUR ANDERSEN LLP
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated June 13, 2001, included in Ashford.com, Inc.'s report on Form 10-K for
the year ended March 31, 2001 and to all references to our Firm included in or
made a part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
October 5, 2001
EX-99.1
6
dex991.txt
FORM OF ASHFORD.COM, INC. PROXY
EXHIBIT 99.1
ASHFORD.COM, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON [ ,] 2001
The undersigned hereby appoints David Gow and Brian Bergeron and each of
them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Ashford.com, Inc., a
Delaware corporation, which the undersigned may be entitled to vote at the
special meeting of Ashford stockholders to be held at the Renaissance Hotel, 6
Greenway Plaza East, Suite 1809, Houston, Texas 77046 on [ ], 2001 at [
a.m.], local time, and at any and all postponements, continuations and
adjournments thereof, with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in
accordance with the following instructions.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1 AS MORE SPECIFICALLY DESCRIBED IN THE PROSPECTUS/PROXY STATEMENT. IF
SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE
THEREWITH.
(Continued, and to be dated and signed on other side)
ASHFORD'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
PROPOSAL 1: To adopt the Agreement and Plan of Merger and Reorganization, dated
as of September 13, 2001, by and among Global Sports, Inc., a Delaware
corporation, Ruby Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Global Sports, Inc., and Ashford.com, Inc.
[_] For [_] Against [_] Abstain
No matters other than those described in the prospectus/proxy statement will
be presented at the special meeting of Ashford stockholders.
Dated , 2001
_____________________________________
_____________________________________
Signature(s)
Please date this proxy and sign your
name exactly as it appears hereon. If
the stock is registered in the names
of two or more persons, each should
sign. Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If signer is a corporation,
please give full corporate name and
have a duly authorized officer sign,
stating title. If signer is a
partnership, please sign in
partnership name by authorized
person.
Please vote, date and promptly return this proxy in the enclosed return
envelope, which is postage prepaid if mailed in the United States.
EX-99.2
7
dex992.txt
CONSENT OF U.S. BANCORP PIPER JAFFRAY INC.
EXHIBIT 99.2
CONSENT OF U.S. BANCORP PIPER JAFFRAY INC.
We consent to the inclusion in this Registration Statement on Form S-4 of
Global Sports, Inc. ("Global Sports") covering the securities of Global Sports
to be issued in connection with the acquisition of Ashford.com, Inc.
("Ashford"), and in the related prospectus/proxy statement, of our opinion,
dated September 12, 2001, appearing as Annex C to such prospectus/proxy
statement, and to the references to such opinion and our firm name in the
prospectus/proxy statement under the headings "Summary--Opinion of Ashford's
Financial Advisor," "The Merger--Background of Merger," "The Merger--Ashford's
Reasons for the Merger and Recommendation of Ashford's Board of Directors," and
"The Merger--Opinion of Ashford's Financial Advisor." In giving this consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 or Section 11 of the Securities Act of 1933, as
amended (the "Securities Act"), or the rules and regulations promulgated
thereunder, nor do we admit that we are experts with respect to any part of the
Registration Statement within the meaning of the term ''experts" as used in the
Securities Act of the rules and regulations promulgated thereunder.
/s/ U.S. BANCORP PIPER JAFFRAY INC.
U.S. Bancorp Piper Jaffray Inc.
Minneapolis, Minnesota
Dated: October 5, 2001