<PAGE>
As filed with the Securities and Exchange Commission on November 4, 1999
Registration No. 333-87819
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
the Securities Act of 1933
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FOGDOG, INC.
(Exact name of registrant as specified in its charter)
Delaware 7375 77-0388602
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
500 Broadway
Redwood City, CA 94063
(650) 980-2500
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Timothy P. Harrington
Chief Executive Officer
Fogdog, Inc.
500 Broadway
Redwood City, CA 94063
(650) 980-2500
(Address, including zip code, and telephone number, including area code, of
agent for service)
---------------
Copies to:
Warren T. Lazarow, Esq. Stanton D. Wong, Esq.
David A. Makarechian, Esq. David R. Lamarre, Esq.
Elizabeth H. Lefever, Esq. Colin M. Morris, Esq.
Derrick N.D. Hansen, Esq. Paul C. McCoy, Esq.
Hooman Shahlavi, Esq. Pillsbury Madison & Sutro LLP
Brian E. Covotta, Esq. P.O. Box 7880
Brobeck, Phleger & Harrison LLP San Francisco, California 94120
Two Embarcadero Place (415) 983-1000
2200 Geng Road
Palo Alto, California 94303
(650) 424-0160
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximun Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $.001 per
share................. 6,900,000 $10.00 $69,000,000 $19,182
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</TABLE>
(1) Includes 900,000 shares of Common Stock issuable upon exercise of the
Underwriter's over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
(3) Includes $16,680 previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1999
6,000,000 Shares
[LOGO OF FOGDOG SPORTS]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$8.00 and $10.00 per share. We have applied to list our common stock 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.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 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 , 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............................ 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Financial Data.................................................. 26
Selected Pro Forma Financial Data........................................ 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 40
Management................................................................. 53
Transactions and Relationships with Related Parties........................ 67
Principal Stockholders..................................................... 70
Description of Capital Stock............................................... 72
Shares Available for Future Sale........................................... 75
Underwriting............................................................... 77
Notice to Canadian Residents............................................... 79
Legal Matters.............................................................. 80
Experts.................................................................... 80
Additional Information..................................................... 80
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 , 1999 (25 days after the commencement of this offering), 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 plan to
reincorporate in Delaware prior to the commencement of this offering.
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."
Proposed 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 $1.15 per share;
. 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; and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share.
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;
. assumes 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 before the commencement of
this offering.
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 $ 70,600
Working capital........................................... 17,931 66,651
Total assets.............................................. 57,291 106,011
Long-term liabilities..................................... 342 342
Stockholders' equity...................................... 51,340 100,060
</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 estimated net proceeds from the sale of 6,000,000 shares of
common stock at an assumed initial public offering price of $9.00 per
share after deducting the estimated 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."
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. 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 existing relationships with us or prevent new relationships from being
formed.
10
<PAGE>
We have experienced difficulty in obtaining sufficient product allocations
from some of our key vendors. 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 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
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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.
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
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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. 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 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.
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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 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.
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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 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.
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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. We may also be accused of engaging in
unfair competition or other illegal trade practices although we have not
received claims of this nature to date. 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.
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.
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
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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 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, upon reincorporation into
Delaware, our board
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of directors will be divided into three classes, only one of which will be
elected each year. Our directors will only be 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--Anti-
takeover 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;
. 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.
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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 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
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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.
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.
20
<PAGE>
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."
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.
21
<PAGE>
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 56.3% 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 exercise their options or warrants, you will experience
further dilution. 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 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."
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.
22
<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 $48.7 million at an assumed initial
public offering price of $9.00 per share after deducting the estimated
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 $56.3 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.
23
<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 estimated net proceeds from the sale of
6,000,000 shares of our common stock at an assumed initial public
offering price of $9.00 per share after deducting the estimated
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 82,592 131,306
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 51,340 100,060
------- ------- --------
Total capitalization...................... $51,682 $51,682 $100,402
======= ======= ========
</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 $1.15 per share.
. 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; and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share.
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.
24
<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 an assumed initial public offering
price of $9.00 per share, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses, our pro forma net tangible
book value at September 30, 1999, would have been $97.6 million, or $2.74 per
share. This represents an immediate increase in net tangible book value of
$1.09 per share to existing stockholders and an immediate dilution of $6.26 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $9.00
Pro forma net tangible book value per share at September 30,
1999........................................................... $1.65
Increase per share attributable to new investors................ 1.09
-----
Pro forma as adjusted net tangible book value per share after the
offering......................................................... 2.74
-----
Dilution per share to new investors............................... $6.26
=====
</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 assumed initial public
offering price of $ per share and before deducting the estimated
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% $41,937,000 43.7% $1.41
New public investors....... 6,000,000 16.8 54,000,000 56.3 9.00
---------- ----- ----------- -----
Totals................... 35,665,236 100.0% $95,937,000 100.0%
========== ===== =========== =====
</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 $1.15 per share;
. 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; and
. 204,782 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.97 per share.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. 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.
