<PAGE>
Filed pursuant to rule 424(b)(4)
Registration No. 333-87819
6,000,000 Shares
[LOGO OF FOGDOG SPORTS]
Common Stock
------------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "FOGD."
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Fogdog
----------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $11.00 $0.77 $10.23
Total...................................... $66,000,000 $4,620,000 $61,380,000
</TABLE>
Delivery of the shares of common stock will be made on or about December
14, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
J.P. Morgan & Co.
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
The date of this prospectus is December 8, 1999.
<PAGE>
The inside front cover of the prospectus includes:
FOGDOG HOME
[PICTURE OF FOGDOG SPORTS HOMEPAGE]
The following text is placed to the left of the picture of the Fogdog Sports
homepage and lines connect the text to specific items on the picture of the
Fogdog Sports homepage:
1. Highlight Top Shops (seasonal)
The 6 top graphics are designed to highlight the more popular areas for
consumers. These slots are able to change based on seasonality and other
important factors.
2. Personalization
Registered users are greeted by name and directed to an area that highlights
items and promotions specific to their interests.
3. Shop by Sport or Department
Departments are horizontal categorization of products such as footwear,
apparel, etc.
4. Promotional Area
Highlights the most important areas and products on the site. This area is very
dynamic and typically changes on a weekly basis.
5. Concept Shops
In-depth, brand-specific shops for key brands such as Callaway Golf.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
The Offering............................................................. 6
Summary Financial Information............................................ 7
Risk Factors............................................................. 8
Cautionary Note on Forward-Looking Statements............................ 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Selected Pro Forma Financial Data........................................ 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 41
Management................................................................. 54
Transactions and Relationships with Related Parties........................ 68
Principal Stockholders..................................................... 71
Description of Capital Stock............................................... 73
Shares Available for Future Sale........................................... 76
Underwriting............................................................... 78
Notice to Canadian Residents............................................... 80
Legal Matters.............................................................. 81
Experts.................................................................... 81
Additional Information..................................................... 81
Index to Financial Statements.............................................. F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is
legal to sell these securities. The information in this prospectus is accurate
only on the date of this document.
Dealer Prospectus Delivery Obligation
Until January 2, 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to those statements appearing
elsewhere in this prospectus.
Fogdog Sports
We are a leading online retailer of sporting goods. We have designed
fogdog.com, our online store, to offer extensive product selection, detailed
product information and a personalized shopping experience. We believe that we
offer the largest selection of sporting goods online, with up to 60,000
distinct stock keeping units representing more than 500 brands in all major
sports categories. Fogdog.com features a collection of specialty shops,
including soccer, baseball, golf, outdoors, fan/memorabilia and other popular
categories, organized to appeal to a broad base of customers from the avid
enthusiast to the occasional participant. We provide information and analysis
authored by experts, helpful shopping services and innovative merchandising.
According to Media Metrix, Inc., our web site received more visits during
September 1999 than any other online sporting goods retailer focusing
exclusively on sporting goods.
We believe that the sporting goods industry is large and growing and that
sporting goods are increasingly being purchased online. According to the Sports
Business Research Network, total U.S. retail sales of sporting goods were
approximately $77 billion in 1998 and have grown at a 6.8% compound annual rate
since 1994. Forrester Research projects that U.S. consumers will purchase $4.2
billion of sporting goods online in 2004. We believe that the sporting goods
industry will continue to benefit from the growth in participation and interest
in sports, recreation, health, fitness and outdoor activities. We believe the
sporting goods industry is fragmented and fails to satisfy fully the needs of
consumers and manufacturers.
Our online store is designed to address the limitations of the traditional
sporting goods retail channel for consumers and manufacturers. Most of our
products, representing 30 different sports, are featured in fourteen specialty
shops and five brand concept shops. In addition to offering a wide selection of
products, our web site provides a superior online shopping experience by
emphasizing the following:
. Specialty Shops Featuring Extensive Product Selection. We offer a broad
range of product lines in a wide variety of sports in order to make
fogdog.com a "one-stop-shop." Our specialty shops also feature useful,
compelling information and expert advice to help customers make the
right product selection to meet their sports performance objectives.
. Value-Added Shopping Services. We offer helpful services to assist our
customers with their purchasing decisions, including:
- Detailed product information, guides, configurators and comparison
charts;
- Brand concept shops;
- Advice and product recommendations by recognized sports experts;
- Consumer reviews; and
- Personalized shopping.
. Convenient Shopping Experience. Our online store provides customers with
an easy-to-use web site that is available 24 hours a day, seven days a
week.
. Commitment to Excellent Customer Service. We emphasize customer service
during all phases of the customer's online shopping experience and hire
sports consultants with a broad knowledge of athletics, sports products
and training to assist customers in their purchasing decisions.
4
<PAGE>
. Network of Fulfillment Partners. We have developed and implemented a
fulfillment system that utilizes third-party warehouses, distributors
and direct shipping from select manufacturers to support secure and
reliable online retailing.
The Fogdog Sports vision is to reinvent the sporting goods retail industry
by providing customers with a new value proposition of selection, information
and service. Our goal is to be the world's leading sporting goods retailer. We
intend to achieve this goal by:
. Building Brand Recognition. We intend to establish the Fogdog brand as
the first global brand for retail sporting goods and in the process
build consumer trust, confidence and loyalty.
. Promoting Repeat Purchases. We are focused on promoting customer
loyalty and building relationships with our customers to drive repeat
sales.
. Expanding Specialty Shops. We intend to add five to ten specialty shops
organized by sport or brand within the next 12 months.
. Maximizing Product Selection and Fulfillment Capabilities. We intend to
expand our fulfillment network, extend our brand relationships and
augment our technology and expertise so that we can sell and deliver
the broadest possible array of top branded products to our customers.
. Enhancing and Forming Strategic Relationships. We have entered into
agreements with manufacturers, such as Nike USA, Internet shopping
portals, such as America Online, and distribution partners, such as
Keystone Fulfillment, that we believe provide us with competitive
advantages in merchandising, marketing and distributing our products.
We intend to pursue similar arrangements which may include written
agreements, partnerships or other arrangements to further develop our
business.
. Expanding Internationally. We intend to replicate our business model
and build our brand name in selected international markets with
appropriate demographics and market characteristics.
Corporate Information
Fogdog, Inc. was incorporated in October 1994 in California as Cedro Group,
Inc. In November 1998, we changed our name to Fogdog, Inc. We reincorporated in
Delaware in December 1999. References in this prospectus to Fogdog Sports refer
to Fogdog, Inc., a Delaware corporation, its subsidiaries and its California
predecessor, and not to the underwriters. Our principal executive offices are
located at 500 Broadway, Redwood City, California 94063 and our telephone
number is (650) 980-2500. Our web site can be found at www.fogdog.com.
Information contained in our web site is not intended to be a prospectus and
does not constitute a part of this prospectus.
Our trademarks and service marks include Fogdog(TM), Fogdog(TM) with the
accompanying design, the Fogdog logo, "Fogdog Sports(TM)," "The Dog Knows
Sports(TM)," "The Dog Knows(TM)" "Your Anytime, Anywhere Sports Store(TM)",
"360 Info Spin(TM)," "The Ultimate Sports Store(TM)" and "Fogdog Fetch(TM)."
All other brand names or trademarks appearing in this prospectus are the
property of the companies that own them. The inclusion of other companies'
brand names and products in this prospectus is not an endorsement of Fogdog
Sports. These companies are not involved with the offering of our securities.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered...... 6,000,000 Shares
Common stock to be
outstanding after
the offering............. 35,665,236 Shares
Use of proceeds........... For general corporate purposes, including marketing
and sales activities, working capital and capital
expenditures. We may use a portion of the proceeds
for possible acquisitions. See "Use of Proceeds."
Nasdaq National Market
symbol................... FOGD
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999, and
excludes:
. 4,502,885 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted average exercise
price of $1.05 per share, all of which are immediately exercisable;
however, those shares which have not yet vested are subject to
repurchase by the company;
. 6,296,631 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan that incorporates our Amended and Restated 1996
Stock Option Plan;
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan;
. 4,114,349 shares of common stock issuable upon exercise of an
outstanding warrant held by Nike USA, Inc. at an exercise price of $1.54
per share, all of which are fully vested and immediately exercisable;
and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share, all of
which are fully vested and immediately exercisable.
For additional information regarding these shares, see "Management--Benefit
Plans," "Description of Capital Stock" and Notes 7, 8 and 11 of Notes to
Financial Statements.
----------------
Except as set forth in the financial statements or as otherwise specified in
this prospectus, all information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. reflects the completion of a two for three reverse stock split;
. reflects the conversion of all of our preferred stock into 23,425,333
shares of common stock upon the completion of this offering; and
. reflects our reincorporation into Delaware in December 1999.
See "Description of Capital Stock" and "Underwriting."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------ -----------------
1996 1997 1998 1998 1999
------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total net revenues............... $ 677 $ 1,041 $ 765 $ 516 $ 2,577
Gross profit..................... 587 885 490 405 507
Total operating expenses......... 1,053 1,922 4,665 2,316 15,919
Operating loss................... (466) (1,037) (4,175) (1,911) (15,412)
Net loss......................... (469) (1,045) (4,120) (1,883) (15,136)
Basic and diluted net loss per
share available to
common stockholders............. $(0.13) $ (0.23) $(0.95) $(0.43) $ (6.04)
Basic and diluted weighted
average shares used in
computation of net loss per
share available to
common stockholders............. 3,631 4,543 4,323 4,391 4,645
Pro forma basic and diluted net
loss per share.................. $ (.43) $ (1.33)
Pro forma basic and diluted
weighted average shares......... 9,622 21,059
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------
Actual As Adjusted
-------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $ 21,880 $ 81,760
Working capital........................................... 17,931 77,811
Total assets.............................................. 57,291 117,171
Long-term liabilities..................................... 342 342
Stockholders' equity...................................... 51,340 111,220
</TABLE>
The balance sheet data as of September 30, 1999 is set forth:
. on an actual basis; and
. on an as adjusted basis to reflect each of the adjustments listed above
and the net proceeds from the sale of 6,000,000 shares of common stock
at the initial public offering price of $11.00 per share after deducting
the underwriting discounts and commissions and our estimated offering
expenses.
See "Use of Proceeds" and "Capitalization."
See Note 1 to the consolidated financial statements for computation of basic
and diluted net loss per share.
7
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. The occurrence of any of the following risks
could materially and adversely affect our business, financial condition and
operating results. In this case, the trading price of our common stock could
decline and you may lose part or all of your investment.
Investing in our common stock may expose you
to the following risks inherent in our business
We expect significant increases in our operating expenses and continuing
losses.
We incurred a cumulative net loss of $20.9 million for the period from
inception through September 30, 1999. Our operating loss for the nine months
ended September 30, 1999 was $15.4 million, for the year ended December 31,
1998 was $4.2 million, and for the year ended December 31, 1997 was $1.0
million. We have not achieved profitability. We only began selling products
under our current business model in November 1998. We may not obtain enough
customer traffic or a high enough volume of purchases to generate sufficient
revenues and achieve profitability. We believe that we will continue to incur
operating and net losses for the next several years, and that the rate at which
we will incur losses will increase significantly from current levels. We intend
to increase our operating expenses substantially as we:
. increase our sales and marketing activities, particularly advertising
efforts;
. provide our customers with promotional benefits, such as selling
selected products or offering shipping below our actual costs;
. increase our general and administrative functions to support our growing
operations;
. expand our customer support and sports consultant staffs to better serve
customer needs;
. develop enhanced technologies and features to improve our web site;
. enhance our distribution and order fulfillment capabilities; and
. expand third-party distribution facilities or possibly buy or build our
own.
Because we will spend these amounts before we receive any revenues from
these efforts, our losses will be greater than the losses we would incur if we
developed our business more slowly. In addition, we may find that these efforts
are more expensive than we currently anticipate, which would further increase
our losses. Also, the timing of these expenses may contribute to fluctuations
in our quarterly operating results.
Our limited operating history makes forecasting difficult. Because most of our
expenses are based on planned operating results, failure to accurately forecast
revenues could cause net losses in a given quarter to be greater than expected.
As a result of our limited operating history, it is difficult to accurately
forecast our revenues and we have limited meaningful historical financial data
upon which to base planned operating expenses. We were incorporated in October
1994. We started as a web site design company and derived most of our revenues
from the sale of web development services until August 1998, when we stopped
selling those services. We began selling products on our web site only in
November 1998. Our results since that time will not be comparable to our prior
results. We base our current and future expense levels on our operating plans,
expected traffic and purchases from our web site and estimates of future
revenues, and our significant expenses are to a large extent fixed in the short
term. Our sales and operating results are difficult to forecast because they
generally depend on the volume and timing of the orders we receive. As a
result, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
net loss in a given quarter to be greater than expected.
8
<PAGE>
Our operating results are volatile and difficult to predict. If we fail to meet
the expectations of public market analysts and investors, the market price of
our common stock may decline significantly.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may decline significantly. Factors that may harm our
business or cause our operating results to fluctuate include the following:
. our inability to obtain new customers at a reasonable cost, retain
existing customers, or encourage repeat purchases;
. decreases in the number of visitors to our web site or our inability to
convert visitors to our web site into customers;
. the mix of sporting goods, apparel, footwear and other products sold by
us;
. our inability to manage inventory levels;
. our inability to adequately maintain, upgrade and develop our web site,
the systems that we use to process customers' orders and payments or our
computer network;
. the ability of our competitors to offer new or enhanced web sites,
services or products;
. price competition;
. fluctuations in the demand for sporting goods associated with sports
events, movies, television and other entertainment events;
. fluctuations in the amount of consumer spending on sporting goods and
related products, which tend to be discretionary spending items;
. the termination of existing marketing relationships with key business
partners or failure to develop new ones;
. increases in the cost of online or offline advertising;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season; and
. technical difficulties, system downtime or Internet slowdowns.
A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of products sold by us, inventory management,
inbound and outbound shipping and handling costs, the level of product returns
and the level of discount pricing and promotional coupon usage. Any change in
one or more of these factors could reduce our gross margins in future periods.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations and Seasonality."
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We have experienced and expect to continue to experience seasonal
fluctuations in our revenues. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, we expect that the fourth
calendar quarter will account for a large percentage of our total annual sales.
In anticipation of increased sales activity during the fourth calendar quarter,
we may hire a significant number of temporary employees to bolster our
permanent staff and we intend to significantly increase our inventory levels.
For this reason, if our revenues were below seasonal expectations during this
quarter, our annual operating results could be below the expectations of
securities analysts and investors. In the future, our seasonal sales patterns
may become more
9
<PAGE>
pronounced, may strain our personnel, product distribution and shipment
activities and may cause a shortfall in revenues as compared to expenses in a
given period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
To date, we have funded our operations from the sale of equity securities
and have not generated sufficient cash from operations. Cash from revenues must
increase significantly for us to fund anticipated operating expenses
internally. If our cash flows are insufficient to fund these expenses, we may
need to fund our growth through additional debt or equity financings or reduce
costs. Further, we may not be able to obtain financing on satisfactory terms.
Our inability to finance our growth, either internally or externally, may limit
our growth potential and our ability to execute our business strategy. If we
issue securities to raise capital, our existing stockholders may experience
additional dilution or the new securities may have rights senior to those of
our common stock.
We must maintain relationships with our distributors and manufacturers to
obtain sufficient quantities of quality merchandise on acceptable commercial
terms. If we fail to maintain our relationships with those parties on
acceptable terms, our sales and profitability could suffer.
Because we rely primarily on product manufacturers and third-party
distributors to stock the products we offer, our business would be seriously
harmed if we were unable to develop and maintain relationships with suppliers
that allow us to obtain sufficient quantities of quality merchandise on
acceptable terms. Our product orders are fulfilled by more than 15 distributors
and manufacturers. However, our contracts or arrangements with these parties do
not guarantee the availability of merchandise, establish guaranteed prices or
provide for the continuation of particular pricing practices. In addition, we
do not have a written contract with most of our major suppliers. Although we
have alternative sources of supply for a small percentage of the products we
offer, we may have difficulty establishing alternative sources for many of our
products. Our current suppliers may not continue to sell products to us on
current terms or at all, and we may not be able to establish new supply
relationships to ensure delivery of merchandise in a timely and efficient
manner or on terms acceptable to us. Some sporting goods manufacturers may be
slow to adopt the use of the Internet as a distribution channel. In addition,
our supply contracts typically do not restrict a supplier from selling products
to other retailers, which could limit our ability to supply the quantity of
merchandise requested by our customers. If we cannot supply our products to
consumers at acceptable prices, we may lose sales and market share as consumers
make purchases elsewhere. Further, an increase in supply costs could cause our
operating losses to increase beyond current expectations.
If we are unable to establish and maintain relationships with key brand
manufacturers, our sales will decrease.
If we are unable to establish and maintain relationships with important
brand manufacturers, we may be unable to obtain sufficient quantities of
popular products and in-depth product information. This could result in lower
sales. We have never derived more than 40% of our revenues in any quarter from
products purchased directly from manufacturers, although we cannot predict
whether we will exceed this percentage in future periods. For the nine months
ended September 30, 1999, we derived approximately 15% of our net revenues from
sales of our top selling brands, adidas and Nike, although neither of these
brands accounted for in excess of 10% of our net revenues. We recently entered
into an agreement with Nike that will give us access to Nike's generally
available product lines and product information, as well as advance
availability of mutually agreed upon, newly released Nike products. However,
this agreement has a term of only two years and is subject to earlier
termination if we breach the agreement. Moreover, Nike is not legally obligated
to sell us any quantity of product or deliver on any particular schedule. Also,
our purchases from Nike's online affiliate are subject to similar limitations.
If our relationship with Nike deteriorates, our business and reputation could
be seriously harmed. In addition, our relationship with Nike could cause other
existing or future suppliers to modify their
10
<PAGE>
existing relationships with us or prevent new relationships from being formed.
We believe that some of Nike's competitors may be reluctant to enter into an
agreement with us or to provide products for sale on our online store because
of our agreement with Nike. For example, we believe that some competitors may
not want to be featured on our web site because of Nike's involvement with us.
Also, we believe that Nike's competitors may fear that Nike may use its
relationship with us to attempt to gain access to competitive information
concerning those competitors.
We have experienced difficulty in obtaining sufficient product allocations
from some of our key vendors. If we have to rely exclusively on distributors
and not manufacturers, we may not be able to obtain the types and quantities of
the products we desire because of varying demand from their other customers or
temporal limitations on the availability of products from their suppliers. In
addition, Nike and some of our other key vendors have established, and may
continue to expand, their own online retailing efforts, which may impair our
ability to acquire sufficient product allocations from these vendors. In
connection with this expansion, or a decision by manufacturers not to offer
products online or through our web site, manufacturers have asked us and may
again ask us to remove their products from our web site.
We depend on third parties to fulfill all of our customer orders, and any
problems with these parties could impair our operating results and harm our
reputation.
Currently, we rely primarily on third-party distributors and product
manufacturers to fulfill our customers' orders. These fulfillment partners are
responsible for packaging products and arranging for them to be shipped to our
customers. We may be unable to ensure that our fulfillment partners fill our
customers' orders accurately and that orders are shipped promptly and in
appropriate packaging. In addition, we have no written contracts with some of
these fulfillment partners, and our contracts with the others are generally
terminable upon short notice. If any of our existing fulfillment arrangements
were to be terminated, our business could be disrupted and we could incur
significant costs in attempting to make alternative arrangements. Our
distribution network is also heavily dependent upon third-party carriers,
primarily United Parcel Service, for product shipments. UPS accounted for
approximately 90% of our customer shipments by units in the nine months ended
September 30, 1999. We are therefore subject to the risk that labor shortages,
strikes, inclement weather or other factors may limit the ability of UPS and
other carriers to meet our shipping needs. Our shippers' failure to deliver
products to our customers in a timely manner would damage our brand and
adversely affect our operating results. If UPS or our other existing shippers
are unable or unwilling to deliver our products to our customers, we would need
to arrange for alternative carriers. We may be unable to engage an alternative
carrier on a timely basis or upon terms favorable to us. Changing carriers
would likely disrupt our business.
If we fail to expand our fulfillment operations successfully, sales could fall
below expectations and we could incur unexpected costs.
We must be able to fill customer orders quickly and efficiently. If we do
not expand our fulfillment operations and systems to accommodate increases in
demand, particularly during the peak holiday selling season, we will not be
able to increase our net sales in accordance with the expectations of
securities analysts and investors. We intend to add to the capacity of our
distribution network by entering into agreements with additional fulfillment
partners. It may be difficult for us to assimilate new partners into our
distribution system in time for the 1999 holiday season or at all. We may be
unable to secure these additional partners or integrate their systems and
technologies into ours. If we fail to do so, we may lose sales and our
reputation for prompt delivery and customer service would suffer. Even if we
are successful in expanding our distribution network, our planned expansion may
cause disruptions in our business and our fulfillment operations may be
inadequate to accommodate increases in customer demand.
High merchandise returns could adversely affect our financial condition and
results of operations.
We allow our customers to return products within 45 days for a full refund.
We make allowances in our financial statements for anticipated merchandise
returns based on historical return rates. However, actual returns
11
<PAGE>
may exceed our allowances. If merchandise returns increase significantly or
exceed our allowances, our financial condition and results of operations could
be adversely affected.
We plan to expand our inventory levels, and we may have to write down the value
of our inventory if consumer demand changes after we order products.
Although we currently rely primarily on our distributors and brand name
suppliers to carry the inventory available for purchase on our site, we
anticipate that we will carry an increasing amount of inventory and that the
percentage of sales made from our own inventory will rise. As a result, it will
be critical to our success that we accurately predict the rapidly changing
trends in consumer preferences for sporting goods, and do not overstock
unpopular products. Predicting these trends is difficult. If demand for one or
more of our products falls short of our expectations, we may be required to
take significant inventory markdowns, which could reduce our net sales and
gross margins. This risk may be greatest in the first calendar quarter of each
year, after we have significantly increased inventory levels for the holiday
season. In addition, to the extent that demand for our products increases over
time, we may be forced to increase inventory levels. Any increase would subject
us to additional inventory risks.
We rely substantially on our relationships with America Online and other online
services, search engines and directories to drive traffic to our web site. If
these relationships do not continue, it will be difficult for us to increase
market share and achieve profitability.
We have relationships with America Online, Inc. and other online services,
search engines and directories to provide content and advertising banners that
link to our web site. We rely on these relationships as significant sources of
traffic to our web site and, therefore, new customers. However, these
relationships are generally terminable on short notice, and they may not be
available to us in the future on acceptable terms. If we are unable to maintain
satisfactory relationships with high-traffic web sites on acceptable terms, our
ability to attract new customers and enhance our brand could be harmed.
Further, many of the web sites with which we have existing or potential online
advertising arrangements may also provide advertising services for other
marketers of sporting goods. As a result, these sites may be reluctant to enter
into or maintain relationships with us. Our online advertising efforts may
require costly, long-term commitments. We may not achieve sufficient online
traffic or product purchases to realize sufficient sales to compensate for our
significant obligations to these sites. Failure to achieve sufficient traffic
or generate sufficient revenue from purchases originating from third-party web
sites would likely reduce our profit margins and may result in termination of
these types of relationships. Without these relationships, it is unlikely that
we can sufficiently increase market share and achieve profitability.
Because a key element of our strategy is to generate a high volume of traffic
on our web site, our business could be harmed by capacity constraints.
A key element of our strategy is to generate a high volume of traffic on,
and use of, our web site, www.fogdog.com. Accordingly, the satisfactory
performance, reliability and availability of our web site, transaction-
processing systems and network infrastructure are critical to our reputation
and our ability to attract and retain customers and maintain adequate customer
service levels. Our revenue depends upon the number of visitors who shop on our
web site and the volume of orders that we can fulfill. Any system interruptions
that result in the unavailability of our web site or reduced order fulfillment
would reduce the volume of goods that we sell and the attractiveness of our
product offerings. We have experienced periodic system interruptions in the
past, and we believe that system interruptions may continue to occur in the
future. Any substantial increase in the volume of traffic on our web site or
the number of orders placed by customers will require that we expand and
upgrade our technology, transaction-processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our web site or timely expand and upgrade our
technology, transaction-processing systems and network infrastructure. We may
not be able to accurately project the rate or timing of increases, if any, in
the use of our web site or timely expand and upgrade our systems and
infrastructure to accommodate these increases.
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Our vital computer and communications hardware and software systems are
vulnerable to damage and interruption which could harm our business.
Our success, in particular our ability to successfully receive and fulfill
orders and provide high-quality customer service, largely depends upon the
efficient and uninterrupted operation of our computer and communications
hardware and software systems. We use internally developed systems for our web
site and some aspects of transaction processing, including customer profiling
and order verifications. Our systems and operations are vulnerable to damage or
interruption from:
. earthquake, fire, flood and other natural disasters;
. power loss, computer systems failures, Internet and telecommunications
or data network failure, operator negligence, improper operation by or
supervision of employees, physical and electronic loss of data or
security breaches, misappropriation and similar events; and
. computer viruses.
In addition, we maintain our servers at the site of a third party, Exodus
Communications, Inc., in Mountain View, California. We cannot control the
maintenance and operation of this site, which is also susceptible to similar
disasters and problems. We have no formal disaster recovery plan, and our
insurance policies may not adequately compensate us for any losses that we may
incur. Any system failure that causes an interruption in our service or a
decrease in responsiveness could harm our relationships with our customers and
result in reduced revenues. See "Business--Technology."
Establishing the Fogdog brand quickly and cost-effectively is central to our
success. If we do not establish the Fogdog brand quickly, we may not capture
sufficient market share or increase revenues enough to achieve profitability.
We believe that we must establish, maintain and enhance the Fogdog brand to
attract more customers to our web site and to generate revenues from product
sales. Brand recognition and customer loyalty will become increasingly
important as more companies with well-established brands in online services or
the sporting goods industry offer competing services on the Internet. For
example, existing sporting goods retailers with established brand names may
establish an online presence that competes with our web site and existing
online providers with better name recognition than Fogdog Sports may begin
selling sporting goods. Establishing the Fogdog brand as a widely recognized
and trusted source of sporting goods will depend largely on our success in
providing a high-quality online experience supported by a high level of
customer service, which cannot be assured. We expect that we will need to
increase substantially our spending on programs designed to create and maintain
strong brand loyalty among customers and we cannot be certain that our efforts
will be successful.
Our inability to secure and protect our Internet domain name may adversely
affect our business operation.
The www.fogdog.com Internet domain name is our brand on the Internet. In
October 1999, a third party challenged the use of the domain name as a
violation of a registered trademark. If we are unable to adequately protect our
Internet domain name, our trademarks and other intellectual property rights, or
must incur costs in doing so, it could harm our business. The acquisition and
maintenance of Internet domain names generally is regulated by governmental
agencies and their designees. Until recently, Network Solutions, Inc. was the
exclusive registrar for the ".com," ".net" and ".org" generic top-level
Internet domains in the U.S. In April 1999, however, the Internet Corporation
for Assigned Names and Numbers, or ICANN, a new global non-profit corporation
formed to oversee a set of the Internet's core technical management functions,
opened the market for registering Internet domain names to an initial group of
five companies. Network Solutions, Inc. still maintains the registry containing
all the registrations in the generic top-level Internet domains. The market for
registering these Internet domain names in the U.S. and in foreign countries is
expected to undergo further changes in the near future. We expect the
requirements for registering Internet domain names also to be affected. The
relationship between regulations governing Internet domain names and laws
protecting
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trademarks and similar proprietary rights is unclear. We may be unable to
prevent third parties from acquiring Internet domain names that are similar to,
infringe upon or otherwise decrease the value of our Internet domain name, our
trademarks and other intellectual property rights used by us and we may need to
protect our rights through litigation.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to
intensify in the future because current and new competitors can enter our
market with little difficulty and can launch new web sites at a relatively low
cost.
In addition, the development of new technologies and the expansion of
existing technologies, such as price comparison programs that select specific
products from a variety of web sites, may increase competitive pressures on us.
We currently or potentially compete with a variety of other companies,
including:
. traditional, store-based, national chain sporting goods retailers such
as the Venator Group (Footlocker brands and Champs);
. traditional, store-based, national chain outdoor equipment retailers,
such as REI;
. traditional, store-based, national chain athletic footwear retailers,
such as Just for Feet;
. traditional, store-based, regional chain sporting goods retailers such
as The Sports Authority, Dick's Sporting Goods and Galyan's;
. major discount retailers, such as Wal-Mart, Kmart and Target;
. catalog sporting goods retailers, such as Eastbay, TSI and Edwin Watts;
. numerous traditional local sporting goods and outdoor activity stores;
. online efforts of these traditional retailers, including the online
stores operated by Dick's Sporting Goods, Copeland's and REI;
. vendors of sporting goods that currently sell some of their products
directly online, such as K-Swiss and Patagonia;
. Global Sports Interactive, a newly formed online joint venture
established by The Sports Authority, The Athlete's Foot, MC Sports and
Sport Chalet and which may include in the future other store-based
retailers;
. Internet portals and online service providers that feature shopping
services, such as AOL, Excite@Home, GO Network and Lycos;
. other online retailers that include sporting goods as part of their
product offerings, such as Onsale and Buy.com;
. physical and online stores of entertainment entities that sell sporting
goods and fan memorabilia, such as ESPN.com and CBS Sportsline; and
. retailers selling sporting goods exclusively online.
There are no assurances that we will be able to be competitive against
current or potential competitors. Many of our traditional store-based and
online competitors have longer operating histories, larger customer or user
bases, greater brand recognition and significantly greater financial,
marketing, technical and other resources than we do. Many of these competitors
have well established relationships with manufacturers, more extensive
knowledge about our industry and can devote substantially more resources to web
site development
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and advertising. In addition, new competitors may emerge in the future and
larger, well-established and well-financed entities may join with online
competitors or sporting goods suppliers as the use of the Internet and other
online services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Furthermore,
our competitors may be able to secure a broader range of products from or
otherwise develop close relationships with primary vendors. Some competitors
may price their products below cost in an attempt to gain market share.
Traditional store-based retailers also enable customers to see and feel
products in a manner that is not possible over the Internet. See "Business--
Competition."
We may be unable to hire and retain the skilled personnel necessary to develop
our business.
We intend to hire a significant number of additional marketing, engineering,
merchandising and retailing personnel in 1999 and beyond. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain
highly qualified personnel in the future. Our business cannot continue to grow
if we cannot attract qualified personnel. Our failure to attract and retain the
highly trained personnel that are integral to our business may limit our growth
rate, which would harm our business. We expect to face greater difficulty
attracting these personnel with equity incentives as a public company than we
did as a privately held company. See "Business--Employees."
We are dependent upon our chief executive officer for our future success and
our managers are not obligated to stay with us.
Our future success depends to a significant degree on the skills, experience
and efforts of Timothy Harrington, our Chief Executive Officer, and other key
personnel. The loss of the services of any of these individuals could harm our
business and operations. In addition, we have not obtained key person life
insurance on any of our key employees. If any of our key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement, our business could be harmed.
We have experienced significant growth in our business in recent periods and
any inability to manage this growth and any future growth could harm our
business.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our management, administrative
resources, software and systems. Any failure to manage growth effectively could
seriously harm our business. We have grown from 40 employees on September 30,
1998 to 96 employees on September 30, 1999. We have also recently moved into a
new headquarters building and significantly expanded our operations. To be
successful, we will need to continue to implement management information
systems and improve our operating, administrative, financial and accounting
systems and controls. We will also need to train new employees and maintain
close coordination among our executive, accounting, finance, marketing, sales
and operations organizations. These processes are time consuming and expensive,
will increase management responsibilities and will divert management attention.
If the protection of our trademarks and proprietary rights is inadequate, our
brand and reputation could be damaged and we could lose customers.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets
and similar intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights. Despite these precautions, it may be possible
for a third-party to copy or otherwise obtain and use our intellectual property
without our authorization. We have applied to register the trademark Fogdog in
the United States and internationally. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country
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in which we will sell our products and services online. If we become involved
in litigation to defend our intellectual property rights, we may have to spend
significant amounts of money, and the litigation could divert our management's
time and efforts.