25
<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) $ (447) $ (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>
26
<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>
27
<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.
28
<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) (370) (598)
Interest income (expense), net.............. -- (1) 4 -- 11
Other income................................ -- -- 3 5 --
--- ---- ---- ---- ----
Net loss................................. (69)% (100)% (539)% (365)% (587)%
=== ==== ==== ==== ====
</TABLE>
29
<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
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<PAGE>
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 $28.8 million,
calculated on a straight-line basis. 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 six months ended June 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 employee stock-based compensation
expenses of approximately $1.5 million for the quarter ending December 31,
1999, $1.5 million for the quarter ending March 31, 2000 and $1.4 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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<PAGE>
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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<PAGE>
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.
33
<PAGE>
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 28
Amortization of intangible
assets................... -- -- -- -- 3 2 8
Amortization of stock-
based compensation....... -- 16 68 47 94 56 56
------ ------ ------ -------- -------- -------- -------
Total operating
expenses............... 234 447 758 943 755 602 593
------ ------ ------ -------- -------- -------- -------
Operating loss.............. (163) (364) (674) (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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<PAGE>
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 second 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 and second 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 $497,000
during the first nine months of 1999.
35
<PAGE>
Our financing activities generated cash of $971,000 during 1996, $836,000
during 1997, $5.0 million during 1998 and $32.4 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, $4.8 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.
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
36
<PAGE>
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.
37
<PAGE>
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 have determined that the
current version of our server software is not Year 2000 compliant and are
upgrading it to a Year 2000 compliant version, which we expect to complete by
the end of November 1999. 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 67% of these entities responded to our request. Of those entities all but
one vendor 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, to assess how its 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 expect our compliance program to be substantially completed by the end of
November 1999. If we encounter delays or are unable to meet this schedule, we
will engage in testing and re-testing of non-compliant areas and develop a back
up plan which we would expect to complete by 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.
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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 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." We believe our affiliates program is 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. We believe we 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. This 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. 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 12/31/02 380,147 480,414
Timothy P. Harrington... 800,000 41.2 0.082 06/02/02 9,123,626 11,530,072
Robin R. Smith.......... -- -- -- -- -- --
Marcy E. von Lossberg... -- -- -- -- -- --
Robert S. Chea.......... 33,333 1.7 0.082 12/31/02 380,147 480,414
</TABLE>
In 1998, we granted options to purchase an aggregate of 1,942,000 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 assumed initial public offering price of $9.00,
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 -- 297,247 --
Timothy P. Harrington... 800,000 -- 7,134,000 --
Robin R. Smith.......... 381,406 -- 3,401,188 --
Marcy E. von Lossberg... 66,666 -- 594,494 --
Robert S. Chea.......... 33,333 -- 297,247 --
</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 will be approved by our
stockholders prior to the consummation of this offering. The 1999 plan will
become effective when the underwriting agreement for this offering is 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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<PAGE>
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 666,667 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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<PAGE>
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 four
successive annual installments upon the optionee's completion of each year of
board service over the four-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 will be approved by the stockholders prior to the
consummation of this offering. The plan will become 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 offering
periods, each with a maximum duration 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. The
next offering period will start on the first business day in February 2002, and
subsequent offering periods will be set by our compensation committee.
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 or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of February and August each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
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 participant's entry date into 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 a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
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 participant's entry date into the
offering period in which an 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
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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 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.
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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. 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 equal to the
fair market value of our common stock on the date of
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the grant. 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.
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
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
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 Juvertson 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............. -- -- 2,942,057 1,100,964 276,816 -- -- 4,319,837
Entities affiliated with
Whitney Equity
Partners............... -- -- 3,075,787 1,100,964 196,078 -- -- 4,372,829
Novus Ventures.......... -- 948,148 267,460 323,813 -- 35,556 -- 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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(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 2,666 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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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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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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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 Equiserve L.P. Its
telephone number is (781) 575-2469.
74
<PAGE>
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 $1.15 per share;
. 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>
4,062,366 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
75
<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. 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."
76
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 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......................
J.P. Morgan Securities Inc..................................
Thomas Weisel Partners LLC..................................
Warburg Dillon Read LLC.....................................
---------
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 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 $ per share. The
underwriters and selling group members may allow a discount of $ 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.. $ $ $ $
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.
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
77
<PAGE>
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.
We have applied to list the shares of common stock 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 will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include 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 LLC has acted as lead or co-manager on
over 30 public offerings of equity securities that have been completed. Thomas
Weisel Partners LLC does not have any material relationship with us or any of
our officers, directors or controlling persons, except with respect to its
contractual relationship with us under 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.
78
<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.
79
<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.
80
<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.
The reincorporation and stock split described in Note 11 to the
consolidated financial statements have not been consummated as of November 4,
1999. When the reincorporation and stock split have been completed, we will be
in position to furnish the following report:
"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 November , 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 $ 2,836
Notes payable to stockholders.. 155 -- --
Current portion of long-term
debt.......................... 252 606 554
Other current liabilities...... 123 423 2,219
------- ------- --------
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 4,543 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 21,059
======= ========
</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 10 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 -- 463
Changes in assets and
liabilities:
Accounts payable and other
current liabilities......... 80 27 945 340 3,476
Accounts receivable.......... (26) (17) (12) (15) (210)
Other assets................. (18) 8 -- -- (1,084)
Merchandise inventory........ -- -- -- -- (722)
Prepaid expenses and other
current assets.............. (10) 7 (164) (125) (601)
----- ------- ------- ------- --------
Net cash used in operating
activities................ (399) (915) (2,952) (1,472) (11,766)
----- ------- ------- ------- --------
Cash flows from investing
activities:
Purchase of property and
equipment....................... (137) (81) (269) (212) (1,393)
Sale of (purchase of) short-term
investments..................... -- -- (423) (423) 423
----- ------- ------- ------- --------
Net cash used in investing
activities................ (137) (81) (692) (635) (970)
----- ------- ------- ------- --------
Cash flows from financing
activities:
Proceeds from the sale of Common
Stock........................... 28 -- 23 (136) 298
Proceeds from the sale of
Preferred Stock................. 945 528 4,455 4,770 32,523
Proceeds from (payments under)
term loan....................... 35 (70) 266 145 611
Payments under capital leases.... (14) (21) (15) (18) (3)
Proceeds from (payments under)
line of credit.................. -- 237 186 192 (423)
Payments under software loan..... -- -- (58) -- (84)
Proceeds from (payments under)
notes payable to stockholders... (23) 162 170 -- --
----- ------- ------- ------- --------
Net cash provided by
financing activities...... 971 836 5,027 4,953 32,922
----- ------- ------- ------- --------
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 $ -- $ --
===== ======= ======= ======= ========
Software purchased under loan
agreement....................... $ -- $ -- $ 161 $ -- $ --
===== ======= ======= ======= ========
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 4,543 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 4,543 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 6,453
Series C Preferred Stock.................. -- -- -- -- 8,097
Series D Preferred Stock.................. -- -- -- -- 79
Warrants to purchase Series A Preferred
Stock.................................... -- 1 77 74 89
Warrants to purchase Series C Preferred
Stock.................................... -- -- -- -- 196
Warrants to purchase Common Stock......... -- -- -- -- 55
Employee stock options.................... -- 524 810 587 1,601
Common Stock subject to repurchase
agreements............................... -- -- 405 300 472
--- ----- ----- ------ -------
177 1,302 6,591 5,256 18,828
=== ===== ===== ====== =======
</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 16,415,000 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........................ $ -- $ -- $ 28,561
Deferred offering costs........................ -- -- 709
Deposits....................................... -- -- 190
Other.......................................... -- -- 190
----- ----- --------
$ -- $ -- $ 29,650
===== ===== ========
Other current liabilities:
Accrued professional fees...................... $ -- $ -- $ 729
Accrued financing fees on Series D financing... -- -- 650
Accrued advertising............................ -- -- 217
Accrued compensation........................... 28 375 582
Other.......................................... 95 48 41
----- ----- --------
$ 123 $ 423 $ 2,219
===== ===== ========
</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>
Distributors
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.
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 USA, Inc. ("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 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...................................... 6,452
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........ 5,497
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................................................
------
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 64,763
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 4,167
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 1.15
====== ===== ========
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.
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 Six
9, Months
1998 (inception) Ended
through June 30,
----------------------- 1999
<S> <C> <C> --------
December 31, June 30,
1998 1998
------------ ---------
<CAPTION>
(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>
The back cover of the prospectus contains Fogdog Sports logo.