We may be subject to intellectual property claims that could be costly and
could disrupt our business.
Third parties have in the past and may in the future assert that our
business or technologies infringe their intellectual property rights. From time
to time, we have received notices from third parties questioning our right to
present specific images or mention athletes' names on our Web site, or stating
that we have infringed their trademarks or copyrights. In addition, in June
1999 we received a letter from a third party stating his belief that our
Internet marketing activities infringe a patent for a home shopping device and
inviting us to license this technology. Also, in October 1999 we received a
letter from a third party alleging that our use of the trademark "Fogdog" and
the domain name for our web site fogdog.com infringed a registered trademark
licensed by this third party, and further alleging unfair competition under
state and federal trademark law. We may in the future receive additional claims
that we are engaging in unfair competition or other illegal trade practices.
These claims may increase in the future. We may be unsuccessful in defending
against any such claim, which could result in substantial damages, fines or
other penalties. The resolution of a claim could also require us to change how
we do business, redesign our web site and other systems, or enter into
burdensome royalty or licensing agreements. In particular, we may have to enter
into a license to use our domain name, or we could even be forced to change our
name, either of which would severely harm our business. 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. Our insurance
coverage may not be adequate to cover every claim that could be asserted
against us. Even unsuccessful claims could result in significant legal fees and
other expenses, diversion of management's time and disruptions in our business.
Any such claim could also harm our reputation and brand.
We intend to expand our business internationally, causing our business to
become increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to pursue or consider pursuing international expansion. We have expanded into
international markets by opening an office in London. Revenue from merchandise
shipped outside the United States was approximately 9% of total merchandise
revenue for the nine months ended September 30, 1999, and we expect to increase
our international sales efforts. International sales are subject to inherent
risks and challenges that could affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting goods manufacturers may require that
our 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 we generate international sales in the future, any negative
effects on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into U.S. dollars may contribute
to fluctuations in our results of operations and fluctuating exchange rates
could cause reduced gross revenues and/or gross margins from dollar-denominated
international sales.
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We may encounter significant difficulties in integrating our recent
acquisition, Sports Universe, which could divert our management's attention and
harm our business.
In early September 1999, we completed the acquisition of Sports Universe,
Inc. We acquired Sports Universe because we believe that we can achieve a
broader and more complete product offering for our consumers by combining our
products, marketing, consumer experience, distribution channels and client base
with the "action sports" line of Sports Universe. We may not be able to
successfully integrate the businesses and product offerings of the two
companies. The process of combining the two companies and their product
offerings may cause an interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could
adversely affect their combined operations. Our management may have to divert
attention from our day-to-day business and devote substantial resources to
retaining employees and maintaining other relationships. If we fail to
successfully complete the integration of Sports Universe, our business could be
harmed.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations.
We may make acquisitions or investments in other companies or technologies.
We may not realize the anticipated benefits of any acquisition or investment.
If we make any acquisitions, we will be required to assimilate the operations,
products and personnel of the acquired businesses and train, retain and
motivate key personnel from the acquired businesses. We may be unable to
maintain uniform standards, controls, procedures and policies if we fail in
these efforts. Similarly, acquisitions may cause disruptions in our operations
and divert management's attention from day-to-day operations, which could
impair our relationships with our current employees, customers and strategic
partners. In addition, our profitability may suffer because of acquisition-
related costs or amortization costs for acquired goodwill and other intangible
assets.
We may be subject to product liability claims or other claims that could be
costly and time consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted against us. Similarly, we could be subject
to claims that users of the site were harmed due to their reliance on our
product information, product selection guides and configurators, advice or
instruction. If a successful claim were brought against us in excess of our
insurance coverage, it could harm our business. Even unsuccessful claims could
result in the expenditure of funds and management time and could have a
negative impact on our business.
Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction.
After this offering, our executive officers and directors, their affiliates
and other substantial stockholders will together control approximately 49.3% of
our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring our stockholders'
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may delay, prevent or
deter a change in control, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of the company or
its assets and might adversely affect the market price of our common stock.
Provisions of our certificate of incorporation and bylaws may make changes of
control difficult, even if they would be beneficial to stockholders.
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Also, without any further vote or
action on the part of the stockholders, the board of directors
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will have the authority to determine the price, rights, preferences, privileges
and restrictions of the preferred stock. If we issue preferred stock, it might
have preference over and harm the rights of the holders of common stock.
Although the availability of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, the issuance of preferred stock may make it more difficult for a
third-party to acquire a majority of our outstanding voting stock. We currently
have no plans to issue preferred stock.
Our certificate of incorporation and bylaws include provisions that may
deter an unsolicited offer to purchase us. These provisions, coupled with the
provisions of the Delaware General Corporation Law, may delay or impede a
merger, tender offer or proxy contest. Further, our board of directors is
divided into three classes, only one of which is elected each year. Our
directors are only removable by the affirmative vote of at least 66 2/3% of all
classes of voting stock. These factors may further delay or prevent a change of
control. See "Description of Capital Stock--Antitakeover Effects of Provisions
of the Certificate of Incorporation, Bylaws and Delaware Law."
We will rely on email and other forms of direct online marketing. Our business
could suffer if these marketing techniques encounter consumer resistance or
increased governmental regulation.
We send emails to our registered users to obtain feedback about our online
store, to provide order information and to promote repeat sales. We may expand
our use of email and other direct online marketing techniques. If consumers
resist these forms of communication due to concerns about privacy, computer
viruses or the proliferation of commercial email, our business and reputation
could be damaged. We also anticipate that our use of email and other direct
online marketing techniques will be subject to increasingly stringent
regulation. For example, several states have passed laws limiting the use of
email for marketing purposes. To date, these laws have not had a significant
effect on us because they focus primarily on unsolicited email marketing and we
currently ask for our customers' permission before sending them email. However,
other states and Congress have begun to consider placing restrictions on email
marketing. This additional legislation could hamper our ability to provide
effective customer service and generate repeat sales.
If we experience significant inventory theft, our gross margin may decrease.
If the security measures used at any distribution facility we use or operate
do not significantly reduce or prevent inventory theft, our gross margin may
significantly decrease. During the nine months ended September 30, 1999, we
experienced an immaterial amount of inventory theft. However, this theft may
increase as we expand our fulfillment operations and distribution network. If
measures we take to address inventory theft do not reduce or prevent inventory
theft, our gross margin and results of operations could be significantly below
expectations in future periods.
Risks specific to the Internet and our industry
Sporting goods consumers may not accept our online business model. This may
result in slower revenue growth, loss of revenue and increased operating
losses.
To be successful, we must attract and retain a significant number of
consumers to our web site at a reasonable cost. Any significant shortfall in
the number of transactions occurring over our web site will negatively affect
our financial results by increasing or prolonging operating losses. Conversion
of customers from traditional shopping methods to electronic shopping may not
occur as rapidly as we expect, or at all. Therefore, we may not achieve the
critical mass of customer traffic we believe is necessary to become successful.
Specific factors that could prevent widespread customer acceptance of our
online business model, and our ability to grow our revenue, include:
. customer concerns about the security of online transactions;
. customer concerns about buying sporting goods, footwear and other
products without first seeing them;
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. delivery time before customers receive Internet orders, unlike the
immediate receipt of products at traditional retail outlets;
. pricing that may not meet customer expectations;
. customer resistance to shipping charges, which generally do not apply to
purchases from traditional retail outlets;
. shipment of damaged goods or wrong products from our suppliers; and
. difficulties in returning or exchanging orders.
The success of our business model is dependent upon the continued growth of the
online commerce infrastructure.
Our future revenue and any future profits are also dependent upon the
continued development of the online commerce infrastructure. The Internet and
other online services may not be accepted as a viable commercial marketplace
for a number of reasons, including potentially inadequate development of
enabling technologies and performance improvements. To the extent that the
Internet and other online services continue to experience significant growth in
the number of users, their frequency of use or an increase in their bandwidth
requirements, there can be no assurance that the infrastructure for the
Internet and other online services will be able to support the demands placed
upon them. In addition, the Internet or other online services could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet or other online
service activity. Changes in or insufficient availability of telecommunications
services to support the Internet or other online services could result in
slower response times and adversely affect usage of the Internet and other
online services, including fogdog.com. These problems would adversely affect
our business and cause our stock price to decline.
Sporting goods and apparel are subject to changing consumer preferences. If we
fail to anticipate these changes, we will experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our 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 we fail to
identify and respond to changes in sporting goods merchandising and
recreational sports participation, our sales could suffer and we could be
required to mark down unsold inventory. This would depress our profit margins.
In addition, any failure to keep pace with changes in consumers' recreational
sports habits could allow our competitors to gain market share and could hurt
our reputation.
If we do not respond to rapid technological changes, our services could become
obsolete and we could lose customers.
To be competitive, we must continue to enhance and improve the functionality
and features of our online store. The Internet and the online commerce industry
are rapidly changing. If competitors introduce new products and services
featuring new technologies, or if new industry standards and practices emerge,
our existing web site and proprietary technology and systems may become
obsolete. We may use new technologies ineffectively, or we may be unable to
license or otherwise obtain new technologies from third parties. We may also
experience difficulties in adapting our web site, the systems that we use to
process customers' orders and payments, our computer network to customer
requirements, new technologies or emerging industry standards.
Governmental regulation may slow the Internet's growth and increase our costs
of doing business.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. These laws and regulations could
expose us to compliance costs and substantial liability, which
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could materially harm our business, operating results and financial condition.
In addition, the growth of the Internet, coupled with publicity regarding
Internet fraud, may lead to the enactment of more stringent consumer protection
laws. These laws would be likely to impose additional burdens on our business.
The adoption of any additional laws or regulations may also inhibit the
expansion of the Internet, which could reduce visits to our online store or
otherwise harm our business. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as qualifications
to do business, property ownership, sales tax, obscenity, employment, libel,
intellectual property and personal privacy is uncertain and may take years to
resolve. In order to comply with new or existing laws regulating online
commerce, we may need to modify the manner in which we do business, which may
result in additional expenses and could slow our growth. For instance, we may
need to spend time and money revising the process by which we fulfill customer
orders to ensure that each shipment complies with applicable laws. We may also
need to revise our customer acquisition and registration processes to comply
with increasingly stringent laws relating to dealing with minors online. We may
need to hire additional personnel to monitor our compliance with applicable
laws. We may also need to modify our software to further protect our customers'
personal information.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of our Internet business or our marketing efforts.
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from
individuals when accessing web sites, with particular emphasis on access by
minors. These regulations may include requirements that we establish procedures
to disclose and notify users of privacy and security policies, obtain consent
from users for collection and use of information and provide users with the
ability to access, correct and delete personal information stored by us. These
regulations may also include enforcement and remedial provisions. Even in the
absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of other companies that collect
information on the Internet. One investigation resulted in a consent decree
under which an Internet company agreed to establish programs to implement the
principles noted above. We may become a party to a similar investigation or
enforcement proceeding, or the Federal Trade Commission's regulatory and
enforcement efforts may harm our ability to collect demographic and personal
information from users, which could be costly or adversely affect our marketing
efforts.
Our inability to securely transmit confidential information over public
networks may harm our business and cause our stock price to decline.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. We rely upon
encryption and authentication technology licensed from third parties to effect
the secure transmission of confidential information, such as customer credit
card numbers. Advances in computer capabilities, new discoveries in the field
of cryptography or other events may result in a compromise or breach of the
systems that we use to protect customer transaction data. A party who is able
to circumvent our security measures may misappropriate proprietary information
or customers' personal data such as credit card numbers, and could interrupt
our operations. We may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by these breaches. In addition, security breaches may damage our
reputation and cause our stock price to decline.
Credit card fraud could adversely affect our business.
A failure to adequately control fraudulent credit card transactions could
reduce our net revenues and our gross margin because we do not carry insurance
against this risk. We have put in place technology to help us detect the
fraudulent use of credit card information and have not suffered material losses
to date. However, we 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, we are liable for fraudulent credit card transactions because we do
not obtain a cardholder's signature.
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If one or more states successfully assert that we should collect sales or other
taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California and Pennsylvania. However,
one or more local, state or foreign jurisdictions may seek to impose sales tax
collection obligations on us and other out-of-state companies that engage in
online commerce. If one or more states or any foreign country successfully
asserts that we should collect sales or other taxes on the sale of our
merchandise, it could adversely affect our business.
We may be subject to liability for content on our web site.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, right of publicity or privacy, patent or
trademark infringement, or other claims based on the nature and content of
materials that we publish or distribute. We have, in the past, received notices
of such claims, and we expect to continue to receive such claims in the future.
We may also be subject to claims based on the content on our bulletin boards.
If we face liability, then our reputation and our business may suffer. In the
past, plaintiffs have brought these types of claims and sometimes successfully
litigated them against online services. Although we carry general liability
insurance, our insurance currently does not cover claims of these types.
Year 2000 issues present technological risks, could disrupt our business and
could decrease our sales.
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these year 2000 requirements or risk system
failure or miscalculations causing disruption of normal business activities.
Any failure of our material systems, our suppliers' and fulfillment
partners' material systems or the Internet to be year 2000 compliant could
result in financial loss to us, harm to our reputation and legal liability. We
are currently assessing the year 2000 readiness of the software, computer
technology and other services that we use that may not be year 2000 compliant.
We have not completed all operational tests on our internal systems.
Accordingly, we are unable to predict to what extent our business may be
affected if our software, the systems that operate in conjunction with our
software or our internal systems experience a material year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
Risks Related to This Offering
Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be appropriately used.
We intend to use the proceeds from this offering for general corporate
purposes, including working capital and capital expenditures, and we may use a
portion of the proceeds to acquire other businesses, products or technologies.
We will in any case have broad discretion over how we use these proceeds. You
will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions regarding how to use the proceeds
from this offering, and we may spend these proceeds in ways with which you may
disagree. Pending any of these uses, we plan to invest the proceeds of this
offering in short-term, investment-grade, interest-bearing securities. We
cannot predict whether these investments will yield a favorable return. See
"Use of Proceeds."
21
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The price of our common stock after this offering may be lower than the
offering price you pay and may be volatile.
Prior to this offering, our common stock has not been sold in a public
market. After this offering, an active trading market in our stock might not
develop. If an active trading market develops, it may not continue. Moreover,
if an active market develops, the trading price of our common stock may
fluctuate widely as a result of a number of factors, many of which are outside
our control. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market prices of many Internet
related companies, and which have often been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could adversely affect the market price of our common stock. A significant
decline in our stock price could result in substantial losses for individual
stockholders and could lead to costly and disruptive securities litigation.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters based
upon a number of factors. The price of our common stock that will prevail in
the market after this offering may be higher or lower than the offering price.
See "Underwriting."
You will experience immediate and substantial dilution in the value of your
shares following this offering.
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution, in that the price you pay per
share will be substantially greater than our net tangible book value per share,
or the per share value of our assets after subtracting our liabilities.
Specifically, purchasers of shares of our common stock in this offering will
contribute 61.4% of the total amount paid to fund our company but will own only
16.8% of our outstanding shares. Additionally, if the holders of outstanding
options and warrants as of September 30, 1999, exercise their options or
warrants, purchasers of shares of our common stock in this offering will own
only 13.5% of our outstanding shares while contributing 55.3% of the total
amount paid to fund our company. See "Dilution."
Substantial amounts of our common stock could be sold in the near future, which
could depress our stock price.
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have
on the market price of the common stock prevailing from time to time. If our
stockholders sell substantial amounts of our common stock in the public market
following this offering, including shares issued upon the exercise of
outstanding options and warrants, the trading price of our common stock could
fall. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, based upon shares outstanding as
of September 30, 1999, we will have 35,665,236 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options and warrants. All of the shares we are
selling in this offering may be resold in the public market immediately.
Another 29,602,871 shares are subject to lock-up agreements and will become
available for resale in the public market beginning 180 days after the date of
this prospectus. As restrictions on resale end, our stock price could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them. See "Shares Available for
Future Sale."
22
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws, which involve risks and uncertainties. These
forward-looking statements are not historical facts but rather are based on
current expectations, estimates and projections about our industry, our beliefs
and assumptions. We use words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of these words and
similar expressions to identify forward-looking statements. These statements
are not guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These risks
and uncertainties include those described in "Risk Factors" and elsewhere in
this prospectus. You should not place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. We undertake no obligation to update these statements or publicly
release the result of any revision to the forward-looking statements that we
may make to reflect events or circumstances after the date of this prospectus
or to reflect the occurrence of unanticipated events.
23
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale and issuance of the 6,000,000 shares of
common stock offered are estimated to be $59.9 million at the initial public
offering price of $11.00 per share after deducting the underwriting discounts
and commissions and our estimated offering expenses. If the underwriters' over-
allotment option is exercised in full, our estimated net proceeds will be $69.1
million. We intend to use the net proceeds for general corporate purposes,
including marketing and sales activities, working capital and capital
expenditures, but we have no specific plans for use of the net proceeds of this
offering. Pending these uses, we will invest the net proceeds of the offering
in short-term, interest-bearing investment-grade securities. See "Risk
Factors--Our management has broad discretion as to how to use the proceeds from
this offering and the proceeds may not be appropriately used." In addition, we
may use a portion of the net proceeds to acquire or invest in complementary
businesses or products or to obtain the right to use complementary
technologies. We currently have no agreements or commitments with respect to
any acquisition or investment, and we are not involved in any negotiations with
respect to any similar transaction.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion. Our credit facility with Imperial Bank prohibits us from paying
dividends without prior approval.
24
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on the following three bases:
. on an actual basis;
. on a pro forma basis giving effect to the conversion of all
outstanding shares of preferred stock into shares of common stock
effective upon the completion of this offering; and
. on a pro forma as adjusted basis to reflect each of the adjustments
listed above and the net proceeds from the sale of 6,000,000 shares
of our common stock at the initial public offering price of $11.00
per share after deducting the underwriting discounts and commissions
and our estimated offering expenses.
You should read this table in conjunction with our financial statements and
the notes to our financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt, less current portion........... $ 342 $ 342 $ 342
-------- -------- --------
Stockholders' equity:
Convertible Preferred Stock, issuable in
series, $0.001 par value, 41,796,282,
41,796,282 and 5,000,000 shares authorized
actual, pro forma and pro forma as adjusted,
respectively; 23,425,000, no shares and no
shares issued and outstanding actual, pro
forma and pro forma as adjusted,
respectively................................ 24 -- --
Common Stock, $0.001 par value, 72,000,000,
72,000,000 and 100,000,000 shares authorized
actual, pro forma and pro forma as adjusted,
respectively; and 6,240,000, 29,665,000 and
35,665,000 shares issued and outstanding
actual, pro forma and pro forma as adjusted,
respectively................................ 6 30 36
Additional paid-in capital................... 82,592 82,592 142,466
Notes receivable ............................ (94) (94) (94)
Unearned stock-based compensation............ (10,270) (10,270) (10,270)
Accumulated deficit.......................... (20,918) (20,918) (20,918)
-------- -------- --------
Total stockholders' equity................. 51,340 51,340 111,220
-------- -------- --------
Total capitalization..................... $ 51,682 $ 51,682 $111,562
======== ======== ========
</TABLE>
The number of shares outstanding as of September 30, 1999 excludes:
. 4,502,885 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $1.05 per share, all of which are immediately
exercisable; however, those shares which have not yet vested are
subject to repurchase by the company;
. 6,296,631 shares of common stock reserved for issuance under the 1999
Stock Incentive Plan that incorporates our Amended and Restated 1996
Stock Option Plan;
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan;
. 4,114,349 shares of common stock issuable upon exercise of an
outstanding warrant held by Nike USA, Inc. at an exercise price of
$1.54 per share, all of which are fully vested and immediately
exercisable; and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share, all
of which are fully vested and immediately exercisable.
For additional information regarding these shares, see "Management--Benefit
Plans," "Description of Capital Stock" and Notes 7, 8 and 11 of Notes to
Financial Statements.
25
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Our pro forma net tangible book value at
September 30, 1999, was approximately $48.9 million, or $1.65 per share of
common stock. Pro forma net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding after giving effect to the conversion of all
outstanding convertible preferred stock. After giving effect to the sale of
6,000,000 shares of our common stock at the initial public offering price of
$11.00 per share, and after deducting underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book value at
September 30, 1999, would have been $108.7 million, or $3.05 per share. This
represents an immediate increase in net tangible book value of $1.40 per share
to existing stockholders and an immediate dilution of $7.95 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $11.00
Pro forma net tangible book value per share at September 30,
1999.......................................................... $1.65
Increase per share attributable to new investors............... 1.40
-----
Pro forma as adjusted net tangible book value per share after the
offering........................................................ 3.05
------
Dilution per share to new investors.............................. $ 7.95
======
</TABLE>
The following table summarizes, at September 30, 1999, on a pro forma as
adjusted basis, the total number of shares and consideration paid to us and the
average price per share paid by existing stockholders and by new investors
purchasing shares of common stock in this offering at an initial public
offering price of $11.00 per share and before deducting the underwriting
discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 29,665,236 83.2% $ 41,503,000 38.6% $1.40
New public investors...... 6,000,000 16.8 66,000,000 61.4 11.00
---------- ----- ------------ -----
Totals.................. 35,665,236 100.0% $107,503,000 100.0%
========== ===== ============ =====
</TABLE>
The above computations are based on the number of shares of common stock
outstanding as of September 30, 1999 and exclude:
. 4,502,885 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted average exercise
price of $1.05 per share, all of which are immediately exercisable;
however, those shares which have not yet vested are subject to
repurchase by the company;
. 6,296,631 shares of common stock reserved for issuance under the 1999
Stock Incentive Plan that incorporates our Amended and Restated 1996
Stock Option Plan;
. 500,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan;
. 4,114,349 shares of common stock issuable upon exercise of an
outstanding warrant held by Nike USA, Inc. at an exercise price of $1.54
per share, all of which are fully vested and immediately exercisable;
and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share, all of
which are fully vested and immediately exercisable.
If these options or warrants are exercised, new investors will own only
13.5% of our outstanding shares while contributing 55.3% of the total amount
paid to fund our company. For additional information regarding these shares,
see "Capitalization," "Management--Benefit Plans," "Description of Capital
Stock" and Notes 7, 8 and 11 of Notes to Financial Statements.
26
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The statement of operations
data for the years ended December 31, 1996, 1997 and 1998, and the balance
sheet data as of December 31, 1997 and 1998, are derived from the audited
financial statements included elsewhere in this prospectus. The statement of
operations data for the period from inception (October 28, 1994) to December
31, 1994 and for the year ended December 31, 1995, and the balance sheet data
as of December 31, 1994, 1995 and 1996, are derived from the audited financial
statements not included elsewhere in this prospectus. The statement of
operations data for the nine months ended September 30, 1998 and 1999 and the
balance sheet data as of September 30, 1999 are derived from the unaudited
financial statements included elsewhere in this prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of this information when read in conjunction with the audited
financial statements and related notes. The diluted net loss per share
computation excludes potential shares of common stock (preferred stock, options
and warrants to purchase common stock and common stock subject to repurchase
rights that we hold), since their effect would be antidilutive. See Note 1 of
Notes to Financial Statements for a detailed explanation of the determination
of the shares used to compute actual and pro forma basic and diluted net loss
per share. The historical results are not necessarily indicative of results to
be expected for future periods.
<TABLE>
<CAPTION>
Period from Nine Months
October 28, 1994 Ended September
(inception) to Years Ended December 31, 30,
December 31, -------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---------------- ------ ------ ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues:
Merchandise........... $ -- $ -- $ -- $ -- $ 195 $ -- $ 2,542
Commission............ -- -- -- 11 123 69 35
Web development....... -- 213 677 1,030 447 447 --
------ ------ ------ ------- ------- ------- --------
Total net revenues.. -- 213 677 1,041 765 516 2,577
------ ------ ------ ------- ------- ------- --------
Cost of revenues:
Merchandise........... -- -- -- -- 157 -- 2,070
Commission............ -- -- -- -- 19 12 --
Web development....... -- 84 90 156 99 99 --
------ ------ ------ ------- ------- ------- --------
Total cost of
revenues........... -- 84 90 156 275 111 2,070
------ ------ ------ ------- ------- ------- --------
Gross profit............ -- 129 587 885 490 405 507
------ ------ ------ ------- ------- ------- --------
Operating expenses:
Marketing and sales... 2 65 686 1,285 2,399 997 10,807
Site development...... 90 15 119 259 1,318 737 2,205
General and
administrative....... 11 87 248 378 705 457 1,181
Amortization of
intangible assets ... -- -- -- -- -- -- 144
Amortization of stock-
based compensation... -- -- -- -- 243 125 1,582
------ ------ ------ ------- ------- ------- --------
Total operating
expenses........... 103 167 1,053 1,922 4,665 2,316 15,919
------ ------ ------ ------- ------- ------- --------
Operating loss ......... (103) (38) (466) (1,037) (4,175) (1,911) (15,412)
Interest income
(expense), net......... (1) (6) (3) (8) 29 2 276
Other income............ -- -- -- -- 26 26 --
------ ------ ------ ------- ------- ------- --------
Net loss................ (104) (44) (469) (1,045) (4,120) (1,883) (15,136)
Deemed preferred stock
dividend............... -- -- -- -- -- -- (12,918)
------ ------ ------ ------- ------- ------- --------
Net loss available to
common stockholders.... $ (104) $ (44) $ (469) $(1,045) $(4,120) $(1,883) $(28,054)
====== ====== ====== ======= ======= ======= ========
Basic and diluted net
loss per share
available to common
stockholders........... $(0.20) $(0.14) $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04)
====== ====== ====== ======= ======= ======= ========
Basic and diluted
weighted average shares
used in computation of
net loss per share
available to common
stockholders .......... 525 3,105 3,631 4,543 4,323 4,391 4,645
====== ====== ====== ======= ======= ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (.43) $ (1.33)
======= ========
Pro forma basic and
diluted weighted
average shares......... 9,622 21,059
======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ----- ------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................ $ 23 $ 36 $471 $ 311 $2,117 $21,880
Working capital (deficit)........ (11) (71) 375 (172) 590 17,931
Total assets..................... 51 144 763 580 2,840 57,291
Long-term liabilities............ -- 8 87 3 189 342
Total stockholders' equity
(deficit)....................... 17 (21) 483 (13) 917 51,340
</TABLE>
27
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
Effective September 3, 1999, Fogdog Sports merged with Sports Universe, Inc.
Sports Universe sells equipment and apparel for wakeboarding, waterskiing,
inline skating, surfing and skateboarding on the Internet. The merger was
accounted for using the purchase method of accounting and accordingly the
purchase price was allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their fair values as of the acquisition
date. The total purchase price of approximately $2.1 million consisted of
266,665 shares of Fogdog Sports common stock with an estimated fair value of
approximately $8.00 per share and other acquisition related expenses of
approximately $30,000, consisting primarily of payments for professional fees.
The purchase price was allocated as follows: $451,000 to net tangible
liabilities assumed and $2.6 million to goodwill. The acquired goodwill will be
amortized over its estimated useful life of two years. The following unaudited
pro forma consolidated statement of operations gives effect to this merger as
if it had occurred on February 9, 1998 (inception) by consolidating the results
of operations of Sports Universe from inception through December 31, 1998 and
the nine months ended September 30, 1999 with the results of operations of
Fogdog Sports. See Note B to Pro Forma Consolidated Financial Information for a
description of the method used to compute basic and diluted net loss per share.
<TABLE>
<CAPTION>
Pro Forma
------------------------------------
Nine Months
Year Ended Ended
December 31, 1998 September 30, 1999
----------------- ------------------
(in thousands, except per share
data)
<S> <C> <C>
Pro Forma Consolidated Statement of
Operations Data:
Net revenues.............................. $ 944 $ 3,062
Cost of revenues.......................... 401 2,397
------- --------
Gross profit............................ 543 665
------- --------
Operating expenses:
Marketing and sales..................... 2,660 10,928
Site development........................ 1,318 2,205
General and administrative.............. 983 1,395
Amortization of intangible assets ...... 1,184 1,005
Amortization of stock-based
compensation........................... 243 1,582
------- --------
Total operating expenses.............. 6,388 17,115
------- --------
Loss from operations...................... (5,845) (16,450)
Interest and other income, net............ 55 276
------- --------
Net loss.................................. (5,790) (16,174)
Deemed preferred stock dividend........... -- (12,918)
------- --------
Net loss available to common
stockholders............................. $(5,790) $(29,092)
======= ========
Basic and diluted loss per share available
to common stockholders................... $ (1.27) $ (5.96)
======= ========
Basic and diluted weighted average shares
used in computation of net loss per share
available to common stockholders......... 4,561 4,885
======= ========
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements include, among others, those
statements including the words "expects," "anticipates," "intends," "believes"
and similar language. Our actual results could differ materially from those
discussed in this prospectus. Factors that could cause or contribute to these
differences include, but are not limited to, the risks discussed in the section
entitled "Risk Factors" in this prospectus.
Overview
We are a leading Internet retailer focused exclusively on sporting goods. We
currently offer an extensive selection of competitively priced sporting goods
consisting of up to 60,000 distinct stock keeping units representing more than
500 brands in all major sports categories.
We were incorporated in October 1994. From our inception through July 1998,
we were engaged in providing web development and design services to sporting
goods manufacturers, trade associations, retailers and other industry members.
In July 1997, we launched a web site, "SportSite.com," and established
partnerships with sporting goods catalog and distribution companies to process
orders, manage inventory and ship goods directly to customers. In the third
quarter of 1998, we phased out the design services portion of our business to
focus exclusively on online retail. In November 1998, we changed our name to
Fogdog, Inc. and the name of our web site to "fogdog.com."
We derive our revenue from the sale of sporting goods from our web site.
Merchandise revenue is recognized when goods are shipped to our customers from
manufacturers, distributors or third-party warehouses, which occurs only after
credit card authorization. For sales of merchandise, we are responsible for
pricing, processing and fulfilling the orders. We process merchandise returns
and bear the credit risk for these transactions. We generally allow returns for
any reason within 45 days of the sale. Accordingly, we provide for allowances
for estimated future returns at the time of shipment based on historical data.
Historically, our rate of product returns has ranged between 8% and 10% of
total revenues, but our future return rates could differ significantly from our
historical averages. Currently, less than 15% of our transactions are shipped
from inventory held at third-party warehouses. We expect this percentage to
increase in future periods.
From October 1994 through March 1999, we derived revenue from commissions.
Our commission revenue was earned from transactions processed through our
online stores, fogdog.com and SportSite.com, whereby we obtained and processed
customer orders in exchange for a commission on the sale of the vendor's
merchandise. At the conclusion of the sale, we forwarded the order information
to the vendor, which then charged the customer's credit card and shipped the
merchandise directly to the customer. We recognized commission revenue when we
forwarded the order to the vendor. In a commission sale transaction, we did not
take title or possession of the merchandise, and the vendor bore all the risk
of credit card chargebacks and merchandise returns. When we launched our
fogdog.com web site in November 1998, we began to take title to our own
merchandise and also to bear customer credit and return risk on a substantial
number of our transactions. In April 1999, we began to take title to the
merchandise on all transactions processed on our web site. We have also earned
commission revenue from transactions processed on several client sites, which
has been immaterial to date.
From October 1994 to July 1998, we also earned revenue from web development.
Revenue from the sale of web development services was recognized when we had
the right to invoice the customer, the collection of the receivable was
probable, there were no significant obligations remaining and the client's web
site was either placed on-line or completed to the client's satisfaction. We
terminated our web development services in July 1998, and transitioned our
remaining support obligations to a third party.
29
<PAGE>
We have incurred substantial costs to develop our web site and to recruit,
train and compensate personnel for our creative, engineering, sales, marketing,
merchandising, customer service and administration departments. As a result, we
have incurred substantial losses since inception and, as of September 30, 1999,
had an accumulated deficit of $20.9 million. In order to expand our business,
we intend to invest heavily in sales, marketing, merchandising, operations,
site development and additional personnel to support these activities. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
We had 96 full-time employees as of September 30, 1999 and intend to hire a
significant number of employees in the future. This expansion will place
significant demands on our management and our operational resources. To manage
this rapid growth, we must invest in and implement operational systems,
procedures and controls that can be expanded easily. We expect future expansion
to continue to challenge our ability to hire, train, manage and retain
employees.
In September 1999, we purchased Sports Universe, Inc., and Sports Universe
became our wholly owned subsidiary. Sports Universe derives its revenue
primarily from the sales of sporting goods from its web site,
"sportsuniverse.com." Sports Universe is a Delaware corporation that is based
in Austin, Texas and has fewer than 10 full-time employees. In the merger, we
exchanged 266,665 shares of our common stock for all outstanding shares of
Sports Universe capital stock. The transaction was accounted for using the
purchase method. We have recorded goodwill of approximately $2.6 million, which
will be amortized over a two-year period, in connection with the merger.
Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total net revenues.
<TABLE>
<CAPTION>
Nine
Months
Ended
Year Ended September
December 31, 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues:
Merchandise............................... --% --% 25% --% 99 %
Commission................................ -- 1 16 13 1
Web development........................... 100 99 59 87 --
--- ---- ---- ---- ----
Total net revenues...................... 100 100 100 100 100
--- ---- ---- ---- ----
Cost of revenues:
Merchandise............................... -- -- 21 -- 80
Commission................................ -- -- 2 2 --
Web development........................... 13 15 13 19 --
--- ---- ---- ---- ----
Total cost of revenues.................. 13 15 36 22 80
--- ---- ---- ---- ----
Gross profit................................ 87 85 64 78 20
--- ---- ---- ---- ----
Operating expenses:
Marketing and sales....................... 101 123 314 193 419
Site development.......................... 18 25 172 143 86
General and administrative................ 37 36 92 89 46
Amortization of intangible assets......... -- -- -- -- 6
Amortization of stock-based compensation.. -- -- 32 24 61
--- ---- ---- ---- ----
Total operating expenses................ 156 184 610 449 618
--- ---- ---- ---- ----
Operating loss.............................. (69) (99) (546) (371) (598)
Interest income (expense), net.............. -- (1) 4 -- 11
Other income................................ -- -- 3 5 --
--- ---- ---- ---- ----
Net loss................................. (69)% (100)% (539)% (366)% (587)%
=== ==== ==== ==== ====
</TABLE>
30
<PAGE>
Nine Months Ended September 30, 1998 and 1999
Net Revenues
We had no merchandise revenue for the nine months ended September 30, 1998
and $2.5 million for the nine months ended September 30, 1999. Our merchandise
revenue resulted from customer transactions on our fogdog.com web site. In
November 1998, we began taking title to our own merchandise and bearing the
credit risk on an increasing number of transactions. Revenue from merchandise
shipped outside the United States was approximately 9% of total merchandise
revenue for the nine months ended September 30, 1999.
Commission revenue was $69,000 for the nine months ended September 30, 1998
and $35,000 for the nine months ended September 30, 1999. The decrease in
commission revenue was due to the elimination of commission transactions in
March 1999.
Web development revenue was $447,000 for the nine months ended September 30,
1998, and we had no web development revenue for the nine months ended September
30, 1999. We terminated our web development services in July 1998.
Cost of Revenues
Cost of merchandise revenue consists of product, shipping and handling
costs, and credit card processing fees. We incurred no cost of merchandise
revenue for the nine months ended September 30, 1998, and cost of merchandise
revenue was $2.1 million for the nine months ended September 30, 1999. As a
percentage of merchandise revenue, cost of merchandise revenue was 81% for the
nine months ended September 30, 1999. We began to incur cost of merchandise
revenue as we began taking title to our own merchandise and bearing customer
credit risk.
Cost of web development revenue consists of third-party fees and salaries
and related costs for site development and maintenance on behalf of clients.
Cost of web development revenue was $99,000 for the nine months ended September
30, 1998, and we had no cost of web development revenue for the nine months
ended September 30, 1999. The decrease in the cost of web development revenue
in dollars was due to the elimination of our hosting and maintenance activity.
Gross Profit
Gross profit was $405,000 for the nine months ended September 30, 1998 and
$507,000 for the nine months ended September 30, 1999. As a percentage of total
net revenues, gross profit was 78% for the nine months ended September 30, 1998
and 20% for the nine months ended September 30, 1999. The decrease in gross
profit in dollars and as a percentage of total net revenues was due to the
shift in our revenue from web development services to the sale of merchandise
on our web site.
Marketing and Sales Expenses
Our marketing and sales expenses consist primarily of advertising and
promotional expenditures, distribution facility expenses, including equipment
and supplies, credit card verification fees and payroll and related expenses
for personnel engaged in marketing, merchandising, customer service and
distribution activities. Marketing and sales expenses were $997,000 for the
nine months ended September 30, 1998 and $10.8 million for the nine months
ended September 30, 1999. As a percentage of net revenues, marketing and sales
expenses were 193% for the nine months ended September 30, 1998 and 419% for
the nine months ended September 30, 1999. The increase in marketing and sales
expenses in dollars and as a percentage of net revenues was attributable to an
increase in advertising and merchandising, customer service, distribution, and
marketing personnel and related costs as we continued to expand our online
store and establish the Fogdog brand. In September 1999, we entered into an
agreement with Nike USA, Inc. to distribute Nike products on our web site. In
connection with this agreement, we granted Nike a warrant to purchase 4,114,349
shares of our common stock at an exercise price of $1.54 per share. Our sales
and marketing expenses in each quarter over the two-year term of the agreement
will include a portion of the warrant's estimated fair value of approximately
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$28.8 million, calculated on a straight-line basis. Our expenses over the term
of the agreement will also include amortization of $250,000 we paid to Nike
upon execution of the agreement and an additional $250,000 we will pay seven
days after the closing of this offering. We expect to continue to substantially
increase our marketing and promotional efforts and hire additional marketing,
merchandising, customer service and operations personnel. For the nine months
ended September 30, 1999 we amortized $463,000 of expense related to the Nike
warrant.
Site Development Expenses
Our site development expenses consist of payroll and related expenses for
web site development and information technology personnel, Internet access,
hosting charges and logistics engineering, and web content and design expenses.
Site development expenses were $737,000 for the nine months ended September 30,
1998 and $2.2 million for the nine months ended September 30, 1999. As a
percentage of net revenues, site development expenses were 143% for the nine
months ended September 30, 1998 and 86% for the nine months ended September 30,
1999. The increase in site development expenses in dollars was due to the
introduction and enhancement of our fogdog.com web site in November 1998 and
subsequent enhancements. We expect to continue to make substantial investments
in site development and anticipate that site development expenses will continue
to increase.
General and Administrative Expenses
General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
service expenses and other general corporate expenses. General and
administrative expenses were $457,000 for the nine months ended September 30,
1998 and $1.2 million for the nine months ended September 30, 1999. As a
percentage of net revenues, general and administrative expenses were 89% for
the nine months ended September 30, 1998 and 46% for the nine months ended
September 30, 1999. The increase in general and administrative expenses in
dollars was due to increased personnel and related costs to support the
implementation of our business strategy. The decrease in general and
administrative expenses as a percentage of net revenues was due to the growth
in merchandise revenue without a proportionate increase in general and
administrative expenses. We expect that general and administrative expenses
will increase substantially as we add personnel and incur additional costs
related to the anticipated growth of our business and operation as a public
company.
Amortization of Stock-Based Compensation
In connection with the grant of employee stock options, we recorded
aggregate unearned stock-based compensation of $12.1 million through September
30, 1999. Employee stock-based compensation expense is amortized over the
vesting period of the options, which is generally four years, using the
multiple-option approach. We expect to record additional unearned stock-based
compensation of approximately $4.0 million for stock options granted in
October, November and December 1999. We expect to record employee stock-based
compensation expenses of approximately $1.8 million for the quarter ending
December 31, 1999, $2.0 million for the quarter ending March 31, 2000 and $1.9
million for the quarter ending June 30, 2000. We anticipate this expense to
decrease in future periods. Unearned stock-based compensation expense will be
reduced in future periods to the extent that options are terminated prior to
full vesting.
Interest Income (Expense), Net
Interest income (expense), net consists of interest earned on cash and
short-term investments, offset by interest expense related to bank borrowings
and other financing lines. Interest income (expense), net was $2,000 for the
nine months ended September 30, 1998 and $276,000 for the nine months ended
September 30, 1999. The increase in interest income was due to higher average
cash balances from additional sales of preferred stock completed in the first
three quarters of 1999.
Other Income
Other income consists of the proceeds we received when we transitioned our
remaining web development service obligations to a third-party, which was
completed in the third quarter of 1998.
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Years Ended December 31, 1996, 1997 and 1998
Net Revenues
We had no merchandise revenue for the years ended December 31, 1996 and
1997, and merchandise revenue of $195,000 for the year ended December 31, 1998.
Our merchandise revenue resulted from customer transactions on our fogdog.com
web site. In November 1998, we began taking title to our own merchandise and
bearing the credit risk on an increasing number of transactions. Our
merchandise revenue increased due to an increase in the number of merchandise
transactions processed on our web site. Revenue from merchandise shipped
outside the United States was approximately 6% of total merchandise revenue for
the year ended December 31, 1998.
We had no commission revenue for the year ended December 31, 1996.
Commission revenue was $11,000 and $123,000 for the years ended December 31,
1997 and 1998, respectively. This increase in commission revenue was due to an
increased number of commission transactions processed on our web site.
Web development revenue was $677,000, $1.0 million and $447,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. The increase in web
development revenue from 1996 to 1997 was due to an increase in the number of
development contracts that we signed. The decrease in web development revenue
from 1997 to 1998 occurred as we shifted our focus from being a web development
services provider to an online retailer.
Cost of Revenues
We had no cost of merchandise revenue for the years ended December 31, 1996
and 1997, and cost of merchandise revenue was $157,000 or 81% of merchandise
revenue for the year ended December 31, 1998. We began to incur cost of
merchandise revenue as we began to take title to the merchandise and bear the
credit risk prior to delivery to the customer.
Cost of commission revenue consists of the value of services rendered and
fees paid to trade associations. We had no cost of commission revenue for the
years ended December 31, 1996 and 1997, and cost of commission revenue was
$19,000 or 15% of commission revenue for the year ended December 31, 1998. We
had no commission revenue in 1996. We had no cost of commission revenue for
1997 because all commission revenue in 1997 was derived from third-party web
sites for which we incurred no verification fees.
Cost of web development revenue was $90,000, $156,000 and $99,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of
web development revenue, cost of web development revenue was 13%, 15% and 22%
for the years ended December 31, 1996, 1997 and 1998, respectively. The
increase in the cost of web development revenue in dollars and as a percentage
of web development revenue from 1996 to 1997 was attributable to an increase in
our hosting and maintenance activity for which we incurred initial start-up
costs. The decrease in the cost of web development revenue in dollars and as a
percentage of web development revenue from 1997 to 1998 was due to a reduction
of our hosting and maintenance activity as we shifted our focus from being a
web development services provider to an online retailer.
Gross Profit
Gross profit was $587,000, $885,000 and $490,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. As a percentage of total net
revenues, gross profit was 87%, 85% and 64% for the years ended December 31,
1996, 1997 and 1998, respectively. The increase in gross profit from 1996 to
1997 was due to an increase in web development revenue. The decrease in gross
profit in dollars and as a percentage of total net revenues from 1997 to 1998
was due to the shift in our revenue from web development to the sale of
merchandise.
Marketing and Sales Expenses
Marketing and sales expenses were $686,000, $1.3 million and $2.4 million
for the years ended December 31, 1996, 1997 and 1998, respectively. As a
percentage of net revenues, marketing and sales expenses were 101%, 123% and
314% for the years ended December 31, 1996, 1997 and 1998, respectively.
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The increase in dollars and as a percentage of net revenues from 1996 to 1997
was attributable to an increase in personnel and related costs required to
implement our sales and marketing strategy. The increase in marketing and sales
expenses in dollars and as a percentage of net revenues from 1997 to 1998 was
attributable to an increase in advertising and merchandising, customer service,
distribution, and marketing personnel and related costs.
Site Development Expenses
Site development expenses were $119,000, $259,000 and $1.3 million for the
years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of
net revenues, site development expenses were 18%, 25% and 172% for the years
ended December 31, 1996, 1997 and 1998, respectively. The increase in site
development expenses in dollars and as a percentage of net revenues from 1996
to 1997 was due to the introduction and enhancement of the SportSite.com web
site and subsequent enhancements. The increase in dollars and as a percentage
of net revenues from 1997 to 1998 was due to the introduction and enhancement
of our fogdog.com web site and the development of technologies for integrating
with our suppliers.
General and Administrative Expenses
General and administrative expenses were $248,000, $378,000 and $705,000 for
the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage
of net revenues, general and administrative expenses were 37%, 36% and 92% for
the years ended December 31, 1996, 1997 and 1998, respectively. The increase in
general and administrative expenses in dollars and as a percentage of net
revenues was due to increased personnel and related costs to support the
implementation of our business strategy.
Amortization of Stock-Based Compensation
In connection with the grant of employee stock options, we recorded
aggregate unearned stock-based compensation of $1.2 million for the year ended
December 31, 1998 which is being amortized over a four-year vesting period
using the multiple-option approach.
Interest Income (Expense), Net
Interest income (expense), net was $(3,000), $(8,000) and $29,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. The increase in
interest income (expense), net was due to higher average cash balances from
additional sales of securities completed in the second quarter of 1998.
Other Income
Other income consists of the proceeds we received when we transitioned our
remaining web development service obligations to a third-party, which was
completed in the third quarter of 1998.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
June 30, 1999, and therefore have not recorded a provision for income taxes.
Our deferred tax asset primarily consists of net operating loss carryforwards
and nondeductible accruals and allowances. We have recorded a valuation
allowance for the full amount of our net deferred tax assets, as the future
realization of the tax benefit is not currently likely.
As of December 31, 1998, we had net operating loss carryforwards for federal
and state tax purposes of approximately $4.3 million and $4.7 million,
respectively. These federal and state tax loss carryforwards are available to
reduce future taxable income and expire at various dates into the year 2019. We
expect that the amount of net operating loss carryforwards that could be
utilized annually in the future to offset taxable income will be limited by
"change in ownership" provisions of the Internal Revenue Code. This annual
limitation may result in the expiration of net operating loss carryforwards
before their utilization.
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Quarterly Results of Operations and Seasonality
The following tables set forth a summary of our unaudited quarterly
operating results for each of the seven quarters in the period ended September
30, 1999. This information has been derived from our unaudited financial
statements which, in management's opinion, have been prepared on a basis
consistent with the audited financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of this information when read in
conjunction with our audited financial statements and related notes. The amount
and timing of our operating expenses generally will vary from quarter to
quarter depending on our level of actual and anticipated business activities.
Our revenue and operating results are difficult to forecast and will fluctuate,
and we believe that period-to-period comparisons of our operating results will
not necessarily be meaningful. As a result, you should not rely upon them as an
indication of future performance.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
Statement of Operations
Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Merchandise............... $ -- $ -- $ -- $ 195 $ 318 $ 731 $ 1,493
Commission................ 11 26 32 54 35 -- --
Web development........... 206 122 119 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Total net revenues...... 217 148 151 249 353 731 1,493
------ ------ ------ -------- -------- -------- -------
Cost of revenues:
Merchandise............... -- -- -- 157 232 589 1,249
Commission................ -- -- 12 7 -- -- --
Web development........... 62 25 12 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Total cost of revenues.. 62 25 24 164 232 589 1,249
------ ------ ------ -------- -------- -------- -------
Gross profit................ 155 123 127 85 121 142 244
------ ------ ------ -------- -------- -------- -------
Operating expenses:
Marketing and sales....... 192 257 548 1,402 1,536 2,809 6,462
Site development.......... 185 224 328 581 482 726 997
General and
administrative........... 131 158 168 248 304 448 429
Amortization of intangible
assets .................. -- -- -- -- 12 12 120
Amortization of stock-
based compensation....... -- 23 102 118 331 409 842
------ ------ ------ -------- -------- -------- -------
Total operating
expenses............... 508 662 1,146 2,349 2,665 4,404 8,850
------ ------ ------ -------- -------- -------- -------
Operating loss.............. (353) (539) (1,019) (2,264) (2,544) (4,262) (8,606)
------ ------ ------ -------- -------- -------- -------
Interest income (expense),
net........................ (11) (13) 26 27 22 136 118
Other income................ -- -- 26 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Net loss.................... $(364) $(552) $(967) $(2,237) $(2,522) $(4,126) $(8,488)
====== ====== ====== ======== ======== ======== =======
<CAPTION>
As a Percentage of Total Net
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Merchandise............... --% --% --% 78% 90% 100% 100%
Commission................ 5 18 21 22 10 -- --
Web development........... 95 82 79 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Total net revenues...... 100 100 100 100 100 100 100
------ ------ ------ -------- -------- -------- -------
Cost of revenues:
Merchandise............... -- -- -- 63 66 81 84
Commission................ -- -- 8 3 -- -- --
Web development........... 29 17 8 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Total cost of revenues.. 29 17 16 66 66 81 84
------ ------ ------ -------- -------- -------- -------
Gross profit................ 71 83 84 34 34 19 16
------ ------ ------ -------- -------- -------- -------
Operating expenses:
Marketing and sales....... 89 173 363 563 435 384 433
Site development.......... 85 151 217 233 137 99 67
General and
administrative........... 60 107 110 100 86 61 29
Amortization of intangible
assets................... -- -- -- -- 3 2 8
Amortization of stock-
based compensation....... -- 16 68 47 94 56 56
------ ------ ------ -------- -------- -------- -------
Total operating
expenses............... 234 447 759 943 755 602 593
------ ------ ------ -------- -------- -------- -------
Operating loss.............. (163) (364) (675) (909) (721) (583) (576)
------ ------ ------ -------- -------- -------- -------
Interest income (expense),
net........................ (5) (9) 17 11 6 19 8
Other income................ -- -- 17 -- -- -- --
------ ------ ------ -------- -------- -------- -------
Net loss.................... (168)% (373)% (640)% (898)% (715)% (564)% (569)%
====== ====== ====== ======== ======== ======== =======
</TABLE>
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Commencing with the launch of our fogdog.com web site in November 1998, our
merchandise revenue has increased during each quarter. These increases resulted
from growth in the number of customers and products available for sale on our
web site.
Cost of merchandise revenue increased from the fourth quarter of 1998
through the third quarter of 1999 as we increased merchandise sales. Our cost
of merchandise revenue as a percentage of net revenues increased from the
fourth quarter of 1998 to the first through third quarters of 1999 due to
increased shipping and handling costs.
Marketing and sales expenses increased each quarter from the first quarter
of 1998 through the third quarter of 1999 as we began online and offline
advertising and as we launched the fogdog.com web site in the fourth quarter of
1998. We also increased personnel and related expenses required to implement
our marketing and sales strategy. Site development expenses increased each
quarter from the first quarter of 1998 through the fourth quarter of 1998 as we
began enhancing our web site to accommodate the increased transaction volume
and product offerings for the holiday season. After completion of the launch of
our fogdog.com web site in the fourth quarter of 1998, site development
expenses decreased from the fourth quarter of 1998 to the first quarter of 1999
as we did not have any launch related expenses. Site development expenses
increased from the first quarter of 1999 through the third quarter of 1999 as
we increased spending on design and content to develop additional specialty
shops. General and administrative expenses increased each quarter from the
first quarter of 1998 through the third quarter of 1999 as we increased
personnel and related expenses to support our new business strategy.
We expect our business to be highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
fourth quarter. We believe that a substantial portion of our annual sales will
occur in the fourth quarter. We expect to experience lower sales during the
other quarters, and as is typical in the retail industry, have incurred and may
continue to incur greater losses in these quarters. See "Risk Factors--Seasonal
fluctuations in the sales of sporting goods could cause wide fluctuations in
our quarterly results."
Results of Operations--Sports Universe
We acquired Sports Universe, Inc. in September 1999. Since its inception in
February 1998, Sports Universe has incurred operating losses. During the six
months ended June 30, 1999, Sports Universe recorded revenue of approximately
$262,000 from the sale of merchandise on its web site and from web design
services, and incurred a net loss of $63,000. During the six months ended June
30, 1999, Sports Universe incurred total operating expenses of approximately
$170,000, which consisted primarily of personnel and related costs for
marketing, sales and administrative staff. At June 30, 1999, Sports Universe
had negative working capital of $571,000 and an accumulated deficit of
$549,000.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $38.8 million and, to a lesser
extent, from bank borrowings and lease financing.
Our operating activities used cash of $399,000 during 1996, $915,000 during
1997, $3.0 million during 1998 and $11.8 million during the first nine months
of 1999. This negative operating cash flow resulted primarily from our net
losses experienced during these periods. In 1998 and 1999, we invested in the
development of our brand and online store, hired additional personnel and
expanded our technology infrastructure to support our growth.
Our investing activities, consisting of purchases of furniture, fixtures and
computer equipment to support our growing number of employees, used cash of
$137,000 during 1996, $81,000 during 1997, $692,000 during 1998 and $970,000
during the first nine months of 1999.
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Our financing activities generated cash of $971,000 during 1996, $836,000
during 1997, $5.0 million during 1998 and $32.9 million during the first nine
months of 1999. Of these financing activities, the issuance of convertible
preferred stock generated net proceeds of $945,000 during 1996, $528,000 during
1997, $4.5 million during 1998 and $32.5 million for the nine months ended
September 30, 1999. We also had proceeds from bank borrowings of $452,000 in
1998.
At September 30, 1999, we had cash and cash equivalents and short-term
investments aggregating $21.9 million. Our short-term investments secure a
letter of credit issued in connection with the lease of our corporate offices.
We have an agreement with a bank, which provides us with the ability to borrow
up to $1.0 million, subject to specified limitations. The agreement provides
for the following:
. an equipment loan for $800,000, payable in 24 equal installments
commencing October 15, 1999, limited to 75% of the invoice amount of the
equipment; and
. an equipment term loan for $150,000 payable in 24 equal installments
commencing January 28, 1999.
We had an outstanding aggregate balance at September 30, 1999 of $877,000.
Interest on the borrowings range from the prime rate plus one-half percent to
the prime rate plus one percent and is payable monthly. We must meet financial
covenants with respect to the borrowings, which we were in compliance with at
September 30, 1999.
We also have an agreement with a software company to purchase software under
a one-year loan agreement which bears interest at 7.5%. The principal and
interest is payable in 12 equal monthly installments beginning in October 1998.
We had an outstanding balance at September 30, 1999 of $19,000.
During 1999, we entered into a number of commitments for online and
traditional offline advertising. As of September 30, 1999, our remaining
commitments were approximately $4.0 million. In addition, we have remaining
commitments under the lease for our headquarters of $4.8 million. Upon entering
into our agreement with Nike USA, Inc., we also paid $250,000 and will pay an
additional $250,000 seven days after the closing of this offering. This expense
is being amortized over the life of the Nike agreement.
We expect to devote substantial resources to continue development of our
brand and online store, expand our sales, support, marketing and engineering
organizations, establish additional facilities worldwide and build the systems
necessary to support our growth. Although we believe that the proceeds of this
offering, together with our current cash and cash equivalents and our borrowing
capacity, will be sufficient to fund our activities for at least the next 12
months, there can be no assurance that we will not require additional financing
within this time frame or that additional funding, if needed, will be available
on terms acceptable to us or at all. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies, we may, from time to time, evaluate
potential acquisitions of other businesses, products and technologies. In order
to consummate potential acquisitions, we may issue additional securities or
need additional equity or debt financing and these financings may be dilutive
to existing investors.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirements to capitalize specified costs and
amortization of such costs. The adoption of the provisions of SOP 98-1 during
our fiscal year beginning January 1, 1999 did not have a material effect on our
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133
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establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
other hedging activities. SFAS 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 1999. In July 1999, the Financial
Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. We will adopt SFAS 133 in our quarter ending June
30, 2000. We do not currently engage in hedging activities or invest in
derivative instruments.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
In the second quarter of 1999, we initiated a Year 2000 compliance program.
The program is being directed by our information technology group. Our IT group
is charged with identifying issues of potential risk within each department and
making the appropriate evaluation, modification, upgrade or replacement.
Members of our IT group have worked with members of each of our principal
internal divisions in the course of assessing our Year 2000 compliance.
Scope of Year 2000 Assessment
The scope of our Year 2000 compliance program included testing our web site
and the IT and non-IT systems used in our business at our headquarters and at
our third-party warehouses. The operational areas that we investigated include:
. software applications;
. facilities;
. suppliers and vendors, including distributors; and
. computer systems.
We do not currently have information concerning the Year 2000 compliance
status of all of our vendors and distributors. If our suppliers, distributors
and manufacturers fail to achieve Year 2000 compliance, our business could
suffer.
Budget and Schedule
We have funded our Year 2000 plan from available cash and have not
separately accounted for these expenses in the past. As a result of our short
operating history, we believe that most of our third-party systems were
purchased in Year 2000 compliant condition. To date, expenditures for Year 2000
compliance have not been material and have totaled less than $150,000. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. We expect to incur no more
than an additional $100,000 to verify that our IT and non-IT systems are
capable of properly distinguishing between 20th century and 21st century dates.
However, we may experience unanticipated, material problems and expenses
associated with Year 2000 compliance that could harm our business. Finally, we
are also subject to external forces that might generally affect industry and
commerce, such as Year 2000 compliance failures by utility or transportation
companies and related service interruptions.
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We have not yet completed the evaluation of our web site and our third-party
software systems. We are in the process of obtaining Year 2000 assurances from
our principal third-party hardware vendors and service providers, and
installing Year 2000 "patch kits", where appropriate. We anticipate concluding
these activities by the end of November 1999.
Internal Third-Party Hardware and Software Systems and Services
We have evaluated all of our material internal third-party hardware and
software systems we use on our web site and in our business. We have received
written assurances of Year 2000 compliance from substantially all of the
providers of hardware used in our business. We have identified approximately 20
different software vendors that provide software products for our web site and
in our business. We have received adequate assurances of Year 2000 compliance
from substantially all of our software vendors. We had determined that our
server software was not Year 2000 compliant, but we upgraded it to a Year 2000
compliant version. If any of the assurances we have received from our third-
party software or hardware providers are false, our internal systems and our
ability to ship our product would be materially harmed.
We have also obtained assurances as to Year 2000 compliance from our hosting
service provider and we are in the process of obtaining written assurances from
our other third-party service providers. We expect to receive assurances from
such entities without additional expenditures by us.
We have made written inquiry of all of our current vendors and distributors
and approximately two-thirds of these entities responded to our request. Of
those entities all but one vendor and one fulfillment partner have provided us
with written assurances as to Year 2000 compliance. We are working with the
remaining vendor, an equipment supplier in one of our sports categories, and
fulfillment partner to assess how their possible failure to be Year 2000
compliant will affect our business. We are attempting to obtain Year 2000
compliance assurance from the vendors and distributors that did not respond to
our request. We cannot assure you that we will obtain Year 2000 assurances from
these entities, and if they do not upgrade their systems for Year 2000
compliance, our ability to ship products would be materially impaired.
Contingency Plan
We substantially completed our compliance program in November 1999. However,
we will continue to engage in testing and re-testing of non-compliant areas and
develop a back up plan which we would expect to complete in December 1999.
We may discover Year 2000 compliance problems in our systems that will
require substantial revision. In addition, third-party software, hardware or
services incorporated into our business or used in our web site may need to be
revised or replaced, all of which could be time-consuming and expensive and
result in the following, any of which could adversely affect our business:
. delay or loss of revenue;
. diversion of development and information technology resources;
. damage to our reputation; and
. litigation costs.
Our failure to fix or replace our third-party software, hardware or services on
a timely basis could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions.
Quantitative and Qualitative Disclosure About Market Risk
We currently market our merchandise in the United States and anticipate
expanding our marketing efforts in Europe in late 1999 and throughout 2000. As
a result, our financial results could be affected by factors
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<PAGE>
including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our products less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the short-term nature of our
investments, we believe that there is no material risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
Fogdog Sports is a leading online retailer of sporting goods. We have
designed fogdog.com, our online store, to offer an extensive product selection,
detailed product information and other value-added services. We believe that we
offer the largest selection of sporting goods online, with up to 60,000
distinct stock keeping units representing more than 500 brands in all major
sports categories. According to Media Metrix, Inc., our web site received more
visits during September 1999 than any other online retailer focusing
exclusively on sporting goods. Fogdog.com features a collection of specialty
shops, including soccer, baseball, golf, outdoors, fan/memorabilia and other
popular categories, organized to appeal to a broad base of customers from the
avid enthusiast to the occasional participant. We provide information and
analysis authored by our own experts, helpful shopping services, innovative
merchandising and an emphasis on customer service to help customers make more
educated purchasing decisions. We offer customers the convenience and
flexibility of shopping 24 hours a day, seven days a week, which makes
fogdog.com the "anytime, anywhere, sports store." We intend to establish Fogdog
as the first global brand for retail sporting goods, and in the process build
consumer trust, confidence and loyalty.
Industry Overview
Electronic Commerce. The Internet is an increasingly significant medium for
communication, information exchange and commerce. Forrester Research estimates
that online purchases by U.S. consumers will grow from approximately $20
billion in 1999 to $184 billion by 2004, representing a compound annual growth
rate of 56%. International Data Corporation estimates that the number of total
online purchasers will grow from approximately 31 million in 1998 to 183
million in 2003, representing a compound annual growth rate of 43%. Forrester
Research projects that U.S. consumers will purchase $4.2 billion of sporting
goods online in 2004. We believe that growth in Internet usage is being fueled
primarily by easier and cheaper access to the Internet and improvements in
network security, infrastructure and bandwidth. We believe that these trends
are also helping to fuel the growth and consumer acceptance of online commerce.
The Internet provides a number of advantages for online retailers. Because
online retailers are not constrained by shelf space or catalog page
limitations, they are able to "display" a larger number of products at a lower
cost than traditional store-based or catalog retailers. In addition, online
retailers can more easily and frequently adjust their featured selections,
editorial content and pricing, providing significant merchandising flexibility.
Online retailers also benefit from 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 burdensome costs of managing and maintaining a retail store infrastructure
or the significant printing and mailing costs of catalogs. Online retailers
also can more easily obtain demographic and behavioral data about customers,
increasing their opportunities for targeted marketing and personalized
services.
Traditional Sporting Goods Industry. We believe that the sporting goods
industry, which includes apparel, equipment and athletic footwear, is large and
growing. According to the Sports Business Research Network, total U.S. retail
sales of sporting goods were approximately $77 billion in 1998 and have grown
at a 6.8% compound annual rate since 1994. Additionally, according to Sports
Trend, a trade publication, in 1998 the top five U.S.-based sporting goods
specialty retailers, excluding mass merchandisers, accounted for only $6.6
billion of total industry sales, demonstrating the highly fragmented nature of
the sporting goods retail market. According to the Sporting Goods Manufacturers
Association, the number of people who actively participate in sports, fitness
and outdoor activities grew 19% from 68.5 million in 1987 to 81.6 million in
1996. We believe that the sporting goods industry will continue to benefit from
the continued growth in participation and interest in sports, recreation,
health, fitness and outdoor activities.
Limitations of the Traditional Sporting Goods Retail Channel. The
traditional sporting goods retail channel is fragmented, including mass
merchant retailers and discount stores, regional or national chain stores,
local specialty shops and mail order catalogers. Mass merchant retailers and
discount stores often offer
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attractive pricing. However, they typically offer only a limited selection of
each brand's products and lack trained, knowledgeable sales people. Local and
regional chain stores often have a broader line of branded products, but lack
extensive product knowledge at the individual store level. Specialty stores
such as golf and ski shops may offer better customer service, but with higher
prices and a narrower selection. Mail order catalogers typically focus on one
sport category, and are limited by catalog space constraints in offering either
extensive selection or in-depth product information. As a result of these
factors, we believe that the traditional retail channel for sporting goods
fails to satisfy fully consumers' desire for selection, product information,
expert advice, personalized service and convenience.