[LOGO OF FOGDOG SPORTS]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fees and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 19,182
NASD Filing Fee.................................................. 7,400
Nasdaq National Market Listing Fee............................... 75,000
Printing and Engraving Expenses.................................. 275,000
Legal Fees and Expenses.......................................... 650,000
Accounting Fees and Expenses..................................... 350,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent Fees.............................................. 15,000
Miscellaneous.................................................... 98,418
----------
Total.......................................................... $1,500,000
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit the
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of our bylaws
provides for mandatory indemnification of our directors and officers and
permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Our certificate of
incorporation provides that, subject to Delaware law, our directors will not
be personally liable for monetary damages for breach of the directors'
fiduciary duty as directors to Fogdog Sports and its stockholders. This
provision in the certificate of incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the company or our
stockholders for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. We have entered into indemnification agreements with our officers and
directors, a form of which will be filed with the Securities and Exchange
Commission as an exhibit to our registration statement on Form S-1 (No. 333-
87819). The indemnification agreements provide our officers and directors with
further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is also made to Section 7 of the
underwriting agreement contained in exhibit 1.1 hereto, indemnifying our
officers and directors against certain liabilities, and section 1.11 of the
Third Amended and Restated Registration Rights Agreement contained in exhibit
4.2 hereto, indemnifying the parties thereto, including controlling
stockholders, against liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, the registrant has issued unregistered
securities to a limited number of persons as described below. All share
numbers and per share prices have been adjusted to reflect a two for three
reverse stock split to be effective immediately prior to the consummation of
this offering.
(a) Since inception, the registrant has issued an aggregate of
1,133,333 shares of its common stock to Brett M. Allsop in exchange for
services rendered in connection with the organization of the company and
valued at approximately $30,000.
(b) Since inception, the registrant has issued an aggregate of
1,133,333 shares of its common stock to Robert S. Chea in exchange for
services rendered in connection with the organization of the company and
valued at approximately $30,000.
(c) Since inception, the registrant has issued an aggregate of
1,133,333 shares of its common stock to Andrew Y. Chen in exchange for
services rendered in connection with the organization of the company and
valued at approximately $30,000.
(d) Since inception, the registrant has issued and sold an aggregate of
200,000 shares of its common stock to Michael Allsop for an aggregate
consideration of $10,000.
(e) Since inception, the registrant has issued and sold an aggregate of
200,000 shares of its common stock to James Allsop for an aggregate
consideration of $10,000.
(f) Since inception, the registrant has issued and sold an aggregate of
200,000 shares of its common stock to Jon Allsop for an aggregate
consideration of $10,000.
(g) Since inception, the registrant has issued and sold an aggregate of
210,528 shares of its common stock to Marcy E. von Lossberg in exchange for
services rendered to the company during her first year of employment
pursuant to the terms of her employment agreement entered in July 1995. See
"Transactions and Relationships with Related Parties--Agreements with
Officers and Directors."
(h) Since inception, the registrant has issued and sold an aggregate of
221,164 shares of its common stock to Robert Maxfield for an aggregate
consideration of $18,661.
(i) Since inception, the registrant has issued and sold an aggregate of
110,581 shares of its common stock to Frederick M. Gibbons for an aggregate
consideration of $9,330.
(j) In September 1996, the registrant issued and sold 1,155,554 shares
of its Series A preferred stock to Novus Ventures, L.P., the Robert
Maxfield Separate Property Trust, William Romans and Frederick Gibbons for
an aggregate purchase price of $974,999.
(k) In May 1997, the registrant issued and sold 622,224 shares of its
Series A preferred stock to Marianne Allsop, Richard K. Morse, Lazy A Land
Company LLC, Jamey Allsop, Skye Allsop and BSJR, Inc. for an aggregate
purchase price of $525,001.
(l) In October 1997, the registrant issued and sold 8,400 shares of its
Series A preferred stock to Enterprise Law Group for an aggregate purchase
price of $7,088.
(m) In December 1997, the registrant issued to Imperial Bank warrants
to purchase 29,630 shares of its Series A preferred stock at an exercise
price of $0.84375 per share.
(n) In December 1997, the registrant issued to Novus Ventures, L.P.,
Robert Maxfield and Frederick Gibbons warrants to purchase an aggregate of
29,778 shares of its Series A preferred stock at an exercise price of
$0.84375 per share and convertible promissory notes in aggregate principal
amount of $162,500 accruing interest at a rate of 8% per annum.
(o) In May 1998, the registrant issued to Novus Ventures, L.P., Robert
Maxfield and Frederick Gibbons warrants to purchase an aggregate of 29,778
shares of its Series A preferred stock at an exercise price of $0.84375 per
share and convertible promissory notes in aggregate principal amount of
$162,500 accruing interest at a rate of 8% per annum.
(p) 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 the registrant's
Series B preferred stock.
II-2
<PAGE>
(q) In June 1998, the registrant issued and sold 6,017,844 shares of
its Series B preferred stock to entities affiliated with Whitney Equity
Partners and entities affiliated with Draper Fisher (now Draper Fisher
Jurvetson Management) for an aggregate purchase price of $4,500,000, which
included $75,000 of cancellation of indebtedness.
(r) In August 1998, the registrant issued and sold 47,413 shares of its
common stock to A&R Partners, Inc. in exchange for past services valued at
$3,912.
(s) In November 1998, the registrant issued to Sequoia Partners
warrants to purchase 146,666 shares of its common stock at an exercise
price of $0.75 per share. In February 1999, Sequoia Partners exercised such
warrants for 29,333 shares in the name of Patricia M. Baehr Residual Trust,
44,000 shares in the name of Borenstein Family Trust, and 73,333 shares in
the name of Makena Partners, L.P. for an aggregate purchase price of
$110,000.
(t) In March 1999, the registrant issued to iTurf, Inc. warrants to
purchase 64,762 shares of its common stock at an aggregate exercise price
of $100,000.
(u) In March and April 1999, the registrant issued and sold 11,657,277
shares of its Series C preferred stock to Novus Ventures, L.P., entities
affiliated with Vertex Technologies, Glynn Investment Co., LLC, Intel
Corporation, entities affiliated with Venrock Associates, entities
affiliated with Draper Fisher Jurvetson, entities affiliated with Whitney
Equity Partners, entities affiliated with Sprout Group L.P., entities
affiliated with DLJ Capital Corp., entities affiliated with Marquette
Venture Partners and approximately fifteen other investors for an aggregate
purchase price of $18,000,000.
(v) In August 1999, in connection with the acquisition of Sports
Universe, Inc., the registrant issued 266,665 shares of its common stock in
exchange for all outstanding shares of Sports Universe, Inc.'s capital
stock.
(w) In September 1999, the registrant issued to Nike USA, Inc. a
warrant to purchase 4,114,349 shares of its Series C preferred stock at an
exercise price of $1.54 per share.
(x) In September 1999, prior to the filing of the Registration Statement,
the registrant issued and sold 3,529,410 shares of its Series D preferred
stock 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, Vertex Technology Fund (II) Ltd., 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 Ventures III and two other investors
for an aggregate purchase price of $15,300,000.
(y) In September 1999, the registrant issued to Fromuth Tennis, Inc.,
one of the registrant's suppliers, warrants to purchase 33,333 shares of
its common stock at an exercise price of $3.00 per share.
(z) In May 1999, the registrant issued to distribution partners
warrants to purchase 4,166 shares of its common stock at an exercise price
of $4.50 per share.
(aa) Since its inception, the registrant has granted stock options to
its employees, directors and consultants under its 1996 Amended and
Restated Stock Option Plan, exercisable for up to an aggregate of 6,602,154
shares of its common stock, with exercise prices ranging from $0.0825 to
$4.50.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or
Rule 701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof,
and appropriate legends were affixed to the share certificates and instruments
issued in these transactions. All recipients had adequate access, through
their relationships with us, to information about us.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the exhibit Index are filed as part of this
registration statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated August 13, 1999, by and
among the registrant, Fogdog Acquisition Corp., Sports Universe, Inc.
and certain principal stockholders of Sports Universe, Inc.
3.1** Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2** Amended and Restated Bylaws, to be effective upon consummation of
this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2** Third Amended and Restated Registration Rights Agreement, dated March
3, 1999, April 16, 1999, and September 23, 1999, by and among the
registrant and the parties who are signatories thereto.
4.3** Warrant to Purchase Series A Preferred Stock, dated December 24,
1997, by and between the registrant and Imperial Bank.
4.4 Warrant to Purchase Series C Preferred Stock, dated September 23,
1999, by and between the registrant and Nike USA, Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered.
10.1** Registrant's Amended and Restated 1996 Stock Option Plan.
10.2 Registrant's 1999 Stock Incentive Plan.
10.3 Registrant's 1999 Employee Stock Purchase Plan.
10.4** Form of registrant's Directors and Officers' Indemnification
Agreement.
10.5+** Agreement, dated June 30, 1999, by and between the registrant and
America Online Inc.
10.6** Amended and Restated Loan Agreement, dated September 16, 1998, by and
between the registrant and Imperial Bank.
10.7** Sublease, dated July 14, 1999, by and between the registrant and
Ampex Corporation.
10.8** Letter Agreement, dated December 9, 1997, by and between the
registrant and Robin Smith.
10.9 Amended and Restated Employment Agreement, effective September 17,
1999, by and between the registrant and Timothy Harrington.
10.10** Employment Agreement, dated June 12, 1998, by and between the
registrant and Robert Chea.
10.11** Amended and Restated Employment Agreement, dated April 5, 1999, by
and between the registrant and Brett Allsop.
10.12** Letter Agreement, dated August 23, 1999, by and between the
registrant and Timothy Joyce.
10.13+** Order Fulfillment Services Agreement, dated September 17, 1999, by
and between the registrant and Keystone Fulfillment, Inc.
10.14+** Letter Agreement dated September 17, 1999, by and between the
registrant and Nike USA, Inc.