We believe that, in addition to failing to fully satisfy the needs of the
customer, the traditional sporting goods retail channel presents significant
limitations for manufacturers. Traditional sporting goods retailers often do
not provide manufacturers global distribution or proper and consistent brand
merchandising and allow discounts below minimum advertised price policy. In
addition, traditional sporting goods retailers cannot offer manufacturers
unlimited shelf space, full product line presentation with high-quality product
information and extensive customer service with knowledgeable salespersons.
Similarly, traditional retailers offer manufacturers limited flexibility in how
a product is sold and presented directly to the consumer.
Taken together, we believe that these factors serve to make the traditional
retail sporting goods experience inefficient and inconvenient for both
customers and manufacturers.
The Fogdog Sports Solution
We have designed our online store to offer an extensive product selection,
detailed product information and other value-added services to address the
limitations of the traditional sporting goods retail channel for customers and
manufacturers. With up to 60,000 distinct stock keeping units representing more
than 500 brands, we believe we offer a broader product selection and more
sporting goods categories than many of the largest, brick and mortar retailers.
Our online store is designed to provide customers with a convenient and
enjoyable shopping experience through a collection of specialty shops for
popular sporting goods categories. Our exclusive focus on sporting goods and
commitment to excellent customer service enable us to effectively address the
needs and desires of our customers. In order to further deploy our solution, we
have entered into a strategic relationship with Nike which will allow us to
offer Nike's generally available product lines, present product information and
give us advance availability of mutually agreed upon, newly released Nike
products. The key components of our solution include:
Specialty Shops Featuring Extensive Product Selection. We offer a broad
range of product lines in a wide variety of sports in order to make Fogdog
Sports a "one-stop-shop." Most of our products, representing 30 different
sports, are featured in fourteen specialty shops and five brand concept shops.
This presentation gives manufacturers an opportunity to merchandise their
entire product lines and maintain brand identity and pricing. Our specialty
shops feature soccer, outdoor, baseball, golf, tennis and racquet sports,
football, hockey, fan/memorabilia and other categories and provide useful
information and expert advice to help customers make product selections. Each
shop offers equipment, apparel and accessories designed to appeal to avid
enthusiasts and occasional participants. For example, our soccer shop features
soccer cleats, protective equipment, balls, uniforms, shorts, tops, cross
training shoes, pants, tights, warm-ups, athletic tape, socks, equipment bags
and other goods. Because we believe that our customers tend to participate in
several sports, a positive shopping experience in one specialty shop may
encourage shopping in our other specialty shops.
Value-Added Shopping Services. We offer helpful services to assist our
customers with their purchasing decisions, including:
. Detailed Product Information, Guides and Comparison Charts. Fogdog.com
features extensive information on products, including product
descriptions, high-quality product pictures, technical specifications
and the intended product use descriptions. Our web site's technology
allows the user to zoom in on selected products to view construction,
materials and other product details. We recently added our "360 Info
Spin" feature to our web site, allowing consumers to zoom in on and spin
a product image to better understand its features and benefits. To
further aid consumers in finding the
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right product for their specific needs, our staff of experts writes
product guides which incorporate manufacturers' data and are intended to
help consumers learn about various product features, sizing and fit
information and other relevant information to know before purchasing.
Our experts research the products and summarize the information in easy-
to-read comparison charts.
. Brand Concept Shops. In addition to our specialty shops, we offer brand
shops devoted exclusively to selected high-end brands for customers
loyal to a particular brand. Created in conjunction with top brand
manufacturers, such as Callaway and Moving Comfort, these shops surround
the customer with in-depth information, broad selection and the "look
and feel" consistent with the manufacturers' product merchandising.
These shops are accessible from our home page and from our specialty
shops.
. Advice and Product Recommendations by Recognized Sports Experts. We
offer information to help customers select the right product for their
sports needs. We have a staff of world-class athletes, notable equipment
experts and recognized sports journalists who write product articles for
the site, respond to customer emails, answer customer service questions
and recommend products as "Fogdog Picks," chosen for their features and
value. We also host bulletin board sessions in which our expert staff
shares ideas with visitors to our web site.
. Consumer Reviews. To further enhance the site experience and to increase
involvement in our online sporting community, we encourage customers to
offer their personal reviews of any product available on the site. Our
customers review products on a five-star rating scale. We moderate the
reviews for appropriate language and user authenticity. To encourage
reviews, recent shoppers at fogdog.com receive a follow-up email
generally within three weeks after their purchase, which inquires about
the overall shopping experience and asks the customer to submit a review
of the purchased products. This email also serves as an opportunity for
cross selling of additional related products.
. My Fogdog. To provide a more personalized shopping experience, we have
developed an environment for registered users of the site known as "My
Fogdog." Every registered user of fogdog.com is greeted by name on the
home page and is offered a link into a customized area focusing on the
individual's product interests and buying history. This area includes
merchandised items that are specific to that individual's interests,
targeted promotions and links to our online order history and tracking
system which enables customers to check order status and reorder more
easily. Registered My Fogdog users are able to receive product offers
that are relevant to their sports preferences, check-out faster with
"Express Shopper" which stores shipping and credit card information,
gain access to special items and promotions and reorder items easily.
Convenient Shopping Experience. Our online store provides customers with an
easy-to-use web site. Fogdog.com is available 24 hours a day, seven days a
week and may be reached from the shopper's home or office. Our online store
enables us to deliver a broad selection of products to customers who do not
have convenient access to physical stores. Our "Power Search" technology
allows customers to locate products more efficiently based on user-defined
criteria such as shoe size, gender, product category and manufacturer.
Commitment to Excellent Customer Service. We emphasize customer service
during all phases of the customer's online shopping experience. Our staff
includes sports consultants who are hired for their broad knowledge of
athletics, sports products and training to assist customers in their
purchasing decisions. To ensure that our staff receives ongoing information on
product features and functionality, we offer training sessions sponsored by
key manufacturers. Our consultants, together with our in-house staff, provide
free pre- and post-sales support via both email and toll-free telephone
service during extended business hours. Once a customer places an order, that
customer can view order-tracking information on our web site or contact our
customer service department to obtain the status of the order and, when
necessary, resolve order and product questions. Furthermore, our web site
contains extensive information for first-time and repeat visitors, including
helpful hints in searching for, selecting, ordering and returning our
products. If the purchased product does not satisfy the customer, we offer an
unconditional, 45-day money-back return policy. If customers are unable to
find a product, they can submit a form asking the "Fogdog Search Squad" to
find it for them. The Fogdog Search
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Squad are members of our customer service staff who locate and ship hard-to-
find products for customers. This service addresses our customers' desire for a
single trusted source for sporting goods.
Network of Fulfillment Partners. We believe the Fogdog Sports solution
simplifies the order fulfillment process in the complex and highly fragmented
sporting goods industry. We have developed proprietary technologies and
implemented a fulfillment system that utilizes two third-party warehouses,
distributors, converted catalogers and direct shipping from select
manufacturers to support and secure reliable online retailing. We believe that
our distribution network provides us with competitive advantages in offering
our customers and partners an efficient and cost-effective order fulfillment
solution. The use of this network is transparent to the customer and allows us
to effectively manage the distribution process and deliver products to the
customer in Fogdog Sports packaging.
Growth Strategy
The Fogdog Sports vision is to reinvent the sporting goods industry by
providing customers with a new value proposition of selection, information and
service. Our goal is to be the world's leading sporting goods retailer. Key
elements of our growth strategy are to:
Build Brand Recognition. We intend to establish the Fogdog brand as the
first global brand for retail sporting goods and in the process build consumer
trust, confidence and loyalty. We believe that through a compelling shopping
experience and aggressive advertising and promotional activities, we can
continue to build awareness for Fogdog. We are targeting a broad base of
customers who are passionate about their sports, from the avid enthusiast to
the occasional participant. A compelling site experience reinforces the brand
promise that fogdog.com is the "ultimate sports store" and "your anytime,
anywhere sports store." We use a combination of traditional and online
marketing strategies to maximize our brand recognition:
. Television, Radio, Print and Outdoor Advertising. We intend to continue
to use a mix of traditional media to build awareness for the Fogdog
brand, relying primarily on cable and broadcast TV. We plan to focus our
TV advertising on high-profile, national cable and broadcast television
networks to associate Fogdog Sports with the active sporting lifestyle.
In addition, we intend to continue to use radio, print and outdoor
advertising to reach potential customers, particularly in markets with
high Internet use.
. Online Advertising. We intend to continue to establish relationships
with major online services and Internet shopping portals to target
active online sporting goods shoppers. For example, we have entered into
a marketing agreement with America Online, and we also have agreements
with WebTV Networks, Inc., GO Network, Snap.com and Women.com for
prominent positioning in their online shopping areas. We advertise on
these sites as well as sites of other major online portals, including
Excite, HotBot and MSN.com. We also advertise on Yahoo! with over 8,000
Fogdog products available through the Yahoo! shopping area. We intend to
continue to maintain high visibility on major web sites and portals.
. Affiliate Network. We have agreements with numerous web sites which we
refer to as "affiliates." Our goal is to make our affiliates program one
of the largest among major online retail web sites. Affiliates direct
traffic to our web site, and we offer affiliates a commission on
resulting sales. We intend to expand our affiliates program to continue
to draw customers to our web site.
. Promotions, Events and Sponsorships. We have a program of sponsoring
high profile, local sporting events, such as the Hi-Tec Adventure Racing
Series and the Escape from Alcatraz Triathlon. We intend to continue to
expand our sponsorship programs in order to build credibility with and
recognition by athletes.
Promote Repeat Purchases. We are focused on promoting customer loyalty and
building relationships with our customers to drive repeat sales. To accomplish
this strategy, we strive to provide quality customer service seven days per
week, ship products promptly and for a low cost and provide an easy-to-shop
online retail environment. We also employ technology which targets returning
customers and makes specific offers to
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them based on the customers' purchase history, sports preferences and shopping
behavior. We intend to continue to build features that will enhance loyalty,
provide offerings unique to each individual customer and continually strive to
enhance our customer service. In addition, we intend to expand our direct,
online marketing by delivering meaningful information and special offers to our
customers.
Expand Specialty Shops. We have created a collection of specialty shops
within our online store, and we intend to provide additional shops organized by
sport or brand. We anticipate adding five to ten of these specialty shops
during the next twelve months. We design these shops to be destination sites
for sports enthusiasts by including top branded products, extensive product
information and superior customer service. We intend to further enhance our
specialty shops by offering the best of a traditional offline specialty shop in
service and information along with the best product selection for all sports
across top brands.
Maximize Product Selection and Fulfillment Capabilities. We intend to employ
a three-part strategy so that we can sell and deliver the broadest possible
array of top branded products to our customers. We believe that our focus on
product availability and use of multiple fulfillment partners and channels will
enable us to increase our margins while serving a rapidly expanding customer
base. Our strategy is to:
. Expand Fulfillment Network. We plan to augment our network of partners
that manage inventory, shipping, warehousing and general purchasing, as
well as our relationships with manufacturers that ship directly to
customers. We believe the strength of our fulfillment network provides a
competitive advantage by increasing product availability without
exposing us to all of the inventory risk of a traditional retailer.
. Extend Brand Relationships. We currently buy products directly from
numerous sporting goods manufacturers with well-known consumer brands.
We intend to continue to develop relationships with top brand
manufacturers to secure the highest level of premium product inventory
available. We also plan to continuously improve our relationships and
the efficiency of our interactions with these key vendors by
incorporating brand and product information into our site, and by
featuring certain brands within brand concept shops. Our strategic
relationship with Nike will give us access to all Nike brands including
Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports.
. Augment Distribution Technology and Expertise. We have developed a broad
range of technologies to integrate our web site and other systems
directly with the systems of our fulfillment partners. We plan to
leverage and expand our technical expertise to increase this
integration. We also have built and will continue to enhance a team
devoted to executing our warehousing, inventory management, buying and
merchandising activities to ensure superior product selection.
Enhance and Form Strategic Relationships. We have agreements with Nike,
America Online and Keystone Fulfillment. We intend to leverage our agreements
in order to provide us with competitive advantages in merchandising, marketing
and distributing our products. For example, we believe our agreement with Nike
will allow us to offer the broadest possible product selection of the leading
sporting goods brand. Under the agreement, we will have access to Nike's
generally available product lines and advance product availability for mutually
agreed upon, newly released products. In addition, we intend to leverage our
agreements with major online services and Internet shopping portals such as AOL
to provide us with key positioning in online sporting goods shopping areas. We
intend to augment our distribution capabilities through agreements with third
parties, such as our agreement with Keystone Fulfillment, which provides
outsourced inventory management, warehousing and shipping services. We intend
to continue to pursue similar arrangements, which may include written
agreements, partnerships or other arrangements that allow us to further develop
our business.
Expand Internationally. Although to date we have focused on the United
States, we believe that growth in sales of sporting goods outside of the United
States will represent additional market opportunities for us. To take advantage
of these opportunities, we intend to replicate our business model and build our
brand name in selected international markets with appropriate demographics and
market characteristics. For example, we have opened an office in London to
serve as a launching point for our European operations.
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The Fogdog Sports Store
We designed our online retail store to be a destination site for sports
enthusiasts from the avid enthusiast to the occasional participant. We believe
our online store is well organized, attractive and easy to use, and offers
customers an enjoyable shopping experience. The look and feel of our web site
is action-oriented, and navigation is user-friendly and consistent throughout.
All of our product pages are "three clicks" from our home page, allowing
customers to find and purchase products easily. A consumer shopping on our web
site can, in addition to ordering products, browse the different specialty
shops, conduct targeted searches by product or brand, view recommended
products, participate in promotions and check order status.
Specialty Shops
We categorize many of our products into different specialty shops, including
soccer, baseball, golf, outdoor, and others. Within each shop, products are
organized by brand, such as Nike and Callaway, by department, such as footwear,
apparel and equipment, and by our recommendations, which we call "bestsellers"
and "Fogdog Picks." Each shop has helpful product information and many feature
tips from a site expert with extensive knowledge about the right gear for
specific sports. The following is a summary of our largest specialty shops:
Soccer. We offer an extensive selection of soccer footwear, apparel, and
equipment, with key brands such as adidas, Kappa, Nike, Puma and Umbro. Our
soccer shop includes a Power Search feature, which allows customers to search
all soccer products for available in-stock merchandise in their size. Our on-
site expert provides advice on soccer cleat selection and evaluates equipment.
The soccer shop features a technology report with information on the way
different manufacturers design their cleats, along with a special section on
"What the Pros Wear," where customers can click directly to purchase products
worn by professional athletes.
Outdoor. The outdoor shop features an extensive selection of products for
hiking, climbing, mountaineering and other outdoor activities from
manufacturers such as Hi-Tec, Kelty, Nike ACG, The North Face and Sierra
Designs. Our outdoor shop expert provides helpful information in areas such as
camping and back packing, as well as detailed product reviews. We also feature
a bulletin board service where customers can post questions about products and
sports activities. We offer an extensive product information resource online,
with comparison charts for items such as backpacks, tents and sleeping bags.
Baseball. We believe that we offer the largest selection of baseball
equipment available on the Internet. We also provide a comprehensive selection
of apparel and footwear, including such key brands as Easton, Louisville
Slugger, Mizuno, Nike, Rawlings and Wilson. In our baseball shop, customers can
use a bat configurator that takes input on the individual's height, weight and
league type and chooses an appropriate selection of product. This shop will
have regular equipment reviews by our staff journalists.
Golf. The golf shop offers golf equipment, apparel and footwear including
brands such as Adams, Callaway, Nike Golf, Orlimar, Spalding and Taylor Made.
This shop features a Callaway brand golf shop, with information on how to
select Callaway clubs, what they are made of and how they are designed. We
worked closely with Callaway to develop the content of this area and the shop
offers the entire line of Callaway products. The golf shop also includes an
area called "What's in the Bag," which shows what professional golfers carry on
the course.
Hockey. Our hockey shop features equipment to outfit players of all skill
levels from the novice to the expert. We offer products from leading brands
such as CCM, Bauer, Jofa and Koho.
Snowboard. We believe that our snowboard shop is one of the most complete
snowboard stores online today with manufacturers including Santa Cruz, Ride,
Switch, Flow and Westbeach. The shop also features expert advice on carving and
equipment selection.
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Tennis & Racquet Sports. The tennis and racquet shop includes a wide
selection of tennis equipment, footwear and apparel from top manufacturers such
as Head, Penn, Pro Kennex and Wilson. The tennis racquet shop also offers a
racquet configurator which gives customers the ability to customize their
racquets with their desired grip, string and stringing tension, which generally
ship the same day the order is placed.
Football. The football shop serves a range of players from the recreational,
weekend participant to the serious league player. We offer the merchandise
necessary to outfit a player and/or team including pads, helmets, guards and
braces, from leading manufacturers such as Bike, Nike, Pony, Rawlings and
Wilson.
Fan/Memorabilia. Our fan/memorabilia shop is designed to outfit fans with
apparel and souvenirs from their favorite teams and players. We help fans of a
specific league, player or team find the products that support their teams. The
shop includes products licensed from NCAA collegiate athletics, the National
Football League, Major League Baseball, the National Basketball Association,
the National Hockey League, Major League Soccer and international soccer teams.
The shop also carries vintage era replicas and other related sports memorabilia
such as autographed photos.
Fitness & Health. Our fitness and health shop is an extensive collection of
products and content associated with general fitness. Our fitness shop offers
Avia, Champion, Fitness Quest, Harbinger, Hind and Moving Comfort. The shop
features advice on exercise, apparel selection and nutrition tips.
Group Sales. We believe that Fogdog Sports is the first and currently the
only online retailer to offer custom uniforms and volume discounts for teams.
Our group sales shop enables the team buyer to design custom uniforms and place
the entire order online. We feature a large in-stock selection of uniforms, and
we are able to ship most orders the same day, with a five to seven day
turnaround for custom orders as compared to three to four weeks for most
traditional team dealers.
Shopping At Our Store
Customers navigate our online store through our simple, intuitive and easy-
to-use web site. Our goal is to make the shopping process as easy as possible
for customers. Users accessing our online store generally fall into two
categories: individuals who want to purchase a particular product immediately
in a highly convenient manner, and individuals who browse the store, seeking an
entertaining and informative shopping experience. We designed our online store
to satisfy both types of users in a simple, intuitive fashion.
Browsing and Comparing. Our web site offers visitors a variety of
highlighted subject areas and special features arranged in a simple, easy-to-
use format intended to enhance product search, selection and discovery. By
clicking on the permanently displayed specialty shop names, the consumer moves
directly to the home page of the desired shop and can quickly view promotions
and featured products. On our web site customers can find detailed product
information, including expert reviews of a product, how to use the product and
how to care for it. Customers can use a quick keyword search or search by brand
in order to locate a specific product. They can also execute more sophisticated
searches based on pre-selected criteria depending upon the department. In
addition, customers can browse our online store by linking to specially
designed pages dedicated to products from key national and specialty brands. We
provide product information in tabular form across brands and stock keeping
units for easy comparison of features and benefits.
Customization and Personalization. We use configurators which we call the
"Fogdog Fetch" to identify merchandise unique to a customer's sport
requirements and interests. We also cross-sell merchandise to customers based
on what they have identified as their sport preferences in My Fogdog, what they
have added to their shopping basket during the checkout process and what they
have purchased. Our Fogdog Power Search tool also enables customers to search
for products in some of our shops based on size and brand preferences.
Selecting a Product and Checking Out. To purchase products, customers simply
click on the "add to basket" button to add products to their virtual shopping
cart. Customers can add and subtract products from their shopping cart as they
browse around our store prior to making a final purchase decision, just as in a
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traditional store. Our web site is updated through the direct uploading of
supply information from distributors to remove products that are out of stock.
To execute orders, customers click on the "checkout" button and,
depending upon whether the customer has previously shopped with us, are
prompted to supply shipping details online. We also offer customers a variety
of shipping options during the checkout process. Prior to finalizing an order
by clicking the "submit order" button, customers are shown their total charges
along with the various options chosen at which point customers still have the
ability to change their order or cancel it entirely.
Paying. To pay for orders, a customer must use a gift certificate or credit
card, which is authorized during the checkout process, but which is charged
when the product is shipped. Our web site uses a security technology that works
with the most common Internet browsers. Our system automatically confirms
receipt of each order via email within minutes and notifies the customer when
the order is shipped, typically within one to two business days for in-stock
items. We also offer our customers an unconditional, 45-day money-back return
policy. Repeat customers can use an "Express Checkout" feature in which
customer data and payment information is automatically entered into our system.
Getting Help. From every page of our web site, a customer can click on a
"help" button to go to our customer service area. The customer service area of
our web site contains extensive information for first-time and repeat visitors.
In this area, we assist customers in searching for, shopping for, ordering and
returning our products as well as provide information on our low price
guarantee, shipping charges and other policies. In addition, we provide
customers with answers to the most frequently asked questions and encourage our
visitors to send us feedback and suggestions via email. Furthermore, customer
service agents are available to answer questions about products and the
shopping process during extended business hours via our toll-free number, which
is displayed in the customer service area of our web site.
Promotional Area. Through our promotional area, which is located on the
Fogdog Sports home page, we offer products that tie into recent sporting events
or seasonal themes. For example, we offered soccer jerseys and equipment
following the Women's World Cup, golf equipment and apparel to tie into the
U.S. Open, and backpacks in time for back to school. Customers can also
purchase gift certificates from us in any denomination. We keep each customer's
gift certificate balance on record on the site.
Marketing
We have implemented an aggressive advertising and marketing campaign to
increase awareness of the Fogdog brand. We plan to acquire new customers
through multiple channels, including traditional and online advertising, direct
marketing and expansion and strengthening of our strategic relationships. We
intend to use a significant portion of the net proceeds from this offering to
continue to pursue advertising and marketing campaigns. Our marketing strategy
is designed to:
. build global brand recognition;
. differentiate and build a unique positioning for Fogdog Sports in the
marketplace;
. increase consumer traffic to our web site;
. acquire new customers;
. build strong customer loyalty;
. emphasize a one-on-one relationship with our customers;
. maximize repeat purchases; and
. develop additional ways to increase our net sales.
Positioning and Branding Strategy. We aggressively seek to brand the Fogdog
online experience at every customer touch point, including advertising,
promotions, site experience, packaging and delivery. We seek to position Fogdog
Sports as the trusted online sports store built for people who "live to play
sports" with a selection of top brands, information and expertise. We target a
broad range of customers in active lifestyle households. Our primary
demographic focus is on active sports participants, male and female.
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Advertising Mix. To build brand awareness, the primary elements of our
marketing mix include cable and network television, broad reach online
services, such as AOL, and Web shopping portals. We also employ targeted radio,
print and outdoor media campaigns in specific markets during key sporting goods
shopping seasons. We believe that through a sustained national TV campaign, we
can drive consistent growth in awareness, and reach a broad audience of active
sports participants with high-impact creative advertising. Our TV media plan
includes advertising during major cable and network sports programming and
events. We have also secured agreements with leading shopping portals, with
positioning in sporting goods shopping areas. For example, under our agreement
with AOL, we are a "Shopping Anchor" in two of the four AOL sports shopping
areas. We also have agreements with WebTV, GO Network, Snap.com and Women.com
for prominent positioning in their online shopping areas. In addition, we
advertise on Yahoo! with over 8,000 Fogdog products available through the
Yahoo! shopping area.
Under our contracts with Internet portals and online service providers, we
typically pay a fixed dollar amount in exchange for placement of an enlarged
icon in high traffic areas of their sites. These agreements are generally for a
fixed term of one to two years. For example, under our agreement with AOL, we
have an "anchor" position providing prominent placement in the camping and
outdoor fitness and sports sections of AOL Shopping for the next two years. AOL
guarantees a minimum number of user impressions of our material through AOL's
online service or AOL.com.
Affiliate Network. Our goal is to create and maintain one of the leading
affiliate programs on the Web, extending the reach of our brand and drawing
customers from a variety of sports and general content sites. Our program
provides a low-cost means of acquiring customers by providing a sales
commission of between 10% and 20% to affiliate partners.
Promotions, Events and Sponsorships. We sponsor multiple events to build
credibility with and recognition by athletes and sports enthusiasts, including
the Hi-Tec Adventure Racing Series, an extreme type of triathlon, Let it Fly
Football, a football program that has attracted more than 50,000 participants
and triathlons such as the recent Escape from Alcatraz triathlon in San
Francisco. Promotions on the site, such as a free gym bag with purchase, the
chance to win a Volkswagen Jetta loaded with sports gear, and "A Buck Buys It,"
are designed to encourage consumers to try our service. We have also offered
sports-related sweepstakes to win baseball gloves, soccer gear, adventure trips
and trips to baseball spring training.
Loyalty, Retention and Personalization. We believe that we are building a
loyal base of customers through a total shopping experience which emphasizes
customer service and marketing incentive programs. For example, we communicate
with prospective customers through email campaigns and with customers through
follow-up emails. In addition, through My Fogdog, we collect relevant
information from registered customers that allow us to market more specifically
to each customer's interest. Each registered member of My Fogdog has access to
special product offerings, promotions and targeted offers, which we believe
helps build loyalty.
Distribution Strategy and Operations
Our strategy for delivering our products to our customers is to focus on
obtaining products through authorized distribution channels while maximizing
customer selection and product availability. Inventory available to us is
either reserved for our customers, shared with other partners or purchased for
our account. Our shared and reserved inventory partners include distributors,
manufacturers and catalogers who purchase and inventory products and then make
products available for sale on our web site. These partners ship products
directly to our customers from these partners using our packaging and shipping
materials, so that customers only interact with the Fogdog brand throughout the
order and delivery process. Our purchased inventory is held at two third-party
distribution centers for processing, packaging and shipment to customers. The
shipment of products directly from our distributors, manufacturers and
catalogers to our customers reduces the level of inventory we are required to
carry. We generally handle merchandise returns ourselves. We are currently
evaluating various alternatives to expand the capacity of our distribution
system.
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We use technology to optimize the exchange of information between Fogdog,
our third party distribution centers and our distribution partners, so that we
can properly set customer expectations about product availability and delivery
dates. Our distribution, engineering and logistics teams work with our partners
and third-party warehouses to manage and monitor order accuracy, fulfillment
rate, shipment speed, and overall delivery reliability and timeliness. We
measure performance through daily reports, frequent on-site visits with
partners and our warehouses and quarterly reviews. The following diagram
illustrates our distribution system:
[DIAGRAM OF OUR DISTRIBUTION STRUCTURE SHOWING A BOX LABELED "WWW.FOGDOG.COM,"
OVER A BOX LABELED "FULFILLER MANAGEMENT SYSTEMS (FMS)" OVER THREE ARROWS, ONE
OF WHICH IS LABELED ORDERS AND POINTS DOWN, ONE OF WHICH IS LABELED INVENTORY
AND POINTS UP AND ONE OF WHICH IS LABELED ORDER STATUS AND POINTS UP, ALL THREE
OF WHICH ARROWS ARE OVER A BOX LABELED FULFILLMENT PARTNERS, WHICH BOX IS OVER
FOUR SIDE BY SIDE BOXES LABELED "FOGDOG WAREHOUSE," "DISTRIBUTORS," "DIRECT
SHIP" AND "SEARCH SQUAD."]
Merchandising
Merchandising. Our merchandising strategy is to provide a broad assortment
of quality equipment, athletic footwear and apparel at prices that meet those
of leading sporting goods retailers. Our web site, particularly in our
specialty and brand shops, offers a core selection of brand name merchandise
complemented by a selection of accessories and related products designed to
enable enthusiasts to have a quality shopping experience. Our leading product
category is sporting equipment, followed by apparel and athletic footwear. No
single product category accounts for more than 50% of sales.
Brand Name Merchandise. We emphasize quality brand name merchandise. We
believe that the breadth of our brand name merchandise selection generally
exceeds the merchandise selection carried by traditional, store-based
competitors. Many of these branded products are technical and our customers
benefit from extensive product information and sales assistance. We work with
manufacturers to obtain product information and educate the sports consultants
we keep on staff on the latest features and trends.
Strategic Relationship with Nike. We expect that our relationship with Nike
will provide us with an extensive selection of high quality branded products.
Under the terms of our agreement, Nike will not sell its products to any other
retailer that sells only on the Internet, except for entities affiliated with
Nike customers that derive the majority of their revenue from traditional
retail stores or entities that serve as web sales outsourcing providers for
these Nike customers, through March 2000. In addition, we will have access to
all of Nike's generally available product lines, including Jordan, Bauer, Nike
ACG, Nike Golf and Nike Team Sports. Our agreement also allows us advance
availability on mutually agreed upon products included in Nike's
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generally available product line and the right to return a percentage of some
product lines to Nike for a full refund. Under the agreement, Nike and its
affiliates are not legally obligated to sell us any quantity of product or
deliver on any particular schedule.
Purchasing. Our merchandising manager and merchandise buyers analyze current
sporting goods trends by maintaining close relationships with our
manufacturers, monitoring sales at competing stores, studying specialized data
about traffic to our web site and reviewing industry trade publications.
Customer Service
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. First, our web site is designed to
help answer many questions customers might have in selecting products. Our
customer service representatives are available seven days a week to provide
assistance via email or telephone. We strive to answer all customer inquiries
within 24 hours. Sports consultants on our customer service team are hired for
their extensive knowledge and background in athletics and sporting goods. Their
backgrounds include experience as athletes, coaches and working for sporting
goods manufacturers and retailers. The combination of specific sport and
category understanding, knowledge of products and their use, and technical
capabilities enable them to guide our customers in making an informed product
selection. Our sports consultants also handle questions about orders, assist
customers in finding desired products and register customers' credit card
information over the telephone. We generally allow returns for any reason
within 45 days of the sale for a full refund. Further, if a customer cannot
find a product on our site, we provide the Fogdog Search Squad, which helps
locate products primarily through our existing distribution channels. Our web
site also contains a customer service page that outlines store policies and
provides answers to frequently asked questions.
Technology
We have implemented a broad array of web site management, search, customer
interaction, distribution services and systems that we use to process
customers' orders and payments. These services and systems use a combination of
our own technologies and commercially available, licensed technologies and are
designed to be easily expanded to grow with our business. The systems that we
use to process customers' orders and payments are integrated with our
accounting and financial systems. We focus our internal development efforts on
creating and enhancing specialized software for our business. We use a set of
applications for:
. generating and running our web site;
. managing product data, including product details, inventory and pricing;
. accepting and validating customer orders;
. organizing, placing and managing orders with suppliers and partners; and
. capturing and analyzing customer information and trends.
Our systems are based on commercially available software and industry
standard protocols and have been designed to reduce downtime in the event of
outages or catastrophic occurrences. Our system hardware is hosted at a third-
party data center in Mountain View, California, which provides redundant
communications lines and emergency power backup. We have implemented load
balancing systems and our own redundant servers to provide for fault tolerance.
System security is managed by both internal staff as well as by security staff
at our third-party data center.
Government Regulation
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, as the Internet
becomes increasingly popular, 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
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quality of products and services, taxation, advertising, intellectual property
rights and information security. Furthermore, the growth of electronic 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 and has proposed regulations restricting
the collection and use of information from minors online. We do not currently
provide individual personal information regarding our users to third parties
and we currently do not identify registered users by age. However, the adoption
of additional privacy or consumer protection laws could create uncertainty in
Web usage and reduce the demand for our products and services or require us to
redesign our web site.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
qualification to do business 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 intended to address these issues could create
uncertainty in the Internet marketplace. This uncertainty could reduce demand
for our services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Our primary
competitors are currently traditional national chain retailers of sporting
goods, including Venator Group, which operates Footlocker stores and Champs,
national chain retailers of outdoor equipment, such as REI, and national chain
retailers of athletic footwear, such as Just For Feet. We also compete against
traditional regional chain retailers of sporting goods, such as The Sports
Authority, Dick's Sporting Goods and Galyan's. Our competitors also include
major discount retailers, such as Wal-Mart, Kmart and Target, catalog retailers
and numerous local sporting goods or outdoor activities stores. In addition to
traditional store-based retailers, we compete with numerous online retailers.