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule for Sports Universe, Inc. (In EDGAR format
only)
27.2 Financial Data Schedule for Fogdog, Inc. (In EDGAR format only)
</TABLE>
- --------
*To be filed by amendment
**Previously filed
+Confidential Treatment Requested
(b) Financial Statement Schedule
None
II-4
<PAGE>
Item 17. Undertakings
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the Delaware General Corporation Law, our certificate of incorporation or
our bylaws, indemnification agreements entered into between the company and
our officers and directors, the underwriting agreement, or otherwise, we have
been advised that in the opinion of the commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by us of expenses incurred or paid by any of our directors,
officers or controlling persons in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Redwood City, State of California,
on this 4th day of November, 1999.
/s/ Timothy P. Harrington
By: _________________________________
Timothy P. Harrington
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the persons whose signatures
appear below, which persons have signed such registration statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Timothy P. Harrington Chief Executive Officer November 4, 1999
_______________________________ (Principal Executive
Timothy P. Harrington Officer)
and Director
* President, International November 4, 1999
_______________________________ Division and Chairman of
Brett M. Allsop the Board
/s/ Marcy E. von Lossberg Chief Financial Officer November 4, 1999
_______________________________ (Principal Accounting
Marcy E. von Lossberg Officer)
* Director November 4, 1999
_______________________________
Frederick M. Gibbons
* Director November 4, 1999
_______________________________
Peter J. Huff
* Director November 4, 1999
_______________________________
Robert R. Maxfield
* Director November 4, 1999
_______________________________
Warren J. Packard
* Director November 4, 1999
_______________________________
Ralph T. Parks
* Director November 4, 1999
_______________________________
Ray A. Rothrock
* Director November 4, 1999
_______________________________
Lloyd D. Ruth
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Mary E. von Lossberg
*By: _________________________________
Marcy E. von Lossberg,
Attorney-in-fact
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated August 13, 1999, by and
among the registrant, Fogdog Acquisition Corp., Sports Universe, Inc.
and certain principal stockholders of Sports Universe, Inc.
3.1** Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2** Amended and Restated Bylaws, to be effective upon consummation of
this offering.
4.1* Form of registrant's Specimen Common Stock Certificate.
4.2** Third Amended and Restated Registration Rights Agreement, dated March
3, 1999, April 16, 1999, and September 23, 1999, by and among the
registrant and the parties who are signatories thereto.
4.3** Warrant to Purchase Series A Preferred Stock, dated December 24,
1997, by and between the registrant and Imperial Bank.
4.4 Warrant to Purchase Series C Preferred Stock, dated September 23,
1999, by and between the registrant and Nike USA, Inc.
5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered.
10.1** Registrant's Amended and Restated 1996 Stock Option Plan.
10.2 Registrant's 1999 Stock Incentive Plan.
10.3 Registrant's 1999 Employee Stock Purchase Plan.
10.4** Form of registrant's Directors and Officers' Indemnification
Agreement.
10.5+** Agreement, dated June 30, 1999, by and between the registrant and
America Online Inc.
10.6** Amended and Restated Loan Agreement, dated September 16, 1998, by and
between the registrant and Imperial Bank.
10.7** Sublease, dated July 14, 1999, by and between the registrant and
Ampex Corporation.
10.8** Letter Agreement, dated December 9, 1997, by and between the
registrant and Robin Smith.
10.9 Amended and Restated Employment Agreement, effective September 17,
1999, by and between the registrant and Timothy Harrington.
10.10** Employment Agreement, dated June 12, 1998, by and between the
registrant and Robert Chea.
10.11** Amended and Restated Employment Agreement, dated April 5, 1999, by
and between the registrant and Brett Allsop.
10.12** Letter Agreement, dated August 23, 1999, by and between the
registrant and Timothy Joyce.
10.13+** Order Fulfillment Services Agreement, dated September 17, 1999, by
and between the registrant and Keystone Fulfillment, Inc.
10.14+** Letter Agreement dated September 17, 1999, by and between the
registrant and Nike USA, Inc.