Online retailers that we compete with include the online efforts of traditional
retailers such as Dick's, Copeland's and REI and manufacturers of sporting
goods that currently sell some of their products directly online, such as K-
Swiss and Patagonia. The Sports Authority, The Athlete's Foot, MC Sports and
Sport Chalet have also announced the formation of an online joint venture which
we expect to compete with in the future. In addition, we compete against
Internet portal sites and online service providers that either offer or feature
shopping services, such as AOL, Yahoo!, Excite@Home, GO Network and Lycos. We
also compete against other online retailers that include sporting goods as part
of their product lines, such as Buy.com, Onsale and Value America. In addition,
sports-oriented web sites such as ESPN.com and CBS Sportsline offer sporting
goods and fan memorabilia over the Web, and we expect greater competition from
these web sites in the future. Finally, we compete with other retailers selling
sporting goods exclusively online, many of which sell products in only one or a
few sports categories.
We believe that we compete primarily on the basis of recognition of the
brands we offer on our web site, the breadth of our product offerings, the
amount of product information provided to customers, convenience of the
shopping experience and price. Particularly with online retailers, we compete
on the basis of speed and accessibility of our web site, quality of site
content, customer service and reliability and speed of order shipment. Although
we believe we compete favorably with both traditional, store-based retailers
and our online competitors, our market is relatively new and is evolving
rapidly. We may not be able to maintain our competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and more traffic to their web sites. In addition, many
of our competitors have well-established relationships with manufacturers and
more extensive knowledge about our industry. It is possible that new
competitors or alliances among competitors will emerge in the future.
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Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a materially adverse effect on us.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in services and technology. These include
confidentiality, invention assignment and nondisclosure agreements with
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online. Our
trademarks and service marks include Fogdog, Fogdog with the accompanying
design and the Fogdog logo.
We rely on technologies that we license from third parties. These licenses
may not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
We do not believe that our technologies infringe the proprietary rights of
third parties. However, third parties have in the past and may in the future
claim that our business or technologies infringe their rights. From time to
time, we have received notices from third parties questioning our right to
present specific images or mention athletes' names on our Web site, or stating
that we have infringed their trademarks or copyrights. For example, in June
1999 we received a letter from a third party stating his belief that our
Internet marketing activities infringe a patent for a home shopping device, and
inviting us to license this technology. Also, in October 1999 we received a
letter from a third party alleging that our use of the trademark "Fogdog" and
the domain name for our web site fogdog.com, infringed a registered trademark
licensed by this third party, and further alleging unfair competition under
state and federal trademark law. We expect that participants in our markets
will be increasingly subject to infringement claims as the number of services
and competitors in our industry segment grows. Any such claim, with or without
merit, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to us or at all. As a result, any such claim of infringement against us could
have a material adverse effect upon our business, results of operations and
financial condition.
Employees
As of September 30, 1999, we had 96 full-time employees. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
Facilities
Our corporate offices are located in Redwood City, California, where we
lease 32,000 square feet under a lease that expires in July 2004. We believe
our existing facilities are adequate to meet our needs for at least the next 12
months.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth certain information regarding our executive
officers, directors and key employees as of November 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Timothy P. Harrington......... 42 Chief Executive Officer and Director
Timothy J. Joyce.............. 43 President
Marcy E. von Lossberg......... 30 Chief Financial Officer
Brett M. Allsop............... 29 President, International Division, and
Chairman of the Board
Robert S. Chea................ 28 Vice President, Engineering
Mark S. Garrett .............. 41 Vice President, Finance
Frederick M. Gibbons.......... 49 Director
Peter J. Huff................. 29 Director
Robert R. Maxfield............ 57 Director
Warren J. Packard............. 32 Director
Ralph T. Parks................ 53 Director
Ray A. Rothrock............... 44 Director
Lloyd D. Ruth................. 52 Director
Key Employees
Ronald L. Berry............... 50 Vice President, General Merchandising
Andrew Y. Chen................ 28 Vice President, Team Sports
Mark G. Loncar................ 36 Vice President, Executive Producer
John P. McGovern.............. 41 General Counsel
Thomas G. Romary.............. 33 Vice President, Marketing
Executive Vice President, Strategic
Robin R. Smith................ 52 Development
Phillip A. Winters............ 42 Vice President, Business Development
</TABLE>
Timothy P. Harrington. Mr. Harrington joined Fogdog Sports in June 1998 as
President, Chief Operating Officer and a director. In January 1999 he became
Chief Executive Officer and ceased serving as Chief Operating Officer. Prior to
joining Fogdog Sports, from March 1997 to April 1998, Mr. Harrington served as
General Manager of GolfWeb, Inc., a golf information and e-commerce web site.
From June 1996 to December 1996, Mr. Harrington served as the Director of
National Accounts for Cobra Golf, Inc., a manufacturer of golf equipment. Prior
to working with Cobra Golf, Inc., from June 1979 to June 1996, Mr. Harrington
served in various financial management positions with International Business
Machines Corporation, a computer systems corporation, including Chief Operating
Officer for International Business Machines' education division. Mr. Harrington
was a Sloan Fellow at Stanford University's Graduate School of Business. Mr.
Harrington holds a B.B.A. in accounting from Siena College and an M.S. in
business management from Stanford University's Graduate School of Business.
Timothy J. Joyce. Mr. Joyce joined Fogdog Sports in August 1999 as
President. Prior to joining Fogdog Sports, from April 1980 to August 1999, Mr.
Joyce held various positions at Nike, Inc., an athletic apparel and footwear
manufacturer, serving as Divisional Vice President for Global Sales from
February 1997 to August 1999, Director of European Sales from August 1994 to
February 1997, Director of USA Footwear Sales from May 1990 to August 1994 and
Regional Sales Manager from March 1987 to May 1990. Mr. Joyce holds both a B.A.
and an M.S. in sports administration from Ohio University.
Marcy E. von Lossberg. Ms. von Lossberg joined Fogdog Sports in January 1995
as Chief Financial Officer. Prior to joining Fogdog Sports, from April 1993 to
December 1994, Ms. von Lossberg served as a
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Senior Business Planner for Walt Disney Studios, an entertainment and media
company. From June 1991 to March 1993, Ms von Lossberg served as a financial
analyst for BT Securities, a financial services company. Ms. von Lossberg holds
a B.A. in economics and political science from Stanford University.
Brett M. Allsop. Mr. Allsop is a co-founder of Fogdog Sports, and he has
served as Chairman of the Board of Directors and President of the International
Division of Fogdog Sports since January 1999. From June 1998 to January 1999
Mr. Allsop served as our Chief Executive Officer. From October 1994 to June
1998 Mr. Allsop served as our President. Mr. Allsop holds a B.A. engineering
degree in values, technology, science and society from Stanford University.
Robert S. Chea. Mr. Chea is a co-founder of Fogdog Sports and has served as
Vice President of Engineering since October 1994. Prior to joining Fogdog
Sports, from January 1994 to September 1994, Mr. Chea served as an engineer at
Award Software International, Inc., a firmware software vendor. Mr. Chea holds
a B.S. in electrical engineering from Stanford University.
Mark S. Garrett. Mr. Garrett joined Fogdog Sports in November 1999 as Vice
President, Finance. Prior to joining Fogdog Sports, from January 1997 until
October 1999, Mr. Garrett served as the Vice President, Chief Financial Officer
and Secretary of Documentum, Inc., a software development and consulting
corporation. Prior to joining Documentum, Inc., from June 1991 through December
1996, Mr. Garrett held various positions at Cadence Design Systems, Inc., a
supplier of electronic design automation software, serving as Vice President of
Worldwide Corporate Financial Planning and Analysis from February 1995 through
December 1996, Finance Group Director for the Spectrum Services division from
August 1994 to February 1995, Finance Group Director for Technology Development
from January 1993 to July 1994, and Division Controller and Finance Director
for the Systems and CAE Divisions of Cadence from June 1991 to December 1992.
From June 1979 to May 1991, Mr. Garrett held various financial positions at IBM
Corporation. Mr. Garrett holds an M.B.A. from Marist College and a B.S.B.A.
from Boston University.
Frederick M. Gibbons. Mr. Gibbons has served as a director of Fogdog Sports
since April 1996. Since January 1995, Mr. Gibbons has been a lecturer in
business management at Stanford University's Graduate School of Engineering.
From September 1980 to April 1994, Mr. Gibbons served as the Chief Executive
Officer of Software Publishing Corporation, a personal computer productivity
software company that he founded in 1981. Mr. Gibbons holds both a B.S. in
electrical engineering and a M.S. in computer science from the University of
Michigan and an M.B.A. from the Harvard Business School.
Peter J. Huff. Mr. Huff has served as a director of Fogdog Sports since
August 1999. Mr. Huff joined J.H. Whitney and Co., a private venture capital
firm, in September 1997 and now serves as Managing Director of Whitney Internet
Venture Investing. Mr. Huff is also currently a General Partner and Co-Founder
of Triad Media Ventures, a private venture capital firm. From May 1993 to
September 1997, Mr. Huff was a management consultant with McKinsey and Company,
Inc. From June 1992 to June 1993, Mr. Huff served as a Fulbright Fellow at the
National University of Singapore. He currently serves as a director of Brooks,
Business Data Services, ExpertCentral.com and other private companies. Mr. Huff
received a B.A. from Southern Methodist University and an M.B.A. from Stanford
University's Graduate School of Business.
Robert R. Maxfield. Mr. Maxfield has served as a director of Fogdog Sports
since September 1996. Since January 1989, Mr. Maxfield has served as a
professional consultant and has invested in private start-up and emerging
growth companies. From March 1989 to September 1992, Mr. Maxfield was a venture
partner with Kleiner Perkins Caufield & Byers, a venture capital firm. From
June 1969 to November 1988 Mr. Maxfield served as an Executive Vice President
of ROLM Corporation, a telecommunications and computer equipment company which
he co-founded. Mr. Maxfield was a director of ROLM Corporation from June 1980
to November 1984. Mr. Maxfield also serves on the board of directors of Echelon
Corporation, a public company. Mr. Maxfield holds both a B.A. and a B.S. in
electrical engineering from Rice University and an M.S. and a Ph.D. in
electrical engineering from Stanford University.
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Warren J. Packard. Mr. Packard has served as a director of Fogdog Sports
since June 1999. Since June 1997, Mr. Packard has been a venture capitalist
with Draper Fisher Jurvetson, a venture capital firm. Prior to joining Draper
Fisher Jurvetson, from January 1996 until June 1997, Mr. Packard was Vice
President of Business Development of Angara Database Systems, a main-memory
database technology company which he founded. From June 1996 to January 1997,
Mr. Packard was an Associate at Institutional Venture Partners, a venture
capital firm, investing in early-stage technology companies. From August 1991
to August 1995, Mr. Packard served as a Senior Principal Engineer in the New
Business and Advanced Product Development Group at Baxter International. He
currently serves as a director of Chili!Soft, Inc., Corvia Networks, Inc.,
Digital Impact, Inc., DigitalWork, Inc., Direct Hit Technologies, Inc., Eclipse
International and Best Offer.Com, Inc. Mr. Packard holds a B.S. and M.S. in
Mechanical Engineering from Stanford University and an M.B.A. from Stanford
University's Graduate School of Business.
Ralph T. Parks. Mr. Parks has served as a director of Fogdog Sports since
September 1999. Mr. Parks served as President of Footaction USA, a footwear
retailer, from 1991 to 1999 and as Footaction's Executive Vice President and
Chief Operating Officer from 1987 to 1991.
Ray A. Rothrock. Mr. Rothrock has served as a director of Fogdog Sports
since March 1999. Mr. Rothrock serves as a General Partner of Venrock
Associates, a venture capital firm. Mr. Rothrock also serves on the boards of
directors of Check Point Software Technologies Ltd., USinternetworking, Inc.
and several private companies, including Appliant, General Bandwidth,
PrintNation.com, QPass, Reciprocal, Simba Technology, Shym Technology,
Space.com and Versity.com. Mr. Rothrock holds a B.S. in nuclear engineering
from Texas A&M University, an M.S. in nuclear engineering from the
Massachusetts Institute of Technology and an M.B.A. with distinction from the
Harvard Business School.
Lloyd D. "Chip" Ruth. Mr. Ruth has served as a director of Fogdog Sports
since March 1999. Since January 1987, Mr. Ruth has served as a Partner of
Marquette Venture Partners, a venture capital firm that he co-founded. Mr. Ruth
holds a B.S. in industrial engineering from Cornell University, an M.S. in
computer science from the Naval Postgraduate School in Monterey and an M.B.A.
from Stanford University's Graduate School of Business.
Ronald L. Berry. Mr. Berry joined Fogdog Sports in July 1999 as our Vice
President of General Merchandising. Prior to joining Fogdog Sports, from April
1996 to May 1998, Mr. Berry served as Vice President, Division Merchandising
Manager for Footlocker U.S.A., an athletic footwear and apparel company. From
February 1992 to March 1996, Mr. Berry served as the General Merchandising
Manager of Footlocker Europe.
Andrew Y. Chen. Mr. Chen is a co-founder of Fogdog Sports. From October 1994
to June 1996, he served as our Director of Technical Development. From June
1996 until August 1998, he served as our Vice President of Production. In
August 1998, he became the Vice President of Quality Control and in January
1999 was appointed Vice President of Team Sports.
Mark G. Loncar. Mr. Loncar joined Fogdog Sports in August 1998 as our Vice
President and Executive Producer. Prior to joining Fogdog Sports, from June
1992 to August 1998, Mr. Loncar was a partner with the CKS Group, a marketing,
communications and design company. Prior to June 1992, Mr. Loncar served as a
Vice President and Director of Worldwide Technology with BBDO Advertising.
John P. McGovern. Mr. McGovern joined Fogdog Sports in March 1999 as our
General Counsel. Prior to joining Fogdog Sports, from December 1984 to March
1999, Mr. McGovern was an attorney in private practice, focusing on business
and employment law. Mr. McGovern holds a B.A. in economics and philosophy from
the University of California at San Diego and a J.D. from Martin Luther King,
Jr. Hall at the University of California at Davis.
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Thomas G. Romary. Mr. Romary joined Fogdog Sports in July 1998 as our Vice
President of Marketing. Prior to joining Fogdog Sports, from June 1997 to June
1998, Mr. Romary served as the Director of Marketing of GolfWeb, Inc., a golf
information and e-commerce web site. From May 1995 to May 1997, Mr. Romary
served in various marketing positions with Creative Wonders, an educational
software company, including Product Manager, Group Product Manager and Director
of Channel Marketing. From August 1992 to May 1995, Mr. Romary served in brand
management for General Mills, a consumer goods corporation. Mr. Romary holds a
B.S. in engineering from Duke University and an M.B.A. from the Harvard
Business School.
Robin R. Smith. Mr. Smith joined Fogdog Sports in July 1996 as Vice
President of Sales and Marketing and has served as our Executive Vice President
of Strategic Business Development since April 1999. Prior to joining Fogdog
Sports, from February 1989 to October 1995, Mr. Smith served as Vice President
and General Manager of Mizuno Sports, Inc., a manufacturer of sporting goods
footwear, apparel and equipment. From 1983 to 1988, Mr. Smith held several
senior positions with Avia Athletic Footwear, including Vice President of
Marketing for Avia and Vice President and General Manager for the Donner
Mountain division. Mr. Smith holds a B.A. in economics from Occidental College
and an M.B.A. in Marketing and Finance from the Wharton School at the
University of Pennsylvania.
Phillip A. Winters. Mr. Winters joined Fogdog Sports in January 1999 as
Director of Business Development and has served as our Vice President of
Business Development since April 1999. Prior to joining Fogdog Sports, from
June 1978 to December 1998, Mr. Winters served in United States Naval Aviation
in positions including global logistics, operations, strategic management, and
command of a squadron. Mr. Winters served as a commanding officer from January
1997 to December 1998. Mr. Winters holds a B.S. in engineering from the United
States Naval Academy and an M.S. in management from Stanford University's
Graduate School of Business.
Board of Directors
We currently have authorized nine directors. Following this offering, our
board will consist of nine directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Messrs. Maxfield, Gibbons and
Huff are Class I directors whose terms will expire in 2000, Messrs. Ruth,
Packard and Allsop are Class II directors whose terms will expire in 2001 and
Messrs. Harrington, Rothrock and Parks are Class III directors whose terms will
expire in 2002. This classification of the board of directors may delay or
prevent a change in control of our company or in our management. See
"Description of Capital Stock--Antitakeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law."
Board Committees
We have established an audit committee composed of independent directors
that reviews and supervises our financial controls, including the selection of
our auditors, reviews our books and accounts, meets with our officers regarding
our financial controls, acts upon recommendations of our auditors and takes
further actions as the audit committee deems necessary to complete an audit of
our books and accounts, as well as other matters that may come before it or as
directed by the board. The audit committee currently consists of three
directors, Messrs. Gibbons, Rothrock and Packard.
We have also established a compensation committee that reviews and approves
the compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee currently consists of three directors,
Messrs. Maxfield, Ruth and Huff.
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Director Compensation
We currently do not compensate any non-employee member of the board.
Directors who are also employees do not receive additional compensation for
serving as directors.
Under the 1999 Stock Incentive Plan, non-employee directors will receive
automatic option grants upon becoming directors and on the date of each annual
meeting of stockholders. The 1999 Stock Incentive Plan also contains a director
fee option grant program. Should this program be activated in the future, each
non-employee board member will have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of an
option with an exercise price below the then fair market value. Non-employee
directors will also be eligible to receive discretionary option grants and
direct stock issuances under the 1999 Stock Incentive Plan. See "Management--
Benefit Plans."
In August 1999, we granted Mr. Parks an option to purchase 26,666 shares of
common stock at an exercise price of $1.32 per share, vesting in annual
installments over a four-year period measured from the option grant date.
Compensation Committee Interlocks and Insider Participation
None of our compensation committee members is an employee of or ever was an
employee of Fogdog Sports. Messrs. Huff and Rothrock, who serve on our
compensation committee, are affiliated with two of our significant
stockholders. See "Transactions and Relationships with Related Parties." None
of our executive officers serves on the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of our board or our compensation committee.
Executive Officers
Our executive officers are appointed by and serve at the discretion of our
board of directors. There are no family relationships among any of our
directors, officers or key employees.
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning all
compensation earned during the year ended December 31, 1998 by our Chief
Executive Officer and each of the four other most highly compensated executive
officers for the fiscal year ended December 31, 1998, referred to in this
prospectus as the named executive officers for services rendered during the
fiscal year. In August 1999, Mr. Joyce joined us as our President. Mr. Joyce's
annualized salary for 1999 is $280,000. In November 1999, Mr. Garrett joined us
as our Vice President, Finance. His annualized salary for 1999 is $240,000. In
March 1999, the board of directors approved increases in the annual salaries
that we pay our named executive officers. Pursuant to this increase:
. Mr. Allsop's annualized salary for 1999 is $135,000;
. Mr. Harrington's annualized salary for 1999 is $170,000;
. Ms. von Lossberg's annualized salary for 1999 is $115,000; and
. Mr. Chea's annualized salary for 1999 is $110,000.
No individual who would otherwise have been includable in the table on the
basis of salary and bonus earned during 1998 has resigned or otherwise
terminated his or her employment during 1998.
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<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
-------------------- ------------
Fiscal Securities
Year Underlying
Name and Principal Position Ended Salary ($) Bonus ($) Options (#)
- --------------------------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Brett M. Allsop....................... 1998 86,884 -- 33,333
President, International Division and
former Chief Executive Officer
Timothy P. Harrington (2)............. 1998 86,442 -- 800,000
Chief Executive Officer
Robin R. Smith........................ 1998 114,308 -- --
Executive Vice President, Strategic
Development
Marcy E. von Lossberg................. 1998 95,517 13,000 --
Chief Financial Officer
Robert S. Chea........................ 1998 78,585 -- 33,333
Vice President, Engineering
</TABLE>
- --------
(1) Excludes other compensation in the form of perquisites and other personal
benefits that constitutes the lesser of $50,000 or 10% of the total annual
salary and bonus of each of the named executive officers in 1998.
(2) Mr. Harrington joined us in June 1998. His annualized salary for 1998 was
$150,000.
Option Grants in Fiscal Year 1998
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers in 1998, including the
potential realizable value over the term of the options, based on assumed rates
of stock appreciation of 5% and 10%, compounded annually. No stock appreciation
rights were granted during 1998.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates
Number of Percent of of Stock Price Appreciation
Securities Total Options for Option Term
Underlying Granted at Public Offering Price ($)
Options to Employees in Exercise Expiration ------------------------------
Name Granted Fiscal 1998 Price ($) Date 5% 10%
- ---- ---------- --------------- ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Brett M. Allsop......... 33,333 1.7% 0.082 12/31/02 465,232 587,781
Timothy P. Harrington... 800,000 41.2 0.082 06/02/03 11,165,678 14,106,888
Robin R. Smith.......... -- -- -- -- -- --
Marcy E. von Lossberg... -- -- -- -- -- --
Robert S. Chea.......... 33,333 1.7 0.082 12/31/02 465,232 587,781
</TABLE>
In 1998, we granted options to purchase an aggregate of 1,944,000 shares to
employees, directors and consultants under our Amended and Restated 1996 Stock
Option Plan at exercise prices equal to the fair market value of our common
stock on the date of grant, as determined in good faith by our board of
directors. Options granted are immediately exercisable in full, but any shares
purchased under these options that are not vested are subject to our right to
repurchase the shares at the shares' option exercise price. In general, this
repurchase right lapses as to 25% of the shares after one year of service and
as to the remaining shares in equal monthly installments over an additional
three-year period. However:
. the options granted to Mr. Harrington vest in 48 equal monthly
installments; and
. 8,333 of the options granted to Mr. Chea and Mr. Allsop vested on
January 1, 1999 and the remaining options vest in a series of 36 equal
monthly installments beginning on January 1, 1999.
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The potential realizable value is calculated assuming the aggregate exercise
price on the date of grant appreciates at the indicated rate for the entire
term of the option and that the option is exercised and sold on the last day of
its term at the appreciated price. Stock price appreciation of 5% and 10% is
assumed pursuant to the rules of the Commission. We can give no assurance that
the actual stock price will appreciate over the term of the options at the
assumed 5% and 10% levels or at any other defined level. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the named
executive officers.
In March 1999, we granted to the following named executive officers, options
to purchase the following numbers of shares of common stock at an exercise
price of $0.33 per share:
. Mr. Allsop received an option to purchase 33,333 shares of common stock;
. Mr. Harrington received an option to purchase 533,333 shares of common
stock;
. Mr. Smith received an option to purchase 40,000 shares of common stock;
. Ms. von Lossberg received an option to purchase 66,666 shares of common
stock; and
. Mr. Chea received an option to purchase 33,333 shares of common stock.
The options are immediately exercisable, but any shares purchased under these
options that are not vested are subject to repurchase by us at the option
exercise price. This repurchase right lapses with respect to shares in 48 equal
monthly installments.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning the number and value
of shares of common stock underlying the unexercised options held by the named
executive officers. No options or stock appreciation rights were exercised
during 1998 and no stock appreciation rights were outstanding as of December
31, 1998. The value of unexercised in-the-money options at December 31, 1998 is
calculated on the basis of the initial public offering price of $11.00, less
the aggregate exercise price of the options.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at December In-the-Money Options at
31, 1998 December 31, 1998
------------------------------------ -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Brett M. Allsop......... 33,333 -- $ 363,930 --
Timothy P. Harrington... 800,000 -- 8,734,400 --
Robin R. Smith.......... 381,406 -- 4,164,191 --
Marcy E. von Lossberg... 100,000 -- 1,091,800 --
Robert S. Chea.......... 33,333 -- 363,930 --
</TABLE>
Benefit Plans
1999 Stock Incentive Plan
Introduction. Our 1999 Stock Incentive Plan is intended to serve as the
successor program to our Amended and Restated 1996 Stock Option Plan. The 1999
plan was adopted by our board in September 1999 and was approved by our
stockholders in December 1999. The 1999 plan became effective when the
underwriting agreement for this offering was signed. At that time, all
outstanding options under our existing plan will be transferred to the 1999
plan, and no further option grants will be made under the prior plan. The
transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
1999 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 1999 plan.
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Share Reserve. 6,296,631 shares of our common stock have been authorized for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1996 plan plus an additional
increase of 800,000 shares. The share reserve under our 1999 plan will
automatically increase on the first trading day in January of each year from
2001 through 2005, by an amount equal to 3% of the total number of shares of
our common stock outstanding on the last trading day of December in the prior
year, but in no event will this annual increase exceed 2,000,000 shares. In
addition, no participant in our 1999 plan may be granted stock options or
direct stock issuances for more than 1,000,000 shares of common stock in total
in any calendar year.
Programs. Our 1999 plan has five separate programs:
. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of our common stock that will vest upon the attainment of
performance milestones or upon the completion of a period of service or
that are fully vested at issuance as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our board members and any consultants
that we hire.
Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program if that program is put into effect for one or more calendar years.
Plan Features. Our 1999 plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1996 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from
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us equal to the fair market value of the shares subject to the
surrendered options less the exercise price payable for those shares. We
may make the payment in cash or in shares of our common stock. None of
the options under our 1996 plan have any stock appreciation rights.
Change in Control. The 1999 plan will include the following change in
control provisions that may result in the accelerated vesting of outstanding
option grants and stock issuances:
. If we are acquired by merger or asset sale, each outstanding option
under the discretionary option grant program that is not to be assumed
by the successor corporation will immediately become exercisable for all
the option shares, and all outstanding unvested shares will immediately
vest, except to the extent our repurchase rights with respect to those
shares are to be assigned to the successor corporation.
. The compensation committee will have complete discretion to grant one or
more options that will become exercisable for all the option shares if
those options are assumed in the acquisition but the optionee's service
with us or the acquiring entity is subsequently terminated. The vesting
of any outstanding shares under our 1999 plan may be accelerated upon
similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
. The compensation committee will have the discretionary authority to
extend any of the acceleration provisions of the 1999 plan to one or
more options transferred from our 1996 plan which do not otherwise
contain those provisions. Currently, the transferred options are
structured so that we may cancel those options, to the extent not
exercised within five days prior to an acquisition by merger or asset
sale, in return for a cash payment per option share equal to the price
payable per share of our common stock in connection with the
acquisition, less the option exercise price. To the extent such cash
payment is not made, then the options will immediately terminate upon
the closing of the acquisition, unless those options are assumed in the
acquisition.
Salary Investment Option Grant Program. If the compensation committee
decides to put this program into effect for one or more calendar years, each of
our executive officers and other highly compensated employees may elect to
reduce his or her base salary for the calendar year by an amount not less than
$10,000 nor more than $50,000. Each selected individual who makes such an
election will automatically be granted, on the first trading day in January of
the calendar year for which his or her salary reduction is to be in effect, an
option to purchase that number of shares of common stock determined by dividing
the salary reduction amount by two-thirds of the fair market value per share of
our common stock on the grant date. The option will have an exercise price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the option will be structured so that the fair market
value of the option shares on the grant date less the exercise price payable
for those shares will be equal to the amount of the salary reduction. The
option will become exercisable in a series of 12 equal monthly installments
over the calendar year for which the salary reduction is to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant for 10,000 shares of common stock on the date such
individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 2,500 shares of common stock,
provided such individual has served on the board for at least six months.
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Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per share, any shares purchased under the option that are not vested at the
time of the optionee's cessation of board service. The shares subject to each
initial 10,000-share automatic option grant will vest in a series of three
successive annual installments upon the optionee's completion of each year of
board service over the three-year period measured from the grant date. The
shares subject to each annual 2,500-share automatic option grant will vest upon
the optionee's completion of one year of board service measured from the grant
date. However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a portion
of any cash retainer fee for the year to the acquisition of a below-market
option grant. The option grant will automatically be made on the first trading
day in January in the year for which the non-employee board member would
otherwise be paid the cash retainer fee in the absence of his or her election.
The option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date, and the number of shares
subject to the option will be determined by dividing the amount of the retainer
fee applied to the program by two-thirds of the fair market value per share of
our common stock on the grant date. As a result, the option will be structured
so that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the portion of the
retainer fee applied to that option. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon the death or disability of the optionee while
serving as a board member.
Additional Program Features. Our 1999 plan will also have the following
features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than September 2009.
1999 Employee Stock Purchase Plan
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board
in September 1999 and was approved by the stockholders in December 1999. The
plan became effective immediately upon the signing of the underwriting
agreement for this offering. The plan is designed to allow our eligible
employees and the eligible employees of our participating subsidiaries to
purchase shares of our common stock, at semi-annual intervals, with their
accumulated payroll deductions.
Share Reserve. 500,000 shares of our common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
in January of each year from 2001 through 2005, by an
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amount equal to 1% of the total number of outstanding shares of our common
stock on the last trading day in December in the prior year. In no event will
any such annual increase exceed 1,000,000 shares.
Offering Periods. The plan will have a series of successive overlapping
offering periods with a new offering period beginning on the first business day
of February and August each year and each continuing for a period of 24 months.
However, the initial offering period will start on the date the underwriting
agreement for the offering is signed and will end on the last business day in
January 2002.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date of that period. Employees may participate in only one offering
period at a time.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the start date of the offering period or, if lower, 85% of the fair
market value per share on the semi-annual purchase date. Semi-annual purchase
dates will occur on the last business day of January and July each year. The
first purchase date will occur on the last business day of July 2000. In no
event, however, may any participant purchase more than 750 shares on any
purchase date, and not more than 125,000 shares may be purchased in total by
all participants on any purchase date.
Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and participants in that offering period will automatically be
enrolled in the new 24-month offering period beginning on the next business
day.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than 50% of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the start date of the offering period in
which the acquisition occurs or, if lower, 85% of the fair market value per
share immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of July
2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
Employment Contracts, Termination of Employment Arrangements and Change in
Control Arrangements
In March 1997, we entered into a letter agreement with Mr. Smith to serve as
our Vice President of Business Development and General Manager of Multi-Brand
Stores. Mr. Smith's base annualized salary for his services was $90,000.
Pursuant to the agreement, this base annualized salary was increased to
$135,000 when we completed a venture financing in June 1998. Additional terms
under the agreement are as follows.
. Mr. Smith received options to purchase 224,740 shares of our common
stock in March 1997 at an exercise price of $0.082 per share. Of these
options, 56,184 vested on July 1, 1997 and the remaining options are
vesting in a series of 36 monthly installments over the period of Mr.
Smith's service measured from July 1, 1997. These options will vest in
full if we complete an initial public offering or if we are acquired.
However, Mr. Smith will not receive accelerated vesting in connection
with an acquisition if the acceleration would make the acquisition
ineligible for selected accounting treatment.
. Mr. Smith also received options to purchase 156,666 shares of our common
stock in December 1997 at an exercise price of $ 0.082 per share. Of
these options, 39,166 vested on July 1, 1997, 39,166
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vested upon our closing of a venture financing in June, 1998 and the
remaining options are vesting thereafter in a series of equal monthly
installments of 3,263 shares until July 1, 2000.
In June 1998, we entered into an employment agreement with Mr. Harrington
to serve as our President, Chief Operating Officer and a member of our board
of directors. The agreement was amended in September 1999. Mr. Harrington's
base salary for his services was initially $150,000 per year and was increased
to $170,000 per year in 1999 when Mr. Harrington became our Chief Executive
Officer. Additional terms under the agreement are as follows.
. Mr. Harrington is eligible to receive a bonus of up to 20% of his base
salary based on the achievement of performance goals that are mutually
agreeable to Mr. Harrington and the board of directors.
. Mr. Harrington also received options to purchase 800,000 shares of our
common stock at an exercise price of $0.082 per share. The options are
vesting in 48 equal monthly installments over Mr. Harrington's period of
service with us. However, the options will become fully vested if we are
acquired and the successor corporation does not assume the options or if
Mr. Harrington is involuntarily terminated within 12 months following an
acquisition. In addition, if Mr. Harrington is terminated by us for any
reason other than cause at any time other than within 12 months
following an acquisition, he will receive a payment of $200,000 or one
full year of salary, whichever is greater, an additional 333,333 option
shares will accelerate and Mr. Harrington will provide services to us as
a consultant for a period of six months during which time he will
continue to vest in his remaining options.
Mr. Harrington's employment agreement terminates in September 2000 and
automatically renews for successive one year periods, unless terminated
earlier upon death, disability, notice from us, with or without cause, or
voluntary resignation.
In June 1998, we entered into an employment agreement with Mr. Chea to
serve as our Vice President of Technology. Mr. Chea's initial base salary for
his services was $90,000 and was increased to $110,000 per year in 1999 when
Mr. Chea became Vice President, Engineering. Additional terms under the
agreement are as follows.
. Mr. Chea is entitled to receive an annual bonus of up to 20% of his
annual base salary based on the achievement of performance goals.
. Mr. Chea received options to purchase 33,333 shares of our common stock
at an exercise price of $0.082 per share. Of these options, 8,333 vested
on January 1, 1999 and the remainder are vesting in a series of 36 equal
monthly installments thereafter over Mr. Chea's period of service with
us measured from January 1, 1999.
. Mr. Chea granted us the right to repurchase 333,333 shares of his Fogdog
Sports common stock at fair market value if he voluntarily terminates
his employment without good reason. The repurchase right lapses in 30
equal monthly installments over Mr. Chea's period of service with us.
However, the repurchase right lapses with respect to all of the shares
upon the completion of an initial public offering of our common stock,
if we are acquired, if Mr. Chea dies, becomes disabled or terminates his
employment for good cause, if we terminate his employment without cause
or if we hire a technology officer with a senior title, duties and
responsibilities.
. Mr. Chea is entitled to 12 weeks of severance pay if he is terminated
without cause or if he voluntarily departs with good reason.
Mr. Chea's employment agreement terminates in January 2001, unless terminated
earlier upon death, disability, notice from us with or without cause or if he
voluntary resigns.
In April 1999, we entered into an amended and restated employment agreement
with Mr. Allsop to serve as our President of International Division and
Chairman of the Board for a base salary of $105,000 per year.
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Pursuant to the agreement, Mr. Allsop's base salary was increased to $135,000
per year upon Mr. Allsop's relocation to our new London office. Additional
terms under the agreement are as follows.
. Mr. Allsop is entitled to receive a supplement of $8,000 to his base
salary to compensate him for the higher cost of living abroad.
. Mr. Allsop is eligible to receive a bonus of up to 20% of his base
salary upon achievement of performance goals mutually determined by Mr.
Allsop and our chief executive officer.
. Mr. Allsop granted us the right to repurchase 115,555 shares of his
Fogdog Sports common stock at fair market value if he voluntarily
terminates his employment without good reason. The repurchase right
lapses in 26 equal monthly installments over Mr. Allsop's period of
service with us. However, the repurchase right lapses with respect to
all of the shares upon the completion of an initial public offering of
our common stock, if we are acquired or if Mr. Allsop dies, becomes
disabled or terminates his employment for good cause.
. Mr. Allsop is also entitled to 26 additional weeks of salary if he is
terminated without cause.
Mr. Allsop's employment agreement terminates in June 2001, unless terminated
earlier upon death, disability, notice from us with or without cause or
voluntary resignation.
In August 1999, we entered into a letter agreement with Mr. Joyce to serve
as our President. Additional terms under the agreement are as follows.
. Mr. Joyce is entitled to a base salary of $280,000 per year.
. Mr. Joyce is also eligible to receive a target bonus of 20% of his base
salary with the opportunity to earn more through the attainment of
performance goals.
. Mr. Joyce is also entitled to receive options to purchase 666,666 shares
of our common stock, at an exercise price of $1.32 per share, which were
granted on August 26, 1999, and vest over a period of four years in a
series of 48 equal monthly installments over Mr. Joyce's continued
period of service with us. However, if we are acquired within one year
of the date of the agreement and the successor corporation does not
assume Mr. Joyce's options, the options will vest on an accelerated
basis such that 24 months worth of unvested options shall become vested.
. Mr. Joyce also received a grant of options to purchase 83,333 shares of
our common stock, at an exercise price of $1.32 per share, when Nike
USA, Inc. opened a retail account for its premium products with us in
September 1999, which options will vest fully six months from the date
of grant.
. Mr. Joyce is eligible for a reimbursement of $60,000 for relocation
expenses.
In September 1999, our board of directors approved a severance package for
Ms. von Lossberg. Pursuant to this severance package, she is entitled to three
months of salary if she is terminated without cause.
In November 1999, we entered into a letter agreement with Mr. Garrett to
serve as our Vice President, Finance. Additional terms under the agreement are
as follows:
. Mr. Garrett is entitled to a base salary of $240,000 per year.
. Mr. Garrett is also eligible to receive a target bonus of 20% of his
base salary with the opportunity to earn more through the attainment of
performance goals.
. Mr. Garrett is entitled to receive options to purchase 310,000 shares of
our common stock. These options will have an exercise price of $4.50 per
share. Of these options, 38,750 options vest six months from his
employment date, and the remaining options vest in equal monthly
installments of 6,458 options thereafter. However, if we are acquired
within one year of Mr. Garrett's first day of employment and the
successor corporation does not assume his options, the options will vest
on an accelerated basis such that 12 months worth of unvested options
shall become vested.
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Limitation of Liability and Indemnification
Our certificate of incorporation eliminates, to the maximum extent allowed
by the Delaware General Corporation Law, directors' personal liability to
Fogdog Sports or its stockholders for monetary damages for breaches of
fiduciary duties. The certificate of incorporation of Fogdog Sports does not,
however, eliminate or limit the personal liability of a director for the
following:
. any breach of the director's duty of loyalty to Fogdog Sports or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and executive
officers to the fullest extent permitted under the Delaware General Corporation
Law and may indemnify our other officers, employees and other agents as set
forth in the Delaware General Corporation Law. In addition, we have entered
into an indemnification agreement with each of our directors and executive
officers. The indemnification agreements contain provisions that require us,
among other things, to indemnify our directors and executive officers against
liabilities (other than liabilities arising from intentional or knowing and
culpable violations of law) that may arise by reason of their status or service
as directors or executive officers of Fogdog Sports or other entities to which
they provide service at our request and to advance expenses they may incur as a
result of any proceeding against them as to which they could be indemnified. We
believe that these bylaw provisions and indemnification agreements are
necessary to attract and retain qualified directors and officers.
Prior to the consummation of the offering, we will obtain an insurance
policy covering directors and officers for claims they may otherwise be
required to pay or for which we are required to indemnify them.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
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TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
Sales of Securities
Since January 1996, we have raised capital primarily through the sale of our
securities, including:
. In September 1996, we issued to various investors including Novus
Ventures, L.P., the Robert Maxfield Separate Property Trust and
Frederick Gibbons an aggregate of 1,155,554 shares of our Series A
preferred stock for an aggregate consideration of $974,999. At the time
of this transaction, Mr. Gibbons and Mr. Robert Maxfield became
directors of Fogdog, as did Mr. Dan Tompkins, a partner with Novus
Ventures.
. In September 1996, we issued and sold an aggregate of 221,164 shares of
common stock to Robert Maxfield, one of our directors, for an aggregate
consideration of $18,661.
. In September 1996, we issued and sold an aggregate of 110,581 shares of
common stock to Frederick M. Gibbons, one of our directors, for an
aggregate consideration of $9,330.
. In December 1997, we issued to Novus Ventures, L.P., Robert Maxfield and
Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of
our Series A preferred stock at an exercise price of $0.844 per share,
17,778 of which shares were exercised in November 1999 by Novus
Ventures, L.P., and convertible promissory notes in aggregate principal
amount of $162,500 accruing interest at a rate of 8% per annum.
. In May 1998, we issued to Novus Ventures, L.P., Robert Maxfield and
Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of
our Series A preferred stock at an exercise price of $0.844 per share,
17,778 of which shares were exercised in November 1999 by Novus
Ventures, L.P., and convertible promissory notes in aggregate principal
amount of $162,500 accruing interest at a rate of 8% per annum.
. In June 1998, Novus Ventures, L.P., Robert Maxfield and Frederick
Gibbons converted the principal of the convertible promissory notes, a
total of $325,000, into an aggregate of 434,622 shares of our Series B
preferred stock.
. In June 1998, we sold to various investors, including entities
affiliated with Draper Fisher Jurvetson Management and entities
affiliated with Whitney Equity Partners, an aggregate of 6,017,844
shares of our Series B preferred stock for an aggregate consideration of
$4,500,000, which included $75,000 of cancellation of indebtedness. At
the time of the transaction, Draper Fisher Jurvetson and Whitney Equity
Partners became greater than five percent stockholders of Fogdog, and
Draper Fisher Jurvetson and Whitney Equity Partners appointed
representatives to our Board of Directors.
. In March and April 1999, we sold to various investors, including Novus
Ventures, L.P., entities affiliated with Vertex Management, Inc.,
entities affiliated with Draper Fisher Jurvetson Management, entities
affiliated with Whitney Equity Partners, entities affiliated with Sprout
Group, entities affiliated with Marquette Ventures and entities
affiliated with Venrock Associates, an aggregate of 11,657,277 shares of
our Series C preferred stock for an aggregate consideration of
$18,000,000. At the time of the transaction, Vertex Management, Sprout
Group and Venrock Associates became greater than five percent
stockholders of Fogdog, and Sprout Group and Marquette Ventures and
Venrock Associates appointed representatives to our Board of Directors.
. In September 1999, we issued and sold 3,529,410 shares of our Series D
preferred stock for an aggregate purchase price of $15,300,000 to
entities affiliated with Draper Fisher Jurvetson, entities affiliated
with Whitney Equity Partners, entities affiliated with Venrock
Associates, entities affiliated with Sprout Group L.P., entities
affiliated with Marquette Venture Partners and Vertex Technologies Fund
(II) Ltd. We also sold Series D preferred stock to entities affiliated
with Worldview Technology Partners, Boston Millennia Partners, L.P.,
entities affiliated with Lycos Ventures, Hikari Tsushin, Inc., Aman
Ventures L.L.C., Peder Smedvig Capital Venture III and certain
individual investors which are neither officers, directors, nor greater
than five percent stockholders of our company.
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In September 1999, we issued to Nike USA, Inc. a warrant to purchase an
aggregate of 4,114,349 shares of our Series C preferred stock at an exercise
price of $1.54 per share. Upon the consummation of our public offering, this
warrant will automatically become exercisable for 4,114,349 shares of our
common stock.
The following table summarizes the shares of common stock and preferred
stock purchased by our executive officers, directors and five percent
stockholders and persons associated with them since January 1996. The number of
total shares on an as-converted basis reflects a one-to-one conversion to
common stock ratio for each share of Series A, Series B, Series C and Series D
preferred stock.
<TABLE>
<CAPTION>
Warrants Warrants Total
to Purchase to Purchase Shares on
Series A Series B Series C Series D Series A Series C an As-
Common Preferred Preferred Preferred Preferred Preferred Preferred Converted
Investor Stock Stock Stock Stock Stock Stock Stock Basis
-------- --------- --------- --------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Draper Fisher Jurvetson
Management............. -- -- 2,942,058 1,100,964 276,816 -- -- 4,319,838
Entities affiliated with
Whitney Equity
Partners............... -- -- 3,075,788 1,100,964 196,078 -- -- 4,372,830
Novus Ventures.......... -- 983,704 267,460 323,813 -- -- -- 1,574,977
Entities affiliated with
Venrock Associates..... -- -- -- 2,849,556 196,079 -- -- 3,045,635
Entities affiliated with
Vertex Management,
Inc.................... -- -- -- 1,392,396 69,204 -- -- 1,461,600
Entities affiliated with
Sprout Group........... -- -- -- 2,558,124 173,010 -- -- 2,731,134
Nike USA, Inc. ......... -- -- -- -- -- -- 4,114,349 4,114,349
Timothy P. Harrington... 294,444 -- -- -- -- -- -- 294,444
Brett M. Allsop......... 1,133,333 -- -- -- -- -- -- 1,133,333
Marcy E. von Lossberg... 260,528 -- -- -- -- -- -- 260,528
Robert S. Chea.......... 1,150,694 -- -- -- -- -- -- 1,150,694
Frederick M. Gibbons.... 110,581 59,258 33,432 -- -- 5,333 -- 208,604
Robert R. Maxfield...... 221,164 118,518 133,728 -- -- 18,666 -- 492,076
</TABLE>
Holders of shares of our preferred stock and our common stock issued or
issuable upon conversion thereof and some holders of our common stock are
entitled to registration rights. See "Description of Capital Stock--
Registration Rights."
Agreement with Nike USA, Inc.
In September 1999, we entered into an agreement with Nike USA, Inc. pursuant
to which we have the right to market on our web site the generally available
Nike product lines, including Jordan, Bauer, Nike ACG, Nike Golf and Nike Team
Sports. We will receive a discount on the products we purchase. Under the
agreement, we also have advance product availability for mutually agreed upon,
newly released products. The agreement prohibits us from selling any of these
products to consumers with shipping addresses outside of the United States
unless Nike.com is allowed to sell in those countries and the sales do not
constitute a violation of any agreement with any third party. We also agreed to
use Nike USA as the exclusive supplier of Nike brand products, and Nike USA
agreed not to sell its products to any other retailer that sells only on the
Internet, except entities affiliated with Nike customers that derive the
majority of their revenue from traditional retail stores or entities that serve
as web sales outsourcing providers for these Nike customers through March 2000.
Nike USA may terminate the agreement at any time without cause upon 90 days
notice to us, but must pay us a termination fee if it exercises this right
prior to December 31, 2001. We also issued Nike USA a warrant to purchase
4,114,349 shares of our Series C preferred stock at an exercise price of $1.54
per share. Upon the consummation of this offering, this warrant will
automatically become exercisable for 4,114,349 shares of our common stock.
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<PAGE>
Agreements with Officers and Directors
In July 1995, we entered into an employment agreement with Ms. von Lossberg.
Pursuant to the terms of this agreement, we agreed to grant Ms. von Lossberg a
2.5% equity interest in the company after six months of employment and another
2.5% equity interest in December 1995. In August 1996, we entered into an
agreement with Ms. von Lossberg pursuant to which we issued 210,528 shares of
our common stock to Ms. von Lossberg in satisfaction of our obligations under
the prior employment agreement.
In August 1999, Mr. Harrington exercised vested options to purchase 294,444
shares of our common stock for an aggregate purchase price of $35,292. Mr.
Harrington exercised these options by issuing us a promissory note that is
secured by the stock.
In September 1999, Ms. von Lossberg exercised options to purchase 50,000
shares of our common stock for an aggregate purchase price of $4,192. Ms. von
Lossberg exercised these options by issuing us a promissory note that is
secured by the common stock.
We have entered into employment arrangements with our executive officers.
See "Management--Employment Contracts, Termination of Employment Arrangements
and Change in Control Arrangements."
We have granted options and issued common stock to our executive officers
and directors. See "Management--Executive Compensation" and "Principal
Stockholders."
We have entered into an indemnification agreement with each of our executive
officers and directors. See "Management--Limitation of Liability and
Indemnification."
We have entered into non-competition and confidentiality agreements with
some of our officers.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between the company and our officers, directors and principal stockholders and
their affiliates and any transactions between the company and any entity with
which our officers, directors or five percent stockholders are affiliated will
be approved by a majority of the board of directors, including a majority of
the independent and disinterested outside directors of the board of directors
and will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
our common stock as of September 30, 1999, by the following individuals or
groups:
. each person or entity who is known by us to own beneficially more than
5% of our outstanding stock;
. each of the named executive officers;
. each of our directors; and
. all directors and executive officers as a group.
Each stockholder's percentage ownership in the following table is based on
29,665,236 shares of common stock outstanding as of September 30, 1999, as
adjusted to reflect the conversion of all outstanding shares of preferred stock
upon the closing of this offering into 23,425,333 shares of common stock. For
purposes of calculating each stockholder's percentage ownership, all options
and warrants exercisable within 60 days of September 30, 1999 held by the
particular stockholder and that are included in the first column are treated as
outstanding shares. The numbers shown in the table below assume no exercise by
the underwriters of their over-allotment option.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Fogdog, Inc., 500 Broadway, Redwood City, California
94063. Except as otherwise indicated, and subject 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 held by them.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Prior After
Name and Address of Beneficial Owner Owned to Offering the Offering
------------------------------------ ------------ ----------- ------------
<S> <C> <C> <C>
Entities affiliated with Whitney Equity
Partners(1)............................ 4,372,830 14.7% 12.2%
Entities affiliated with Draper Fisher
Jurvetson(2)........................... 4,319,838 14.6 12.1
Nike USA, Inc.(3)....................... 4,114,349 12.2 10.3
Entities affiliated with Sprout Group,
L.P.(5)................................ 2,731,135 9.2 7.7
Entities affiliated with Venrock
Associates(4).......................... 3,045,635 10.3 8.5
Timothy P. Harrington(6)................ 1,333,333 4.3 3.6
Brett M. Allsop(7)...................... 1,160,000 3.9 3.2
Marcy E. von Lossberg(8)................ 377,199 1.3 1.0
Robin R. Smith(9)....................... 421,406 1.4 1.2
Robert S. Chea(10)...................... 1,200,000 4.0 3.4
Frederick M. Gibbons(11)................ 208,605 * *
Peter J. Huff(1)........................ 4,372,830 14.7 12.2
Robert R. Maxfield(12).................. 492,079 1.7 1.4
Warren J. Packard(2).................... 4,319,838 14.6 12.1
Ralph T. Parks(13)...................... 26,666 * *
Lloyd D. Ruth(14)....................... 1,086,780 3.7 3.0
Ray A. Rothrock(4)...................... 3,045,636 10.3 8.5
All directors and executive officers as
a group (13 persons)(15)............... 18,794,370 58.5 49.3
</TABLE>
- --------
* Less than one percent.
(1) Principal address is 177 Broad Street, Stamford, CT 06901. Represents
4,269,942 shares of common stock held by J.H. Whitney III, L.P. and
102,888 shares of common stock held by Whitney Strategic Partners III,
L.P. Mr. Huff disclaims beneficial ownership of all of these shares except
to the extent of his pecuniary interest in entities affiliated with
Whitney Equity Partners.
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<PAGE>
(2) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
Represents 4,017,450 shares of common stock held by Draper Fisher
Associates Fund IV, L.P. and 283,011 shares of common stock and 19,377
shares of common stock held by Draper Fisher Partners IV, L.P. Mr. Packard
disclaims beneficial ownership of all of these shares except to the extent
of his pecuniary interest in entities affiliated with Draper Fisher
Jurvetson.
(3) Principal address is One Bowerman Drive, Beaverton, OR 97005. Represents
warrants held by Nike USA, Inc. to purchase 4,114,349 shares of common
stock at an exercise price of $1.54 per share.
(4) Principal address is 2494 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
Represents 1,248,710 shares of common stock held by Venrock Associates and
1,796,925 shares of common stock held by Venrock Associates II, L.P. Mr.
Rothrock disclaims beneficial ownership of all of these shares except to
the extent of his pecuniary interest in entities affiliated with Venrock
Associates.
(5) Principal address is 3000 Sand Hill Road, Building 3, Suite 170, Menlo
Park, CA 94025-7114. Includes 7,914 shares of common stock held by DLJ
Capital Corp., 206,432 shares of common stock held by DLJ ESC II, L.P.,
2,372,288 shares of common stock held by Sprout Capital VIII, L.P. and
142,338 shares of common stock held by Sprout Venture Capital, L.P.
(6) Includes 1,038,888 shares of common stock issuable upon the exercise of
immediately exercisable options.
(7) Includes 66,666 shares of common stock issuable upon the exercise of
immediately exercisable options.
(8) Includes 116,666 shares of common stock issuable upon the exercise of
immediately exercisable options.
(9) Includes 421,406 shares of common stock issuable upon the exercise of
immediately exercisable options.
(10) Includes 49,306 shares of common stock issuable upon the exercise of
immediately exercisable options.
(11) Principal address is 11800 Murieta Lane, Los Altos Hills, CA 94022.
Includes warrants to purchase 5,333 shares of common stock at an exercise
price of $0.8438 per share.
(12) Principal address is 12930 Saratoga Avenue, Suite B-3, Saratoga, CA 95070.
Includes warrants to purchase 18,666 shares of common stock at an exercise
price of $0.8438 per share.
(13) Represents 26,666 shares of common stock issuable upon the exercise of
immediately exercisable options.
(14) Principal address is 520 Lake Cook Road, Suite 450, Deerfield, IL 60015.
Represents 1,086,780 shares of common stock held by Marquette Venture
Partners III, L.P. Mr. Ruth disclaims beneficial ownership of all of these
shares except to the extent of his pecuniary interest in Marquette Venture
Partners III, L.P.
(15) Includes 2,469,601 shares of common stock issuable upon the exercise of
options and warrants.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
At the closing of this offering, we will be authorized to issue 100,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value, after giving effect to the amendment of our
certificate of incorporation to delete references to the existing preferred
stock following conversion of that stock. The following description of capital
stock gives effect to the certificate of incorporation to be filed upon closing
of this offering. Immediately following the completion of this offering, and
assuming no exercise of the underwriters' over-allotment option, based on the
number of shares outstanding as of September 30, 1999, an aggregate of
35,665,236 shares of common stock will be issued and outstanding, and no shares
of preferred stock will be issued and outstanding.
The following description of our capital stock is subject to and qualified
by our certificate of incorporation and bylaws, which are included as exhibits
to the registration statement of which this prospectus forms a part, and by the
provisions of the applicable Delaware law.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock that may come into existence,
the holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy." In the event of
our liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Our common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be outstanding
upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of preferred stock may possess voting, dividend,
liquidation and redemption rights superior to those of the common stock. The
rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of our outstanding voting
stock. We have no present plans to issue any shares of or designate any series
of preferred stock.
Warrants
At September 30, 1999, there were warrants outstanding to purchase a total
of 4,319,131 shares of our common stock expiring through March 2003.
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 27,533,333 shares of common stock and warrants to purchase
approximately 4,133,333 shares of our common stock will be entitled to certain
rights with respect to the registration of the shares under the Securities Act.
Nike USA, Inc. has three
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<PAGE>
separate demand registration rights. These rights are provided under the terms
of agreements between us and the holders of these securities. If we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, these holders are entitled to notice of the registration and are
entitled to include shares of common stock in the registration. The rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering subject to the registration to limit the number of shares
included in the registration. Holders of these rights may also require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect the registration, subject to conditions and limitations.
Furthermore, stockholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations.
Compliance with California Law
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of
record by persons having addresses in California and the majority of the
company's operations occur in California. For example, while we are subject to
Section 2115, stockholders may cumulate votes in electing directors. This means
that each stockholder may vote the number of votes equal to the number of
candidates multiplied by the number of votes to which the stockholder's shares
are normally entitled in favor of one candidate. This potentially allows
minority stockholders to elect some members of the board of directors. When we
are no longer subject to Section 2115, cumulative voting will not be allowed
and a holder of 50% or more of our voting stock will be able to control the
election of all directors. In addition to this difference, Section 2115 has the
following additional effects:
. enables removal of directors with or without cause with majority
stockholder approval;
. places limitations on the distribution of dividends;
. extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of
shares; and
. provides for information rights and required filings in the event we
effect a sale of assets or complete a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Our certificate of incorporation authorizes our board to establish one or
more series of undesignated preferred stock, the terms of which can be
determined by our board at the time of issuance. See "--Preferred Stock." Our
certificate of incorporation also provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by written consent.
In addition, our certificate of incorporation and bylaws do not permit our
stockholders to call a special meeting of stockholders. Only our Chief
Executive Officer, President, Chairman of the Board or a majority of the board
of directors are permitted to call a special meeting of stockholders. Our
certificate of incorporation also provides that the board of directors is
divided into three classes, with each director assigned to a class with a term
of three years, and that the number of directors may only be determined by the
board of directors. Our bylaws require that stockholders give advance notice to
our secretary of any nominations for director or other business to be brought
by stockholders at any stockholders' meeting, and that the chairman of the
board has the authority to adjourn any meeting called by the stockholders. Our
bylaws also require a supermajority vote of members of the board of directors
and/or
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<PAGE>
stockholders to amend certain bylaw provisions. These provisions of our
restated certificate of incorporation and our bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of the
company. These provisions also may have the effect of preventing changes in the
management of the company. See "Risk Factors--Provisions of our certificate of
incorporation and bylaws may make changes of control difficult, even if they
would be beneficial to stockholders."
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by:
(i) persons who are directors and also officers; and
(ii) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
Our transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company. Its telephone number is (212) 845-3200.
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SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale
will have on the market price of common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering we will have 35,665,236 shares of
common stock outstanding assuming no exercise of the underwriters' over-
allotment option. The number of shares of common stock to be outstanding after
this offering is based on the number of shares outstanding as of September 30,
1999, and excludes:
. 4,502,885 shares of common stock issuable upon the exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $1.05 per share, all of which are immediately
exercisable; however, those shares which have not yet vested are subject
to repurchase by the company;
. 6,296,631 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan that incorporates our Amended and Restated 1996
Stock Option Plan;
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan;
. 4,114,349 shares of common stock issuable upon exercise of an
outstanding warrant held by Nike USA, Inc. of an exercise price of $1.54
per share; and
. 204,782 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share.
Of the outstanding shares, all of the shares sold in this offering will be
freely tradable, except that any shares held by our "affiliates," as that term
is defined in Rule 144 promulgated under the Securities Act, may only be sold
in compliance with the limitations described below. The remaining 29,602,871
shares of common stock will be deemed "restricted securities" as defined under
Rule 144. Restricted shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act, which rules are summarized below.
Subject to the lock-up agreements described below and the provisions of Rules
144, 144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ------------------------------------------------------------------
<C> <S>
6,062,366 After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock-up
24,569,910 After 180 days from the date of this prospectus, the 180-day lock-
up is released and these shares are saleable under Rule 144
(subject, in some cases, to volume limitations) or Rule 144(k)
1,236,885 After 180 days from the date of this prospectus, the 180-day lock-
up is released and these shares are saleable under Rule 701
(subject to repurchase by the Company)
3,796,076 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including any of our
affiliates, who has beneficially owned shares for at least one year, including
the holding period of any prior owner who is not an affiliate, is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed
76
<PAGE>
the greater of one percent of the then-outstanding shares of our common stock,
which will be approximately 356,000 shares immediately after this offering, or
the average weekly trading volume in our common stock during the four calendar
weeks preceding the date on which notice of such sale is filed, subject to
certain restrictions. In addition, a person who is not deemed to have been an
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell these shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, a person's holding period for the purpose of effecting a
sale under Rule 144 would commence on the date of transfer from the affiliate.
Stock Options
As of September 30, 1999, options to purchase a total of 4,502,885 shares of
common stock were outstanding, all of which were currently exercisable but were
subject to repurchase upon termination of employment until vested. We intend to
file a Form S-8 registration statement under the Securities Act to register all
shares of common stock issuable under our 1999 Stock Incentive Plan and our
1999 Employee Stock Purchase Plan. Accordingly, shares of common stock
underlying these options will be eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreements described below. See
"Management--Benefit Plans."
Lock-up Agreements
We have agreed, and each of our officers and directors and substantially all
of our securityholders have agreed, subject to specified exceptions, not to,
without the prior written consent of Credit Suisse First Boston Corporation,
sell, otherwise dispose of any shares of our common stock or options to acquire
shares of our common stock or take any action to do any of the foregoing during
the 180-day period following the date of this prospectus. Credit Suisse First
Boston Corporation may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, pursuant to the terms of its warrant, Nike USA agreed that it would
sell no more than a specified percentage of the stock issuable upon exercise of
the warrant at each of the first, second and third year anniversaries of the
warrant. Further, pursuant to the terms of the warrant that we issued to an
individual in September 1999, this individual agreed that he would sell no more
than a specified percentage of the stock issuable upon exercise of the warrant
at each six month interval for the first two years that he holds the warrant.
See "Underwriting."
Following this offering, under specified circumstances and subject to
customary conditions, holders of approximately 27,533,333 shares of our
outstanding common stock and warrants to purchase approximately 4,133,333
shares of our common stock will have registration rights with respect to their
shares of common stock, subject to the 180-day lock-up arrangement described
above, to require us to register their shares of common stock under the
Securities Act. If the holders of these registrable securities request that we
register their shares, and if the registration is effected, these shares will
become freely tradable without restriction under the Securities Act. Any sales
of securities by these stockholders could have a material adverse effect on the
trading price of our common stock. See "Description of Capital Stock--
Registration Rights."
77
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated December 8, 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc., Thomas Weisel Partners LLC and Warburg Dillon Read LLC are
acting as representatives, the following respective numbers of shares of common
stock:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation...................... 2,534,400
Thomas Weisel Partners LLC.................................. 1,267,200
J.P. Morgan Securities Inc.................................. 1,056,000
Warburg Dillon Read LLC..................................... 422,400
George K. Baum & Company.................................... 120,000
E*Offering Corp............................................. 120,000
W.R. Hambrecht + Co., Inc................................... 120,000
Invemed Associates LLC...................................... 120,000
The Robinson-Humphrey Company, LLC.......................... 120,000
Charles Schwab & Co., Inc................................... 120,000
---------
Total..................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 900,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.47 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid by
us..................... $0.77 $0.77 $4,620,000 $5,313,000
Expenses payable by us.. $0.25 $0.22 $1,500,000 $1,500,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and substantially all of our existing
stockholders and option holders have agreed not to offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act of 1933 relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any of our
common stock, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus, except in our case issuances pursuant to the exercise of employee
stock options outstanding on the date hereof.
78
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to 510,000 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act of 1933, or to contribute to payments which the
underwriters may be required to make in that respect.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "FOGD."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price has been determined by negotiation
between us and the representatives. The principal factors considered in
determining the public offering price included the following:
. the information included in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as lead or co-manager on over
60 public offerings of equity securities that have been completed. Thomas
Weisel Partners does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
79
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of the common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or such persons outside of Canada.
Notice to British Columbia Residents
A purchaser of the common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any common stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one
such report must be filed in respect of common stock acquired on the same date
and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of the common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
80
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys at the firm
of Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 22,867
shares of our common stock. Pillsbury Madison & Sutro LLP, San Francisco and
Palo Alto, California, is acting as counsel for the underwriters in connection
with selected legal matters relating to the shares of common stock offered by
this prospectus.
EXPERTS
The financial statements of Fogdog, Inc. as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Sports Universe, Inc. as of December 31, 1998
and for the period from February 9, 1998 (inception) through December 31, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating
to the common stock offered. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to us and the shares we are
offering pursuant to this prospectus, you should refer to the registration
statement and its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other document filed as an exhibit to the registration
statement. You may read or obtain a copy of the registration statement at the
commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference room
by calling the commission at 1-800-SEC-0330. The commission maintains a web
site that contains reports, proxy information statements and other information
regarding registrants that file electronically with the commission. The address
of this web site is http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish other reports as we may determine or as may
be required by law.