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule for Sports Universe, Inc. (In EDGAR format
only)
27.2 Financial Data Schedule for Fogdog, Inc. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed
+ Confidential Treatment Requested
<PAGE>
EXHIBIT 2.1
EXECUTION COPY
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
FOGDOG, INC.,
a California corporation
FOGDOG ACQUISITION CORP.,
a Delaware corporation
SPORTS UNIVERSE, INC.,
a Delaware corporation
AND
CERTAIN PRINCIPAL STOCKHOLDERS
OF TARGET
August 13, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER............................................................................. 2
1.1 The Merger...................................................................... 2
----------
1.2 Closing; Effective Time......................................................... 2
-----------------------
1.3 Effect of the Merger............................................................ 2
--------------------
1.4 Certificate of Incorporation; Bylaws............................................ 2
------------------------------------
1.5 Directors and Officers.......................................................... 3
----------------------
1.6 Effect on Capital Stock......................................................... 3
-----------------------
1.7 Surrender of Certificates....................................................... 4
-------------------------
1.8 No Further Ownership Rights in Target Capital Stock............................. 6
---------------------------------------------------
1.9 Lost, Stolen or Destroyed Certificates.......................................... 6
--------------------------------------
1.10 Tax Consequences................................................................ 6
----------------
1.11 Exemption from Registration; Restricted Stock; Certificate Legends.............. 6
------------------------------------------------------------------
1.12 Taking of Necessary Action; Further Action...................................... 7
------------------------------------------
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET AND THE PRINCIPAL STOCKHOLDERS................ 7
2.1 Organization, Standing and Power................................................ 8
--------------------------------
2.2 Capital Structure............................................................... 8
-----------------
2.3 Authority....................................................................... 9
---------
2.4 Financial Statements............................................................ 9
--------------------
2.5 Absence of Certain Changes...................................................... 9
--------------------------
2.6 Absence of Undisclosed Liabilities.............................................. 10
----------------------------------
2.7 Litigation...................................................................... 10
----------
2.8 Restrictions on Business Activities............................................. 10
-----------------------------------
2.9 Governmental Authorization...................................................... 10
--------------------------
2.10 Title to Property............................................................... 11
-----------------
2.11 Intellectual Property........................................................... 11
---------------------
2.12 Manufacturing and Marketing Rights.............................................. 13
----------------------------------
2.13 Taxes........................................................................... 13
-----
2.14 Employee Benefit Plans.......................................................... 13
----------------------
2.15 Certain Agreements Affected by the Merger....................................... 13
-----------------------------------------
2.16 Employee Matters................................................................ 14
----------------
2.17 Interested Party Transactions................................................... 14
-----------------------------
2.18 Insurance....................................................................... 14
---------
2.19 Compliance With Laws............................................................ 14
--------------------
2.20 Minute Books.................................................................... 14
------------
2.21 Disclosure; Delivery of Relevant Documents; Complete Copies of Materials........ 14
------------------------------------------------------------------------
2.22 Brokers' and Finders' Fees...................................................... 15
------------------------
2.23 Vote Required; Affiliate and Stockholder Agreement; Irrevocable Proxies......... 15
-----------------------------------------------------------------------
2.24 Board Approval.................................................................. 15
--------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
2.25 Material Contracts.............................................................. 15
------------------
2.26 No Breach of Material Contracts................................................. 16
-------------------------------
2.27 Material Third Party Consents................................................... 16
-----------------------------
2.28 Representations Complete........................................................ 16
------------------------
2.29 Year 2000....................................................................... 16
---------
2.30 Products Liability.............................................................. 17
------------------
2.31 Service Provider Agreements..................................................... 17
---------------------------
2.32 Customers and Suppliers......................................................... 18
-----------------------
2.33 Accounts Receivable............................................................. 18
-------------------
2.34 Inventory....................................................................... 18
---------
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB............................. 19
3.1 Organization, Standing and Power................................................ 19
--------------------------------
3.2 Capital Structure of Acquiror................................................... 19
-----------------------------
3.3 Authority....................................................................... 19
---------
3.4 Financial Statements of Acquiror................................................ 20
--------------------------------
3.5 Absence of Undisclosed Liabilities.............................................. 20
----------------------------------
3.6 Representations Complete........................................................ 20
------------------------
3.7 Board and Stockholder Approvals................................................. 20
-------------------------------
3.8 Broker's and Finders' Fees...................................................... 20
-------------------------
3.9 Litigation...................................................................... 21
----------
3.10 Key Employees of Target......................................................... 21
-----------------------
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.................................................... 21
4.1 Conduct of Business of Target and Acquiror...................................... 21
------------------------------------------
4.2 Conduct of Business of Target................................................... 21
-----------------------------
4.3 No Solicitation................................................................. 24
---------------
ARTICLE V ADDITIONAL AGREEMENTS................................................................... 24