81
<PAGE>
FOGDOG, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FOGDOG, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit)................... F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to the Consolidated Financial Statements............................. F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Financial Information............................... F-24
Pro Forma Consolidated Statements of Operations............................ F-25
Notes to the Pro Forma Consolidated Financial Information.................. F-27
SPORTS UNIVERSE, INC. FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-28
Balance Sheet.............................................................. F-29
Statement of Operations.................................................... F-30
Statement of Stockholders' Deficit......................................... F-31
Statement of Cash Flows.................................................... F-32
Notes to the Financial Statements.......................................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Fogdog, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit), and
of cash flows present fairly, in all material respects, the financial position
of Fogdog, Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 28, 1999,
except for Note 11, which
is as of December 6, 1999
F-2
<PAGE>
FOGDOG, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
---------------- September 30, September 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 311 $ 1,694 $ 21,880
Short-term investments......... -- 423 --
Accounts receivable, net of
allowances of $5, $35 and $96,
respectively.................. 93 75 205
Merchandise inventory.......... -- -- 722
Prepaid expenses and other
current assets................ 14 132 733
------- ------- --------
Total current assets......... 418 2,324 23,540
Property and equipment, net...... 162 470 1,621
Intangible assets, net........... -- 46 2,480
Other assets, net................ -- -- 29,650
------- ------- --------
Total assets..................... $ 580 $ 2,840 $ 57,291
======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 60 $ 705 $ 2,841
Notes payable to stockholders.. 155 -- --
Current portion of long-term
debt.......................... 252 606 554
Other current liabilities...... 123 423 2,214
------- ------- --------
Total current liabilities.... 590 1,734 5,609
Long-term debt, less current
portion......................... 3 189 342
Commitments and contingencies
(Note 5)
Stockholders' equity (deficit):
Convertible Preferred Stock,
issuable in series, $0.001 par
value, 14,200 and 41,797
shares authorized at
December 31, 1998 and
September 30, 1999
(unaudited), respectively;
1,786, 8,239 and 23,425 shares
issued and outstanding at
December 31, 1997 and 1998 and
September 30, 1999
(unaudited), respectively;
5,000 shares authorized; no
shares issued and outstanding
pro forma (unaudited)......... 2 8 24 $ --
Common Stock, $0.001 par value,
50,000 and 72,000 shares
authorized at December 31,
1998 and September 30, 1999
(unaudited), respectively;
4,547, 4,886 and 6,240 shares
issued and outstanding at
December 31, 1997, 1998 and
September 30, 1999
(unaudited), respectively;
100,000 shares authorized;
29,665 (unaudited) shares
issued and outstanding pro
forma......................... 5 5 6 30
Additional paid-in capital..... 1,642 7,664 82,592 82,592
Notes receivable............... -- -- (94) (94)
Unearned stock-based
compensation.................. -- (978) (10,270) (10,270)
Accumulated deficit............ (1,662) (5,782) (20,918) (20,918)
------- ------- -------- --------
Total stockholders' equity
(deficit)................... (13) 917 51,340 $ 51,340
------- ------- -------- ========
Total liabilities and
stockholders' equity (deficit).. $ 580 $ 2,840 $ 57,291
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended
31, September 30,
------------------------ -----------------
1996 1997 1998 1998 1999
------ ------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Merchandise.................... $ -- $ -- $ 195 $ -- $ 2,542
Commission..................... -- 11 123 69 35
Web development................ 677 1,030 447 447 --
------ ------- ------- ------- --------
Total net revenues........... 677 1,041 765 516 2,577
------ ------- ------- ------- --------
Cost of revenues:
Merchandise.................... -- -- 157 -- 2,070
Commission..................... -- -- 19 12 --
Web development................ 90 156 99 99 --
------ ------- ------- ------- --------
Total cost of revenues....... 90 156 275 111 2,070
------ ------- ------- ------- --------
Gross profit..................... 587 885 490 405 507
------ ------- ------- ------- --------
Operating expenses:
Marketing and sales............ 686 1,285 2,399 997 10,807
Site development............... 119 259 1,318 737 2,205
General and administrative..... 248 378 705 457 1,181
Amortization of intangible
assets........................ -- -- -- -- 144
Amortization of stock-based
compensation.................. -- -- 243 125 1,582
------ ------- ------- ------- --------
Total operating expenses..... 1,053 1,922 4,665 2,316 15,919
------ ------- ------- ------- --------
Operating loss................... (466) (1,037) (4,175) (1,911) (15,412)
Interest income (expense), net... (3) (8) 29 2 276
Other income..................... -- -- 26 26 --
------ ------- ------- ------- --------
Net loss......................... (469) (1,045) (4,120) (1,883) (15,136)
Deemed preferred stock dividend.. -- -- -- -- (12,918)
------ ------- ------- ------- --------
Net loss available to common
stockholders.................... $ (469) $(1,045) $(4,120) $(1,883) $(28,054)
====== ======= ======= ======= ========
Basic and diluted net loss per
share available to common
stockholders.................... $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04)
====== ======= ======= ======= ========
Basic and diluted weighted
average shares used in
computation of net loss per
share available to common
stockholders.................... 3,631 4,544 4,323 4,391 4,645
====== ======= ======= ======= ========
Pro forma basic and diluted net
loss per share (unaudited)...... $ (0.43) $ (1.33)
======= ========
Pro forma basic and diluted
weighted average shares
(unaudited)..................... 9,622 21,058
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Total
Stock Common Stock Additional Unearned Stockholders'
------------- ------------- Paid-In Notes Stock-Based Accumulated Equity
Shares Amount Shares Amount Capital Receivable Compensation Deficit (Deficit)
------ ------ ------ ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- 3,211 $ 4 $ 122 $ -- $ -- $ (148) $ (22)
Issuance of Series A
Preferred Stock, net... 1,155 1 -- -- 944 -- -- -- 945
Issuance of Common
Stock.................. -- -- 1,331 1 27 -- -- -- 28
Net loss................ -- -- -- -- -- -- -- (469) (469)
------ ---- ----- --- ------- ---- -------- -------- -------
Balance at December 31,
1996................... 1,155 1 4,542 5 1,093 -- -- (617) 482
Issuance of Series A
Preferred Stock, net... 631 1 -- -- 527 -- -- -- 528
Issuance of warrants to
purchase Series A
Preferred Stock........ -- -- -- -- 21 -- -- -- 21
Issuance of Common
Stock.................. -- -- 5 -- 1 -- -- -- 1
Net loss................ -- -- -- -- -- -- -- (1,045) (1,045)
------ ---- ----- --- ------- ---- -------- -------- -------
Balance at December 31,
1997................... 1,786 2 4,547 5 1,642 -- -- (1,662) (13)
Issuance of Series B
Preferred Stock, net... 6,453 6 -- -- 4,774 -- -- -- 4,780
Issuance of Common
Stock.................. -- -- 292 -- 23 -- -- -- 23
Unearned stock-based
compensation........... -- -- -- -- 1,221 -- (1,221) -- --
Amortization of stock-
based compensation..... -- -- -- -- -- -- 243 -- 243
Issuance of Common Stock
for services........... -- -- 47 -- 4 -- -- -- 4
Net loss................ -- -- -- -- -- -- -- (4,120) (4,120)
------ ---- ----- --- ------- ---- -------- -------- -------
Balance at December 31,
1998................... 8,239 8 4,886 5 7,664 -- (978) (5,782) 917
Issuance of Series C
Preferred Stock, net
(unaudited)............ 11,657 12 -- -- 17,911 -- -- -- 17,923
Issuance of Series D
Preferred Stock, net
(unaudited)............ 3,529 4 -- -- 14,646 (50) -- -- 14,600
Issuance of Common Stock
(unaudited)............ -- -- 940 1 231 (44) -- -- 188
Common Stock issued for
acquired business
(unaudited)............ -- -- 267 -- 2,132 -- -- -- 2,132
Unearned stock-based
compensation
(unaudited)............ -- -- -- -- 10,874 -- (10,874) -- --
Amortization of stock-
based compensation
(unaudited)............ -- -- -- -- -- -- 1,582 -- 1,582
Issuance of warrants to
purchase Series C
Preferred Stock
(unaudited)............ -- -- -- -- 28,840 -- -- -- 28,840
Issuance of warrants to
purchase shares of
Common Stock
(unaudited)............ -- -- -- -- 184 -- -- -- 184
Issuance of Common Stock
upon exercise of
warrants (unaudited)... -- -- 147 -- 110 -- -- -- 110
Allocation of discount
on Preferred Stock
(unaudited)............ -- -- -- -- 12,918 -- -- -- 12,918
Deemed Preferred Stock
dividend (unaudited)... -- -- -- -- (12,918) -- -- -- (12,918)
Net loss (unaudited).... -- -- -- -- -- -- -- (15,136) (15,136)
------ ---- ----- --- ------- ---- -------- -------- -------
Balance at September 30,
1999 (unaudited)....... 23,425 $ 24 6,240 $ 6 $82,592 $(94) $(10,270) $(20,918) $51,340
====== ==== ===== === ======= ==== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
----------------------- -----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(469) $(1,045) $(4,120) $(1,883) $(15,136)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Allowances for bad debt and
sales returns................. -- -- 30 20 80
Depreciation and amortization.. 44 105 122 76 242
Amortization of intangible
assets........................ -- -- -- -- 144
Amortization of stock-based
compensation.................. -- -- 243 125 1,582
Non-employee stock-based
expense....................... -- -- 4 -- 475
Changes in assets and
liabilities:
Accounts payable and other
current liabilities......... 80 27 945 340 3,476
Accounts receivable.......... (26) (17) (12) 2 (210)
Other assets................. (18) 8 -- -- (1,084)
Merchandise inventory........ -- -- -- -- (722)
Prepaid expenses and other
current assets.............. (10) 7 (164) (152) (601)
----- ------- ------- ------- --------
Net cash used in operating
activities................ (399) (915) (2,952) (1,472) (11,754)
----- ------- ------- ------- --------
Cash flows from investing
activities:
Purchase of property and
equipment....................... (137) (81) (269) (193) (1,393)
Sale of (purchase of) short-term
investments..................... -- -- (423) (423) 423
----- ------- ------- ------- --------
Net cash used in investing
activities................ (137) (81) (692) (616) (970)
----- ------- ------- ------- --------
Cash flows from financing
activities:
Proceeds from the sale of Common
Stock........................... 28 -- 23 9 298
Proceeds from the sale of
Preferred Stock................. 945 528 4,455 4,455 32,523
Proceeds from (payments under)
term loan....................... 35 (70) 266 129 599
Payments under capital leases.... (14) (21) (15) (15) (3)
Proceeds from (payments under)
line of credit.................. -- 237 186 186 (423)
Payments under software loan..... -- -- (58) -- (84)
Proceeds from (payments under)
notes payable to stockholders... (23) 162 170 170 --
----- ------- ------- ------- --------
Net cash provided by
financing activities...... 971 836 5,027 4,934 32,910
----- ------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents.................. 435 (160) 1,383 2,846 20,186
Cash and cash equivalents at the
beginning of the period........... 36 471 311 311 1,694
----- ------- ------- ------- --------
Cash and cash equivalents at the
end of the period................. $ 471 $ 311 $ 1,694 $ 3,157 $ 21,880
===== ======= ======= ======= ========
Supplemental disclosure of cash
flow information:
Interest paid.................... $ 6 $ 14 $ 57 $ 29 $ 67
===== ======= ======= ======= ========
Supplemental disclosure of noncash
transactions:
Conversion of note to Series B
Preferred Stock................. $ -- $ -- $ 325 $ 325 $ --
===== ======= ======= ======= ========
Software purchased under loan
agreement....................... $ -- $ -- $ 161 $ 19 $ --
===== ======= ======= ======= ========
Issuance of stock in exchange for
notes .......................... $ -- $ -- $ -- $ -- $ 94
===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Fogdog, Inc. (the "Company") is an online retailer of sporting goods. The
Company's online retail store, "fogdog.com," offers products, detailed product
information and personalized shopping services. During 1997 and 1998, the
Company also provided web development services to sporting goods manufacturers,
trade associations and retailers. The Company was incorporated in California in
October 1994 as Cedro Group, Inc. and in November 1998, changed its name to
Fogdog, Inc.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Sports Universe, Inc. All significant
intercompany accounts have been eliminated.
Unaudited interim results
The interim consolidated financial statements as of September 30, 1999 and
for the nine months ended September 30, 1998 and 1999 are unaudited. In the
opinion of management, these interim consolidated financial statements have
been prepared on the same basis as the audited financial statements and reflect
all adjustments, consisting only of normal, recurring adjustments necessary for
the fair presentation of the results of interim periods. The financial data and
other information disclosed in these notes to the consolidated financial
statements for the related periods are unaudited. The results of the interim
periods are not necessarily indicative of the results to be expected for any
future periods.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term investments
The Company's investments are classified as available-for-sale. Unrealized
gains or losses have been insignificant for all periods.
Merchandise inventory
Inventory is stated at the lower of cost or market, determined on a first-
in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets, generally three years, or the remaining lease term.
Web development costs
Web development costs primarily consist of costs to develop software which
enables users to access information on the customer's web site. Web development
costs incurred prior to technological feasibility
F-7
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
are expensed as incurred and are included in site development expense. The
Company defines establishment of the technological feasibility as the
completion of a working model. Software development costs incurred subsequent
to the establishment of technological feasibility throughout the period of
market availability of the web site are capitalized. Costs eligible for
capitalization have been insignificant for all periods presented.
Intangible assets
Purchased intangible assets are presented at cost, net of accumulated
amortization, and are amortized using the straight line method over the
estimated useful life of the assets. At each balance sheet date, the Company
assesses the value of recorded intangible assets for possible impairment in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," ("SFAS 121"), based upon a number of factors including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows. Since inception, the Company has not recorded any
provisions for possible impairment of intangible assets. In October 1998, the
Company purchased the mailing list, Internet domain name and client database
from Sportscape.com for $55,000. The Company is amortizing the balance over a
twelve month period.
Revenue recognition
Merchandise revenue is earned by the Company from the sale of sporting goods
through its online retail store. Merchandise revenue is recognized upon the
shipment of the merchandise, which occurs only after credit card authorization
is obtained. For sales of merchandise, the Company is responsible for
establishing prices, processing the orders, and forwarding the information to
the manufacturer, distributor or third-party warehouse for shipment. For these
transactions, the Company assumes credit risk and is responsible for processing
returns. The Company provides for estimated returns at the time of shipment
based on historical data.
Commission revenue was earned by the Company from catalog partners for
transactions processed through the Company's online retail store. Revenue was
recognized when the order was transmitted to the catalog partner. In commission
sales, the Company processed orders in exchange for a commission on the sale of
the vendor's merchandise. At the conclusion of the sale, the Company forwarded
the order information to the vendor, which then charged the customer's credit
card and shipped the merchandise directly to the customer. In a commission sale
transaction, the Company did not take title or possession of the merchandise,
and the vendor assumed all the risk of credit card chargebacks. The Company
also earned commission revenue from transactions processed on several client
sites. Commission revenue from these transactions has been immaterial to date.
Revenue from web development services was recognized when the client's site
had either been placed on-line or completed to the client's satisfaction, the
Company had the right to invoice the customer, collection of the receivable was
probable and there were no significant obligations remaining.
Advertising costs
Advertising costs are expensed as in accordance with Statement of Position
93-7, "Reporting on Advertising Costs." Advertising expense for the years ended
December 31, 1996, 1997, 1998 and the nine months ended September 30, 1998 and
1999 were $12,000, $64,000, $541,000, $154,000, and $3.9 milion, respectively.
F-8
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Site development costs
Site development costs include costs incurred by the Company to develop and
enhance the Company's web site. Site development costs are expensed as
incurred.
Net loss per share
Basic net loss per share available to common stockholders is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of shares of Common Stock outstanding during the
period. Diluted net loss per share available to common stockholders is computed
by dividing the net loss available to common stockholders for the period by the
weighted average number of common and potential common equivalent shares
outstanding during the period. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. Potential
common shares are composed of Common Stock subject to repurchase rights,
incremental shares of Common Stock issuable upon the exercise of stock options
and warrants and incremental shares of Common Stock issuable upon conversion of
Preferred Stock. For the nine months ended September 30, 1999, net loss per
share available to common stockholders includes a charge of $12.9 million to
reflect the deemed preferred stock dividend recorded in connection with the
Series D Preferred Stock financing.
The following table sets forth the computation of basic and diluted net loss
per share available to common stockholders for the periods indicated (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended
31, September 30,
------------------------ -----------------
1996 1997 1998 1998 1999
------ ------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss...................... $ (469) $(1,045) $(4,120) $(1,883) $(15,136)
Deemed Preferred Stock
dividend..................... -- -- -- -- (12,918)
------ ------- ------- ------- --------
Net loss available to Common
Stockholders................. $ (469) $(1,045) $(4,120) $(1,883) $(28,054)
====== ======= ======= ======= ========
Denominator:
Weighted average shares....... 3,631 4,544 4,728 4,691 5,117
Weighted average Common Stock
subject to repurchase
agreements................... -- -- (405) (300) (472)
------ ------- ------- ------- --------
Denominator for basic and
diluted calculation.......... 3,631 4,544 4,323 4,391 4,645
====== ======= ======= ======= ========
Basic and diluted net loss per
share available to common
stockholders................. $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04)
====== ======= ======= ======= ========
</TABLE>
F-9
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
The following table sets forth the weighted average potential shares of
Common Stock that are not included in the diluted net loss per share available
to common stockholders calculation above because to do so would be antidilutive
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
---------------- --------------
1996 1997 1998 1998 1999
---- ----- ----- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average effect of dilutive
securities:
Series A Preferred Stock.................. 177 777 1,786 1,786 1,786
Series B Preferred Stock.................. -- -- 3,513 2,509 6,452
Series C Preferred Stock.................. -- -- -- -- 8,097
Series D Preferred Stock.................. -- -- -- -- 78
Warrants to purchase Series A Preferred
Stock.................................... -- 1 78 74 89
Warrants to purchase Series C Preferred
Stock.................................... -- -- -- -- 196
Warrants to purchase Common Stock......... -- -- -- -- 54
Employee stock options.................... -- 524 810 587 1,601
Common Stock subject to repurchase
agreements............................... -- -- 405 300 472
--- ----- ----- ------ -------
177 1,302 6,592 5,256 18,825
=== ===== ===== ====== =======
</TABLE>
Income taxes
A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year. A deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any benefits
that, based on available evidence, are not expected to be realized.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
nine months ended September 30, 1999 is computed using the weighted average
number of common shares outstanding, including the conversion of the Company's
Convertible Preferred Stock into shares of the Company's Common Stock effective
upon the closing of the Company's initial public offering, as if such
conversion occurred at January 1, 1998 or at date of original issuance, if
later. The resulting unaudited pro forma adjustment includes an increase in the
weighted average shares used to compute basic and diluted net loss per share of
5,299,000 and 16,413,000 for the year ended December 31, 1998 and the nine
months ended September 30, 1999, respectively. The calculation of pro forma
diluted net loss per share excludes Common Stock subject to repurchase
agreements and incremental Common Stock issuable upon the exercise of stock
options and warrants as the effect would be antidilutive.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. During each of the three years ended
December 31, 1998, and the nine months ended September 30, 1998 and 1999 the
Company has not had any significant adjustments to net loss that are required
to be reported in comprehensive income (loss).
F-10
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of Enterprise and Related Information." During
each of the three years ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 the Company's management focused its business
activities on the marketing and sale of sporting goods over the Internet. Since
management's primary form of internal reporting is aligned with the marketing
and sale of sporting goods, the Company believes it operates in one segment.
Revenue from shipments to customers outside of the United States was 0%, 0%,
6%, 0% and 9% for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1998, and 1999, respectively.
Stock-based compensation
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Under APB 25, unearned compensation is based on the difference, if
any, on the date of the grant, between the fair value of the Company's stock
and the exercise price. Unearned compensation is amortized and expensed in
accordance with Financial Accounting Standards Board Interpretation No. 28
using the multiple-option approach. The Company accounts for stock-based
compensation issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Concentration of risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of cash equivalents, short-term investments
and trade accounts receivable. Cash equivalents and short-term investments,
primarily composed of investments in money market funds and certificates of
deposits, are maintained with two institutions and the composition and
maturities are regularly monitored by management. For accounts receivable, the
Company maintains an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable. Because of their short-
term nature, the carrying value of all financial instruments approximate their
respective fair value.
At December 31, 1997, approximately 47% of accounts receivable represented
amounts due from three different customers related to web development revenues.
At December 31, 1998, two customers accounted for 21% and 15% of accounts
receivable for commission-related revenues. Sales to these customers accounted
for approximately 25% of revenues in 1997. At September 30, 1999, no customer
represented more than 10% of outstanding accounts receivable.
The Company relies on a limited number of product manufacturers and third-
party distributors to fulfill a large percentage of products offered on the
online retail store. While management believes that alternate suppliers could
provide product at comparable terms, the loss of any one manufacturer or
distributor could delay shipments and have a material adverse effect on the
Company's business, financial position and results of operations.
F-11
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The adoption of the provisions of SOP 98-1 during
the fiscal year beginning January 1, 1999, did not have a material effect on
the financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In July 1999, the Financial
Accounting Standards Board issued SFAS No. 137, "Accounting with Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date until the
first fiscal quarter ending June 30, 2000. The Company will adopt SFAS 133 in
its quarter ending June 30, 2000. The Company has not engaged in hedging
activities or invested in derivative instruments.
Note 2--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
December
31,
------------ September 30,
1997 1998 1999
----- ----- -------------
(unaudited)
<S> <C> <C> <C>
Prepaid expenses and other current assets:
Prepaid advertising............................ $ -- $ -- $ 709
Other.......................................... 14 132 24
----- ----- --------
$ 14 $ 132 $ 733
===== ===== ========
Property and equipment:
Computer equipment and software................ $ 230 $ 627 $ 1,447
Office furniture and fixtures.................. 101 134 707
----- ----- --------
331 761 2,154
Less: accumulated depreciation.................. (169) (291) (533)
----- ----- --------
$ 162 $ 470 $ 1,621
===== ===== ========
Other assets:
Deferred alliance costs, net (Note 7).......... $ -- $ -- $ 28,535
Deferred offering costs........................ -- -- 735
Deposits....................................... -- -- 196
Other.......................................... -- -- 184
----- ----- --------
$ -- $ -- $ 29,650
===== ===== ========
Other current liabilities:
Accrued professional fees...................... $ -- $ -- $ 724
Accrued financing fees on Series D financing... -- -- 650
Accrued advertising............................ -- -- 217
Accrued compensation........................... 28 375 582
Other.......................................... 95 48 41
----- ----- --------
$ 123 $ 423 $ 2,214
===== ===== ========
</TABLE>
F-12
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Note 3--Long-Term Debt (in thousands):
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December
31,
------------ September 30,
1997 1998 1999
----- ----- -------------
(unaudited)
<S> <C> <C> <C>
Equipment term loan (a).......................... $ -- $ 134 $ 800
Line of credit (b)............................... 237 423 --
Equipment term loan (b).......................... -- 132 77
Software loan (c)................................ -- 103 19
Capital leases................................... 18 3 --
----- ----- -----
255 795 896
Current portion of long-term debt................ (252) (606) (554)
----- ----- -----
$ 3 $ 189 $ 342
===== ===== =====
</TABLE>
(a) In September 1998, the Company entered into a loan agreement with a bank
which provided borrowings up to $800,000. Borrowings under the agreement
bear interest at the prime rate plus one-half percent (8.25% at December
31, 1998 and September 30, 1999) and are payable in equal monthly
installments over a twenty-four month period beginning in October 1999.
Borrowings for software, furniture, fixtures or telephone equipment are
limited to 75% of the invoice amount. The Company must meet certain
financial covenants in connection with the loan agreement with which it was
in compliance at December 31, 1998. As of September 30, 1999, the Company
was in compliance with all of its financial covenants.
(b) In December 1997, the Company entered into a loan agreement with a bank
which provided for a line of credit and an equipment term loan. Under the
line of credit, the Company was permitted to borrow up to $500,000 and was
required to keep cash on hand to cover the balance outstanding. At December
31, 1998, the Company had short-term investments of $423,000 collateralized
under the agreement. The line of credit bore interest at 8.75%. Interest on
the line was payable monthly. The line was paid off and terminated by the
Company in September 1999. Under the equipment term loan, the Company can
borrow up to $150,000 to be used to purchase capital equipment, furniture,
software or other equipment. The term loan bears interest at the prime rate
plus one percent (8.75% at December 31, 1998 and September 30, 1999) and is
payable in twenty-four equal installments, including interest, commencing
on January 28, 1999. The Company must meet certain financial covenants in
connection with the loan agreement with which it was in compliance at
December 31, 1998 and September 30, 1999.
(c) In October 1998, the Company entered into a loan agreement with a software
company to purchase software. Borrowings under the agreement bear interest
at 7.5% and are payable in equal monthly installments over a twelve month
period beginning in October 1998.
Under the terms of the loan agreements, the Company is prohibited from
paying dividends without approval from the bank.
Note 4--Acquisition
Effective September 3, 1999, the Company merged with Sports Universe, Inc.
("Sports Universe"). Sports Universe sells equipment and apparel for
wakeboarding, waterskiing, inline skating, surfing and skateboarding on the
Internet. The merger was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
values as of the acquisition date. The total purchase price of approximately
$2.1 million consisted of 266,665 shares of Company Common Stock with an
estimated fair value of
F-13
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
approximately $8.00 per share and other acquisition related expenses of
approximately $30,000 primarily of payments for professional fees. The purchase
price was allocated to net tangible liabilities assumed of $451,000 and
goodwill of $2.6 million. The acquired goodwill will be amortized over its
estimated useful life of two years. The results of operations for Sports
Universe have been included in the Company's operations as of September 3,
1999.
The following table summarizes unaudited consolidated information for the
Company and Sports Universe (in thousands except per share amounts), giving
effect to this merger as if it had occurred on February 9, 1998 ("inception")
by consolidating the results of operations of Sports Universe from inception
through the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Pro Forma
--------------------------
Nine Months
Year ended Ended
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Net revenues....................................... $ 944 $ 3,062
Net loss available to common stockholders.......... (5,790) (29,092)
Basic and diluted net loss per share available to
common stockholders............................... $ (1.27) $ (5.96)
</TABLE>
Note 5--Commitments and contingencies:
Operating leases
The Company leases office space under noncancelable operating leases at two
locations, expiring in April 2001 and July 2004. Rent expense totaled $44,000,
$51,000, $157,000, $106,000 and $299,000 for the years ended December 31, 1996,
1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively. The Company sublets one of the spaces for a total of $385,000
through April 2001.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999............................................................ $ 262
2000............................................................ 1,113
2001............................................................ 1,042
2002............................................................ 1,024
2003............................................................ 1,062
Thereafter...................................................... 633
------
$5,136
======
</TABLE>
Distributor and Strategic Agreements
The Company maintains agreements with independent distributors to provide
merchandise. The terms of these agreements are generally one to three years
with optional extension periods. Annual minimum payments under these agreements
are $344,000. The Company is also obligated under the strategic agreement
signed with Nike USA, Inc. ("Nike") (Note 7) to make two installment payments
of $250,000, one of which was paid upon entering the agreement and the second
of which is due upon the earlier of seven days after the closing of the
Company's initial public offering or January 15, 2000. The expense is being
amortized over the life of the strategic agreement.
Advertising
As of September 30, 1999 the Company had commitments for online and
traditional offline advertising of approximately $4.0 million.
F-14
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Other
The Company has entered into employment agreements with five of its officers
which provide for minimum annual salary levels ranging from $110,000 to
$280,000, as well as bonuses of up to 20% of the base salary.
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 6--Income Taxes:
The Company incurred net operating losses for each of the three years ended
December 31, 1998 and accordingly, no provision for income taxes has been
recorded. The tax benefit is reconciled to the amount computed using the
federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1996 1997 1998
----- ----- -------
<S> <C> <C> <C>
Federal statutory benefit............................ $(159) $(355) $(1,400)
State taxes, net of federal benefit.................. (28) (63) (247)
Future benefits not currently recognized............. 187 418 1,550
Nondeductible compensation........................... -- -- 97
----- ----- -------
$ -- $ -- $ --
===== ===== =======
</TABLE>
At December 31, 1998, the Company had approximately $4.3 million of federal
and $4.7 million of state net operating loss carryforwards available to offset
future taxable income which expire at various dates through 2019. Under the Tax
Reform Act of 1986, the amount of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 604 $ 1,843
Accruals and allowances.................................... 45 354
----- -------
Net deferred tax assets................................... 649 2,197
Valuation allowance......................................... (649) (2,197)
----- -------
$ -- $ --
===== =======
</TABLE>
The Company has incurred losses for the years ended December 31, 1997 and
1998. Management believes that based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely than
not that the Company will not be able to realize its deferred tax assets and
thus a full valuation allowance has been recorded at December 31, 1997 and
1998.
F-15
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
Note 7--Convertible Preferred Stock:
Convertible Preferred Stock ("Preferred Stock") consists of the following
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Proceeds
Net of
Shares Per Share Liquidation Issuance
Series Authorized Outstanding Amount Amount Costs
------ ---------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
A..................... 2,813 1,786 $0.84 $ 1,502 $ 1,473
B..................... 9,679 6,453 0.75 4,839 4,780
------ ------ ------- -------
Balance at December 31,
1998................... 12,492 8,239 6,341 6,253
C (unaudited)......... 23,804 11,657 1.54 18,000 17,923
D (unaudited)......... 5,500 3,529 4.34 15,300 14,600
------ ------ ------- -------
Balance at September 30,
1999 (unaudited)....... 41,796 23,425 $39,641 $38,776
====== ====== ======= =======
</TABLE>
The Company recorded a preferred stock dividend of $12.9 million to reflect
the difference between the issuance price of $4.34 and estimated fair value of
the Series D Preferred Stock of $8.00. The holders of Convertible Preferred
have various rights and preferences as follows:
Dividends
Holders of the Series A Preferred Stock are entitled to receive annual
dividends of 8% per share, when and if declared by the Board of Directors prior
to the declaration of dividends to holders of Common Stock. Holders of Series B
Preferred Stock are entitled to receive annual dividends of 8% per share, when
and if declared by the Board of Directors prior to the declaration of dividends
to holders of Series A Preferred Stock and holders of Common Stock. Holders of
Series C Preferred Stock are entitled to receive annual dividends of 8% per
share, when and if declared by the Board of Directors prior to the declaration
of dividends to holders of Series A Preferred Stock, holders of Series B
Preferred Stock and holders of Common Stock. Holders of Series D Preferred
Stock are entitled to receive annual dividends of 8% per share, when and if
declared by the Board of Directors prior to the declaration of dividends to the
holders of Series A Preferred Stock, holders of Series B Preferred Stock,
holders of Series C Preferred Stock and holders of Common Stock.
Conversion
Each share of Series A, Series B, Series C and Series D Preferred Stock is
convertible into shares of Common Stock based on a formula which results in a
one-for-one exchange ratio at September 30, 1999. This formula is subject to
adjustment, as defined, which essentially provides adjustments for holders of
the Preferred Stock in the event of stock splits or combinations. Such
conversion is automatic upon the earlier of (i) the effective date of a public
offering of Common Stock resulting in gross proceeds of at least $10,000,000
and at a price per share of at least $5.77 or (ii) written notice to the
corporation of the preferred stockholders' intent to convert into shares of
Common Stock.
Liquidation
In the event of liquidation, holders of the Series A Preferred Stock are
entitled to a per share distribution in preference to holders of Common Stock
equal to the Series A stated value of $0.8438 plus any declared but unpaid
dividends. The holders of Series B Preferred Stock are entitled to a per share
distribution preference to
F-16
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
holders of Common Stock and Series A Preferred Stock equal to the Series B
stated value of $0.75 plus any declared but unpaid dividends. The holders of
Series C Preferred Stock are entitled to a per share distribution preference to
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
equal to the Series C stated value of $1.5441 plus any declared but unpaid
dividends. The holders of Series D Preferred Stock are entitled to a per share
distribution preference to holders of Common Stock, Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock equal to the Series D
stated value of $4.34 plus any declared but unpaid dividends. In the event
funds are sufficient to make a complete distribution to holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock as described above, the remaining assets will be distributed
ratably among the holders of Common Stock and Series A Preferred Stock and
Series B Preferred Stock and Series C Preferred Stock and Series D Preferred
Stock, assuming conversion of all shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock into
Common Stock. If distributions to holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as
described above would reach an aggregate of $1.688, $1.496, $3.089 and $8.660
per share, respectively, the Common Stock holders would receive the remaining
assets.
Redemption
In connection with the Series B Preferred Stock share issuance, holders of
Series A Preferred Stock agreed to waive all mandatorily redeemable features
associated with their Preferred Stock. The holders of the Series B, Series C
and Series D have no redemption rights.
Voting
The holders of the Series A Preferred Stock and Series C Preferred Stock,
voting as separate classes, are entitled to elect one director, each, to the
Board. The holders of the Series B Preferred Stock, voting as a separate class,
are entitled to elect two directors to the Board.
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Common Stock, voting together as a single class, are entitled to elect two
additional directors to the Board. In addition, the holders of the Common
Stock, voting together as a class, are entitled to elect two directors.
Additionally, except as required by law, the consent of at least 66-2/3% of the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, each voting as separate classes are required to (i) amend the
articles of incorporation, (ii) establish any class of capital stock with
dividend or liquidation preferences senior to those of the Series A shares or
Series B shares or Series C shares or (iii) increase the authorized number of
Series A Preferred Stock or Series B Preferred Stock or Series C Preferred
Stock. Without the consent of the holders of at least a majority of the number
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock, voting together as a single class, the Company cannot effect any
liquidation.
Warrants for Preferred Stock
In connection with the loan agreement entered into in December 1997, the
Company issued to the bank a warrant to purchase 29,630 shares of Series A
Preferred Stock. The warrant may be exercised at any time between May 1, 1998
and December 24, 2002 at an exercise price of $0.84 per share. The warrant was
recorded as a debt discount at its estimated fair value of $8,000. Amortization
of the discount was recognized as interest expense over the term of the loan
agreement. The warrant automatically converts to a warrant to purchase Common
Stock upon the effective date of an initial public offering.
F-17
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
In connection with the issuance of convertible promissory notes to certain
holders of the Series A Preferred Stock in May 1998 and December 1997, the
Company issued warrants to purchase 35,556 shares of Series A Preferred Stock.
The warrants may be exercised at any time prior to December 26, 2002 at an
exercise price of $0.84 per share. The warrants were recorded as a debt
discount at its estimated fair value of $13,000. Amortization of the discount
is being recognized as interest expense over the term of the promissory notes.
The warrants automatically convert to warrants to purchase Common Stock upon
the effective date of an initial public offering.
In May 1998 and December 1997, the Company issued warrants to purchase
24,000 shares of Series A Preferred Stock to certain members of the Board of
Directors for services. The warrants may be exercised at any time prior to May
22, 2003 and December 26, 2002 at an exercise price of $0.84 per share. The
warrants automatically convert to warrants to purchase Common Stock upon the
effective date of an initial public offering. The estimated fair value of the
warrants was $8,000. The Company has not recorded any expense for the estimated
fair value of the warrants because such amounts were insignificant.
In September 1999, the Company entered into a two-year strategic agreement
with Nike to distribute Nike products over the Company's web site. In exchange
for certain online exclusivity rights, the Company granted Nike a fully-vested
warrant to purchase 4,114,349 shares of Series C Preferred Stock at $1.54 per
share. The warrant automatically converts to a warrant to purchase Common Stock
upon the closing of an initial public offering. The Company will expense the
estimated fair value of the warrant of approximately $28.8 million over the
term of the distribution agreement as marketing and sales expense. The Company
estimated the fair value using the Black-Scholes option model with a per share
value of $8.00 for the Series C Preferred Stock. The unamortized balance at
September 30, 1999 is included in other assets, net.
The Company estimated the fair value of each warrant using the Black-Scholes
option pricing model using the following assumptions:
<TABLE>
<CAPTION>
Year
Ended
December Nine Months
31, Ended
---------- September 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Risk-free interest rate............................ 6.40% 5.46% 5.11%
Expected life (in years)........................... Term Term Term
Dividend yield..................................... 0% 0% 0%
Expected volatility................................ 50% 50% 90%
</TABLE>
Note 8--Common Stock:
At December 31, 1997 and 1998, there were 4,547,000 and 4,886,000 shares
outstanding, respectively, of Common Stock issued to the founders of the
Company, affiliates and other nonrelated parties. At September 30, 1999, there
were 6,241,000 shares outstanding of Common Stock. A portion of the shares sold
are subject to a right of repurchase by the Company subject to vesting. At
December 31, 1997 and 1998 and September 30, 1999, there were approximately 0,
870,000 and 739,000 shares, respectively, subject to repurchase.
In September 1997, the Board of Directors approved a two-for-one stock split
of the Company's Common Stock and Preferred Stock with a corresponding
adjustment to outstanding stock options. All common and preferred share and per
share data in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split.
F-18
<PAGE>
FOGDOG, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
During the year ended December 31, 1998, the Company issued 47,413 shares of
Common Stock to consultants in exchange for services. In connection with these
issuances, the Company recorded expenses of $4,000 based on the fair value of
the Common Stock on the date of grant as determined by the Board of Directors.
The Board in determining the fair value of the common stock considered, among
other things, the relative level of revenues and other operating results, the
absence of a public trading market for the Company's securities and the
competitive nature of the Company's market.
The Company has reserved shares of Common Stock for issuance as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
1999
-------------
(unaudited)
<S> <C>
Conversion of Series A...................................... 1,786
Conversion of Series B...................................... 6,453
Conversion of Series C...................................... 11,657
Conversion of Series D...................................... 3,529
Common Stock issued......................................... 6,240
Exercise of options under the Equity Incentive Plans........ 8,863
Exercise of warrants issued for Common Stock................ 116
Exercise of warrants issued for Series A Preferred Stock.... 89
Exercise of warrants issued for Series C Preferred Stock.... 4,114
Undesignated................................................ 29,153
------
72,000
======
</TABLE>
The above shares do not include shares reserved under the 1999 Stock and
ESPP Plan (See Note 10).
Warrants for Common Stock
In November 1998, the Company issued fully-vested warrants to purchase
146,667 shares of Common Stock to certain investors for services provided. The
warrants were exercisable at the option of the holder at any time prior to
March 7, 1999 at an exercise price of $0.75 per share. The estimated fair value
of the warrants was $2,000. The Company has not recorded any expense for the
estimated fair value of the warrants because such amount was insignificant. The
warrants were fully exercised in May 1999.
In March 1999, the Company issued a fully-vested warrant to purchase 64,762
shares of Common Stock to a distributor in exchange for exclusivity rights. The
warrant is exercisable at the option of the holder at any time prior to March
31, 2000 at an exercise price of $1.54 per share. The warrant is recorded as a
marketing and sales expense at its estimated fair value of $26,000 over the
term of the distribution agreement.
In May 1999, the Company issued a fully-vested warrant to purchase 4,166
shares of Common Stock to a distributor in exchange for exclusivity rights. The
warrant is exercisable at the option of the holder at any time prior to May 31,
2000, at an exercise price of $4.50 per share. The estimated fair value of the
warrant was $3,000. The Company has not recorded any expense for the estimated
fair value of the warrants because such amount was insignificant.
In September 1999, the Company issued fully-vested warrants to purchase
46,667 shares of Common Stock to distributors in exchange for exclusivity
rights. The warrants are exercisable at the option of the holders at any time
prior to March 31, 2000 at an exercise price of $4.50 per share. The warrants
are recorded as marketing and sales expenses at their estimated fair values of
$184,000 over the term of their respective distribution agreements.
F-19
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
The Company estimated the fair value of each warrant using the Black-Scholes
option pricing model using the following assumptions:
<TABLE>
<CAPTION>
Year
Ended
December Nine Months
31, Ended
--------- September 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Risk-free interest rate............................. -- 5.46% 4.88%
Expected life (in years)............................ -- Term Term
Dividend yield...................................... -- 0% 0%
Expected volatility................................. -- 50% 90%
</TABLE>
Note 9--Stock Option Plan:
In November 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the "Plan") providing for the issuance of incentive and nonstatutory stock
options to employees, consultants and outside directors of the Company. The
Plan was amended in April 1999 to increase the number of shares authorized for
issuance to a total of 10,100,274.
Options may be granted at an exercise price at the date of grant of not less
than the fair market value per share for incentive stock options and not less
than 85% of the fair market value per share for nonstatutory stock options,
except for options granted to a person owning greater than 10% of the total
combined voting power of all classes of stock of the Company, for which the
exercise price of the option must be not less than 110% of the fair market
value. The fair market value of the Company's Common Stock is determined by the
Board of Directors or a committee thereof.
Options granted under the Plan generally become exercisable at a rate of 25%
after the first year and ratable each month over the next three years and
expire no later than five years after the grant date.
The following table summarizes information about stock option transactions
under the Plan (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
--------------------------------- September 30,
1997 1998 1999
---------------- ---------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 1,199 $0.083 2,404 $ 0.083
Granted below fair
value.................. -- -- 1,931 0.083 3,427 1.42
Granted at fair value... 1,231 0.083 13 0.083 --
Exercised............... (5) 0.083 (292) 0.083 (940) .25
Canceled................ (27) 0.083 (447) 0.083 (388) .26
------ ----- --------
Outstanding at end of
period................. 1,199 0.083 2,404 0.083 4,503 1.05
====== ===== ========
Options vested.......... -- 504 825
====== ===== ========
Weighted average fair
value of options
granted during the
period................. $0.083 $ 0.72 $ 4.71
====== ====== ========
</TABLE>
At September 30, 1999, the Company had 4,360,504 shares available for future
grant under the Plan.
F-20
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
--------------------------------
Weighted
Average
Remaining Weighted
Contractual Average
Number Life Exercise
Outstanding (in years) Price
Exercise Price ----------- ----------- --------
<S> <C> <C> <C>
$0.083......................................... 504 2.74 $0.083
</TABLE>
The following table summarizes the information about stock options
outstanding and exercisable as of September 30, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
--------------------------------
Weighted
Average
Remaining Weighted
Contractual Average
Number Life Exercise
Outstanding (in years) Price
Exercise Price ----------- ----------- --------
<S> <C> <C> <C>
$0.083......................................... 825 2.41 $0.083
</TABLE>
The weighted average remaining contractual life of stock options outstanding
at December 31, 1998 and September 30, 1999 was 2.91 and 3.3 years,
respectively.
Fair value disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its stock option plan. Had compensation expense for options granted for the
years ended December 31, 1997 and 1998 and the nine months ended September 30,
1998 and 1999 been determined based on the fair value at the grant date as
prescribed by SFAS No. 123, the Company's net loss and net loss per share would
have decreased to the pro forma amounts indicated below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------- -------------------
1997 1998 1998 1999
------- ------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net loss available to common
stockholders:
As reported.......................... $(1,045) $(4,120) $ (1,883) $ (28,054)
======= ======= ======== =========
Pro forma............................ $(1,048) $(4,018) $ (1,823) $ (27,119)
======= ======= ======== =========
Basic and diluted net loss per share
available to common stockholders:
As reported.......................... $ (0.23) $ (0.95) $ (0.43) $ (6.04)
======= ======= ======== =========
Pro forma............................ $ (0.23) $ (0.93) $ (0.42) $ (5.84)
======= ======= ======== =========
</TABLE>
F-21
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ --------------------
1997 1998 1998 1999
----------- ----------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Risk-free interest rates........ 5.13-5.64% 4.06-5.15% 5.13-5.15% 4.34-5.50%
Expected lives (in years)....... 5 5 5 5
Dividend yield.................. 0% 0% 0% 0%
Expected volatility............. 0% 0% 0% 0%
</TABLE>
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in preceding paragraph, the above
results may not be representative of future periods.
Unearned stock-based compensation
In connection with certain stock option grants, during the year ended
December 31, 1998 and the nine months ended September 30, 1999, the Company
recognized unearned stock-based compensation totaling $1,221,000 and
$10,874,000, respectively, which is being amortized over the vesting periods of
the related options, which is generally four years, using the multiple option
approach. Amortization expense recognized for the year ended December 31, 1998
and the nine months ended September 30, 1999 totaled approximately $243,000 and
$1,582,000, respectively. In determining the fair market value on each grant
date, the Company considered among other things, the relative level of revenues
and other operating results, the absence of a public trading market for the
Company's securities and the competitive nature of the Company's market.
Note 10--Related Party Transactions:
In December 1997 and May 1998, certain holders of Series A Preferred Stock
received from the Company convertible promissory notes in exchange for
$325,000. The notes bore interest at 8% per annum. Under the terms, the notes
automatically converted into Series B Preferred Stock at the price per share
paid by the outside investors. The notes were converted into 386,905 shares of
Series B Preferred Stock in June 1998.
Note 11--Subsequent Events:
Reincorporation
In September 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 100,000,000 shares of
$0.001 par value Common Stock and 5,000,000 shares of $0.001 par value
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. The par value of the
Preferred Stock and shares of Common Stock and Preferred Stock authorized in
the consolidated balance sheet at December 31, 1997 and 1998 and in
consolidated statement of stockholders' equity for each of the three years in
the period ended December 31, 1998 have been retroactively adjusted to reflect
the reincorporation.
Stock Split
In November 1999, the Company's Board of Directors approved a two for three
reverse stock split of the outstanding shares of common and convertible
redeemable preferred stock.
F-22
<PAGE>
FOGDOG, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine months ended September 30, 1998 and 1999 is
unaudited)
All share and per share amounts in these consolidated financial statements
and notes thereto for all periods presented have been retroactively adjusted to
reflect the stock split.
Stock option grant (unaudited)
During October, November and December 1999, the Company granted options to
purchase 667,910 shares of Common Stock to new employees at a weighted average
exercise price of $4.97. In connection with these stock option grants, the
Company will recognize $4.0 million in unearned stock-based compensation that
will be recognized as an expense over the related vesting periods.
1999 Stock Plans (unaudited)
In September 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan (the "1999 Plan"), which will serve as the successor plan to the
1996 Plan. The Board of Directors also approved a 1999 Employee Stock Purchase
Plan (the "1999 ESPP"). These plans will become effective immediately prior to
the completion of an initial public offering. The common stock reserved for
future issuances under these plans will be 18% of the shares of Common Stock
outstanding immediately after the initial public offering. Additionally, the
share reserve in each plan will automatically increase on the first trading day
in January each year, beginning with calendar year 2000, equal to the lesser of
(i) the number of shares initially reserved for such increase in each
respective plan, (ii) 4.25% and 0.75% of the then outstanding shares for the
1999 Plan and the 1999 ESPP, respectively, or (iii) an amount determined by the
Board of Directors.
F-23
<PAGE>
FOGDOG, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Effective September 3, 1999, Fogdog, Inc. ("Fogdog") merged with Sports
Universe, Inc. ("Sports Universe"). Sports Universe sells equipment and apparel
for wakeboarding, waterskiing, inline skating, surfing and skateboarding on the
Internet. The merger was accounted for using the purchase method of accounting
and accordingly the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their fair values at
the acquisition date. The total purchase price of approximately $2.1 million
consisted of 266,665 shares of Fogdog Common Stock with an estimated fair value
of approximately $8.00 per share and other acquisition related expenses of
approximately $30,000, consisting primarily of payments for professional fees.
The purchase price was allocated to net tangible liabilities assumed of
$451,000 and goodwill of $2.6 million. The acquired goodwill will be amortized
over its estimated useful life of two years.
The following unaudited pro forma consolidated statements of operations
gives effect to this merger as if it had occurred on February 9, 1998
("inception"), by consolidating the results of operations of Sports Universe
from inception through December 31, 1998 and the nine months ended September
30, 1999 with the results of operations of Fogdog. The unaudited pro forma
consolidated statements of operations are not necessarily indicative of the
operating results that would have been achieved had the transaction been in
effect as of December 31, 1998 and should not be construed as being
representative of future operating results.
The historical financial statements of Fogdog and Sports Universe are
included elsewhere in this Prospectus and the unaudited pro forma consolidated
financial information presented herein should be read in conjunction with those
financial statements and related notes.
F-24
<PAGE>
FOGDOG, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------------
Sports
Universe,
Fogdog, Inc. Inc. Adjustments Pro Forma
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.................... $ 2,577 $ 485 $ -- $ 3,062
Cost of revenues................ 2,070 327 -- 2,397
-------- ----- ----- --------
Gross profit.................... 507 158 -- 665
-------- ----- ----- --------
Operating expenses:
Marketing and sales........... 10,807 121 -- 10,928
Site development.............. 2,205 -- -- 2,205
General and administrative.... 1,181 214 -- 1,395
Amortization of intangible
assets....................... 144 -- 861 (A) 1,005
Amortization of stock-based
compensation................. 1,582 -- -- 1,582
-------- ----- ----- --------
Total operating expenses.... 15,919 335 861 17,115
-------- ----- ----- --------
Operating loss.................. (15,412) (177) (861) (16,450)
Interest income, net............ 276 -- -- 276
-------- ----- ----- --------
Net loss........................ (15,136) (177) (861) (16,174)
Deemed preferred stock
dividend....................... (12,918) -- -- (12,918)
-------- ----- ----- --------
Net loss available to common
stockholders................... $(28,054) $(177) $(861) $(29,092)
======== ===== ===== ========
Pro forma basic and diluted loss
per share available to common
stockholders (B)............... $ (6.04) $ (5.96)
======== ========
Pro forma basic and diluted
weighted average shares used in
computation of pro forma net
loss per share available to
common stockholders............ 4,645 4,885
======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
F-25
<PAGE>
FOGDOG, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------
Sports
Universe,
Fogdog, Inc. Inc. Adjustments Pro Forma
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.................... $ 765 $ 179 $ -- $ 944
Cost of revenues................ 275 126 -- 401
------- ----- ------- -------
Gross profit.................... 490 53 -- 543
------- ----- ------- -------
Operating expenses:
Marketing and sales........... 2,399 261 -- 2,660
Site development.............. 1,318 -- -- 1,318
General and administrative.... 705 278 -- 983
Amortization of intangible
assets....................... -- -- 1,184 (A) 1,184
Amortization of stock-based
compensation................. 243 -- -- 243
------- ----- ------- -------
Total operating expenses.... 4,665 539 1,184 6,388
------- ----- ------- -------
Operating loss.................. (4,175) (486) (1,184) (5,845)
Interest income, net............ 29 -- -- 29
Other income.................... 26 -- -- 26
------- ----- ------- -------
Net loss........................ $(4,120) $(486) $(1,184) $(5,790)
======= ===== ======= =======
Pro forma basic and diluted loss
per share (B).................. $ (0.95) $ (1.27)
======= =======
Pro forma basic and diluted
weighted average shares used in
computation of pro forma net
loss per share................. 4,323 4,561
======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
F-26
<PAGE>
FOGDOG INC.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to Fogdog's historical financial
statements and those of Sports Universe to arrive at the pro forma consolidated
financial information.
(A) To record amortization of acquired goodwill totaling $2,583,000 over
the estimated period of benefit of two years.
(B) Pro forma basic and diluted net loss per share available to common
stockholders of the nine month period ended September 30, 1999 and for
the year ended December 31, 1998 was computed using the weighted
average number of common and common equivalent shares outstanding. Pro
forma common equivalent shares, composed of unvested restricted Common
Stock, incremental Common Stock issuable upon the exercise of stock
options, warrants, and outstanding Preferred Stock are included in
diluted net loss per share to the extent such shares are dilutive.
Differences between historical weighted average shares outstanding and
pro forma weighted average shares outstanding used to compute net loss
per share results form the inclusion of shares issued in conjunction
with the acquisition as if such shares were outstanding as of February
9, 1998 (inception of Sports Universe).
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Sports Universe, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Sports Universe, Inc. at December
31, 1998 and the results of its operations and its cash flows for the period
from February 9, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
September 8, 1999
F-28
<PAGE>
SPORTS UNIVERSE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash................................................. $ 10,000 $ 21,000
Accounts receivable.................................. 9,000 44,000
Inventory............................................ -- 20,000
Other current assets................................. 1,000 1,000
--------- ---------
Total current assets............................... 20,000 86,000
Property and equipment, net............................ 83,000 47,000
--------- ---------
Total assets..................................... $ 103,000 $ 133,000
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 43,000 $ 109,000
Accrued liabilities.................................. 166,000 175,000
Capital lease obligations............................ 65,000 48,000
Loan from related parties............................ 312,000 325,000
--------- ---------
Total current liabilities.......................... 586,000 657,000
--------- ---------
Commitments (Note 5)
Stockholders' deficit:
Common stock
Par value $0.001; 25,000,000 shares authorized;
785,000 and 6,346,000 shares outstanding........... 1,000 6,000
Additional paid-in capital........................... 2,000 19,000
Accumulated deficit.................................. (486,000) (549,000)
--------- ---------
Total stockholders' deficit........................ (483,000) (524,000)
--------- ---------
Total liabilities and stockholders' deficit...... $ 103,000 $ 133,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-29
<PAGE>
SPORTS UNIVERSE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from February
9,
1998 (inception) Six
through Months
---------------------- Ended
December 31, June 30, June 30,
1998 1998 1999
------------ --------- --------
(Unaudited)
<S> <C> <C> <C>
Net revenues:
Product.................................... $ 142,000 $ 21,000 $225,000
Web design and other....................... 37,000 7,000 37,000
--------- --------- --------
Total net revenues....................... 179,000 28,000 262,000
--------- --------- --------
Cost of revenues:
Product.................................... 122,000 16,000 139,000
Web design and other....................... 4,000 1,000 16,000
--------- --------- --------
Total cost of revenues................... 126,000 17,000 155,000
--------- --------- --------
Gross profit................................. 53,000 11,000 107,000
--------- --------- --------
Operating expenses:
Marketing and sales........................ 261,000 179,000 67,000
General and administrative................. 278,000 147,000 103,000
--------- --------- --------
Total operating expenses................. 539,000 326,000 170,000
--------- --------- --------
Net loss..................................... $(486,000) $(315,000) $(63,000)
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE>
SPORTS UNIVERSE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
at inception........... 785,000 $1,000 $ 2,000 $ -- $ 3,000
Net loss................ -- -- -- (486,000) (486,000)
--------- ------ ------- --------- ---------
Balance at December 31,
1998................... 785,000 1,000 2,000 (486,000) (483,000)
Issuance of common stock
(unaudited)............ 5,611,000 5,000 17,000 -- 22,000
Repurchase of common
stock (unaudited)...... (50,000) -- -- -- --
Net loss (unaudited).... -- -- -- (63,000) (63,000)
--------- ------ ------- --------- ---------
Balance at June 30, 1999
(unaudited)............ 6,346,000 $6,000 $19,000 $(549,000) $(524,000)
========= ====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-31
<PAGE>
SPORTS UNIVERSE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from February 9, 1998 Six
(inception) through Months
-------------------------------- Ended
December 31, June 30, June 30,
1998 1998 1999
---------------- -------------- --------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $ (486,000) $ (315,000) $(63,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 36,000 15,000 24,000
Gain on sale of fixed assets.... -- -- (6,000)
Changes in assets and
liabilities:
Accounts receivable........... (9,000) (5,000) (35,000)
Inventory..................... -- -- (20,000)
Other current assets.......... (1,000) (1,000) --
Accounts payable.............. 43,000 9,000 88,000
Accrued liabilities........... 166,000 128,000 9,000
-------------- -------------- --------
Net cash used in operating
activities................. (251,000) (169,000) (3,000)
-------------- -------------- --------
Cash flows from investing
activities:
Acquisition of property and
equipment........................ (49,000) (47,000) --
Proceeds from sale of computer
equipment........................ -- -- 18,000
-------------- -------------- --------
Net cash (used in) provided
by investing activities.... (49,000) (47,000) 18,000
-------------- -------------- --------
Cash flows from financing
activities:
Payments on capitalized lease
obligations...................... (7,000) (1,000) (17,000)
Payments on loans from related
parties.......................... (64,000) (41,000) (8,000)
Proceeds on loans from related
parties.......................... 378,000 277,000 21,000
Issuance of common stock.......... 3,000 2,000 --
-------------- -------------- --------
Net cash provided by (used
in) financing activities... 310,000 237,000 (4,000)
-------------- -------------- --------
Net increase in cash................ 10,000 21,000 11,000
Cash at beginning of period......... -- -- 10,000
-------------- -------------- --------
Cash at end of period............... $ 10,000 $ 21,000 $ 21,000
============== ============== ========
Non-cash investing activities:
Computer equipment leases......... $ 71,000 $ 71,000 --
Conversion of employee
compensation to common stock..... -- -- $ 22,000
</TABLE>
The accompanying notes are an integral part of these financial statements
F-32
<PAGE>
SPORTS UNIVERSE, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Information for the period from inception through June 30, 1998
and the six months ended June 30, 1999 is unaudited)
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Sports Universe, Inc. (the "Company"), was incorporated in Delaware on
February 9, 1998 ("Inception") for the purpose of selling equipment and apparel
for wakeboarding, waterskiing, inline skating, snowboarding, surfing and
skateboarding on the Internet.
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 amount of assets liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Revenue recognition
The Company's revenues are derived primarily from sales of products over the
Internet. Revenues related to product sales are recognized upon shipment by the
Company or one of its distribution partners. The Company also derives revenues
from Web design, Web hosting, promotion sales and advertising on its web site.
The Company recognizes revenue on Web design and Web hosting as the service is
provided to the customer and no ongoing obligation exists, and advertising
revenue is recognized over the period the advertising is displayed.
Restricted cash
The Company has cash restricted for use for certain service providers that
process customer credit card orders. This cash is used to pay the service
providers for amounts not paid for by credit card vendors related to customer
orders. As of December 31, 1998 and June 30, 1999 (unaudited), the Company had
restricted cash of $3,000 and $7,000, respectively, included in cash.
Inventory
Inventory is stated at lower of cost or market, cost being determined by the
first-in, first-out method.
Property and equipment
Property and equipment are stated at historical cost. Depreciation is
computed using straight-line method over the estimated useful lives of the
assets. Computer equipment and office furniture and fixtures are depreciated
over three and five years, respectively. For computer equipment under capital
leases, the net present value of future lease payments is capitalized at the
inception of the lease and amortized over the estimated useful lives of the
related asset. From Inception to June 30, 1998 and December 31, 1998 and for
the six months ended June 30, 1999 the Company had depreciation and
amortization expense of $15,000, $37,000, and $23,000, respectively. The
capital leases all have bargain purchase options which allows the Company to
purchase the equipment below fair value at the end of the lease.
Advertising costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs". Advertising costs from
Inception to June 30, 1998 and December 31, 1998 and for the six-month period
ended June 30, 1999 (unaudited) were $19,000, $35,000 and $1,000, respectively.
F-33
<PAGE>
SPORTS UNIVERSE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information for the period from inception through June 30, 1998
and the six months ended June 30, 1999 is unaudited)
Concentration of risks
Financial instruments that potentially subject the Company to a
concentration of credit risk are cash and accounts receivable. Cash is
deposited with a high quality financial institution. The Company's accounts
receivable are derived from revenue earned from customers located in the United
States and are dominated in U.S. dollars. Accounts receivable balances are
typically settled through customer credit cards and, as a result, the majority
of accounts receivable are collected upon processing of credit card
transactions. No customer accounts for more than 10% of the revenues or
accounts receivable as of June 30, 1999 or December 31, 1998.
The Company has a limited number of distribution partners one of which fills
a material portion of Company's customer orders. The Company has a distribution
agreement with this distribution partner. The loss of this distribution partner
could have material adverse effect on Company's statement of operations.
Fair value of financial instruments
The Company's financial instruments, including cash, accounts receivables,
accounts payable, accrued expenses and related party loans, have carrying
amounts which approximate fair value due to relatively short maturity of these
instruments.
Interim financial information
The accompanying balance sheet as of June 30, 1999 and the statements of
operations and of cash flows for the six-month period ended June 30, 1999 and
from Inception to June 30, 1998 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The financial data and other information disclosed in these notes to
financial statements related to these periods is unaudited. The results for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
Note 2--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Property and equipment:
Computer equipment...... $ 39,000 $ 39,000
Computer equipment under
a capital lease........ 71,000 36,000
Furniture and office
equipment.............. 10,000 10,000
-------- --------
120,000 85,000
Less: accumulated
depreciation and
amortization........... (37,000) (38,000)
-------- --------
$ 83,000 $ 47,000
======== ========
Accrued expenses:
Web design.............. $ 62,000 $ 56,000
Advertising expenses.... 33,000 19,000
Legal expenses.......... 47,000 52,000
Payroll expense......... -- 19,000
Rent.................... 21,000 25,000
Other................... 3,000 4,000
-------- --------
$166,000 $175,000
======== ========
</TABLE>
F-34
<PAGE>
SPORTS UNIVERSE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information for the period from inception through June 30, 1998
and the six months ended June 30, 1999 is unaudited)
Note 3--Related Party Transactions:
The Company had loans from two of its key employees totaling $240,000 and
$237,000 as of June 30, 1999 and December 31, 1998, respectively. These
borrowings relate to certain operating expenses which were paid by the employee
and cash infusions made which were made to the Company. These related party
loans do not have a stated maturity and are non-interest bearing.
The Company also had convertible debt with certain investors in the amount
of $85,000 and $75,000 as of June 30, 1999 and December 31, 1998, respectively.
The note holder has the option to convert the debt into common stock or to be
paid in cash one year after issuance of the note. The note automatically
converts to common shares if the Company receives financing at a rate based
upon the fair value of the common stock at the date of conversion, as defined
in the agreement. The notes carried an annual interest rate of 10%.
Note 4--Income Taxes:
The Company incurred a net operating loss for the period from Inception to
December 31, 1998 and accordingly, no provision for income taxes has been
recorded. The tax benefit is reconciled to the amount computed using the
federal statutory rate as follows:
<TABLE>
<CAPTION>
From Inception to
December 31, 1998
-----------------
<S> <C>
Federal statutory benefit.................................. $(157,000)
State taxes, net of federal benefit........................ (28,000)
Future benefits not currently recognized................... 185,000
---------
$ --
=========
</TABLE>
At December 31, 1998, the Company had approximately $461,000 of federal and
$462,000 of state net operating loss carryforwards available to offset future
taxable income which expire at various dates through 2013. Under the Tax Reform
Act of 1986, the amount of and benefits from net operating loss carryforwards
may be impaired or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Note 5--Commitments:
Rent expense under non-cancelable operating lease agreements for the six-
month period ended June 30, 1999 and from Inception to June 30, 1998 and
December 31, 1998 were $7,000, $22,000 and $47,000, respectively.
Future minimum lease payments related to office facilities and computer
equipment under non-cancelable operating and capital leases are $44,000 for
1999, $19,000 for 2000 and $4,000 for 2001. There are no minimum lease payments
due after March 2001.
Note 6--Common Stock:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue common stock, $.001 par value. For the six-months ended June 30, 1999,
the Company issued 6,346,000 shares of Common
F-35
<PAGE>
SPORTS UNIVERSE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information for the period from inception through June 30, 1998
and the six months ended June 30, 1999 is unaudited)
Stock to both employees and non-related parties, respectively. A portion of
these shares, issued to employees are subject to a right of repurchase by the
Company, which lapses generally over a one-year period. At June 30, 1999, there
were 735,000 shares subject to repurchase.
Note 7--Subsequent Events:
On September 3, 1999 the Company merged with Fogdog Acquisition Corp., a
wholly owned subsidiary of Fogdog, Inc.
F-36
<PAGE>
The inside backcover of the prospectus includes:
The following text placed in the center of the page and the Fogdog Sports logo
below the text:
THE DOG KNOWS SPORTS
[Fogdog Sports Logo]
Circling the text described above and the Fogdog Sports logo are the following,
clockwise starting with the top of the page in the center:
[PICTURE OF SOCCER CLEAT EXPERT ADVICE PAGE]
The word "EXPERTISE" appears above the picture of the soccer cleat expert advice
page.
[PICTURE OF RUNNING SHOE SELECTION PAGE]
The word "SELECTION" appears above the picture of the running shoe selection
page.
[PICTURE OF BULLETIN BOARD IN THE OUTDOOR COMMUNITY PAGE]
The word "COMMUNITY" appears above the picture of the bulletin board in the
outdoor community page.
[CLOSE-UP PICTURE OF A JACKET]
The words "DETAILED IMAGERY" appear above the close-up picture of a jacket.
[PICTURE OF PRODUCT INFORMATION FOR SOCCER CLEAT PAGE]
The words "PRODUCT INFORMATION" appear above the picture of the product
information for soccer cleat page.
[PICTURE OF COMPARISON CHART FOR CLIMBING FOOTWEAR PAGE]
The words "COMPARISON CHARTS" appear above the picture of the comparison chart
for climbing footwear page.
[PICTURE OF FOGDOG FETCH BASEBALL AND SOFTBALL BAT CONFIGURATOR PAGE]
The word "CONFIGURATOR" appears above the picture of the Fogdog Fetch baseball
and softball configurator page.
[PICTURE OF CALLAWAY GOLF BRAND PAGE]
The words "TOP BRANDS" appear above the picture of the Callaway Golf brand
page, which includes the Callaway logo.
<PAGE>
[LOGO OF FOG DOG SPORTS]