5.1 Preparation of Disclosure Statement............................................. 24
-----------------------------------
5.2 Meeting of Target Stockholders.................................................. 25
------------------------------
5.3 Access to Information........................................................... 25
---------------------
5.4 Confidentiality................................................................. 26
---------------
5.5 Public Disclosure............................................................... 26
-----------------
5.6 Consents; Cooperation........................................................... 26
---------------------
5.7 Stockholder Agreement/Irrevocable Proxies/Stockholder Representation Agreements. 26
-------------------------------------------------------------------------------
5.8 Legal Requirements.............................................................. 26
------------------
5.9 Blue Sky Laws................................................................... 26
-------------
5.10 Assignment of Repurchase Rights................................................. 27
-------------------------------
5.11 Employees....................................................................... 27
---------
5.12 Treatment as Reorganization..................................................... 27
---------------------------
5.13 Reasonable Efforts and Further Assurances....................................... 27
-----------------------------------------
5.14 Disclosure Schedule Supplement.................................................. 27
------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI CONDITIONS TO THE MERGER............................................................... 28
6.1 Conditions to Obligations of Each Party to Effect the Merger.................... 28
------------------------------------------------------------
6.2 Additional Conditions to Obligations of Target.................................. 28
----------------------------------------------
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub............. 29
-------------------------------------------------------------------
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER..................................................... 32
7.1 Termination..................................................................... 32
-----------
7.2 Effect of Termination........................................................... 33
---------------------
7.3 Expenses........................................................................ 33
--------
7.4 Extension; Waiver............................................................... 33
-----------------
7.5 Amendment....................................................................... 34
---------
ARTICLE VIII ESCROW AND INDEMNIFICATION........................................................... 34
8.1 Escrow Fund..................................................................... 34
-----------
8.2 Indemnification................................................................. 34
---------------
8.3 Damage Threshold................................................................ 36
----------------
8.4 Escrow Period................................................................... 36
--------------
8.5 Claims upon Escrow Fund......................................................... 36
-----------------------
8.6 Objections to Claims............................................................ 37
--------------------
8.7 Resolution of Conflicts; Arbitration............................................ 38
------------------------------------
8.8 Stockholders' Agent............................................................. 39
------------------
8.9 Actions of the Stockholders' Agent.............................................. 39
---------------------------------
8.10 Third-Party Claims.............................................................. 40
------------------
8.11 Sole Remedy; Waiver of Rights................................................... 40
-----------------------------
ARTICLE IX GENERAL PROVISIONS..................................................................... 40
9.1 Survival at Effective Time...................................................... 40
--------------------------
9.2 Notices......................................................................... 41
-------
9.3 Interpretation.................................................................. 41
--------------
9.4 Counterparts.................................................................... 42
------------
9.5 Attorneys Fees.................................................................. 42
--------------
9.6 Entire Agreement; Nonassignability; Parties in Interest......................... 42
-------------------------------------------------------
9.7 Severability.................................................................... 42
------------
9.8 Remedies Cumulative............................................................. 42
-------------------
9.9 Governing Law................................................................... 42
-------------
9.10 Rules of Construction........................................................... 43
---------------------
</TABLE>
iii
<PAGE>
SCHEDULES
---------
Acquiror Disclosure Schedule
Section 3.10 Key Employees of Target
Target Disclosure Schedule
Section 2.2 Capital Structure
Section 2.10 Target Real Property
Section 2.11 Target Intellectual Property
Section 2.25 List of Material Contracts
Section 2.27 Material Third Party Consents
Schedule 6.3(c) Additional Required Consents
Schedule 6.3(r) Sports Universe Debt
EXHIBITS
--------
Exhibit A - Certificate of Merger
Exhibit B - Exchange Ratio
Exhibit C - Target Stockholder List
Exhibit D - Stockholder Agreement, including form of Irrevocable
Proxy
Exhibit E - Stockholder Representation Agreement
Exhibit F - Escrow Agreement
Exhibit G - Form of Employment Agreement
Exhibit H - Form of Consulting Agreement
Exhibit I - Acquiror's Legal Opinion
Exhibit J - Target's Legal Opinion
Exhibit K - FIRPTA Notice
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
and entered into as of August 13, 1999, by and among Fogdog, Inc., a California
corporation ("Acquiror"), Fogdog Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Acquiror ("Merger Sub"), Sports Universe, Inc., a
Delaware corporation ("Target"), Edmond Routhier and Shawn Sharp, each an
individual and principal stockholder of Target (the "Principal Stockholders").
RECITALS
A. The Boards of Directors of Target, Merger Sub and Acquiror
believe it is in the best interests of their respective companies and the
stockholders of their respective companies that Target and Acquiror combine into
a single company through the statutory merger of Merger Sub with and into Target
(the "Merger") and, in furtherance thereof, have approved the Merger.
B. The Boards of Directors of Target, Merger Sub and Acquiror agree
that the fair market value of Acquiror Common Stock as of the date hereof is
$0.22 per share.
C. Pursuant to the Merger, among other things, each outstanding
share of capital stock of Target ("Target Capital Stock") shall be converted
into the right to receive shares of common stock of Acquiror ("Acquiror Common
Stock"), at the rate set forth herein and each outstanding right to acquire
capital stock of Target shall be converted into the right to receive Acquiror
Common Stock at the rate set forth herein.
D. Target, the Principal Stockholders, Merger Sub and Acquiror
desire to make certain representations and warranties and other agreements in
connection with the Merger.
E. The parties intend, by executing this Agreement, to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) of the Code.
F. Concurrent with the execution of this Agreement and as an
inducement to Acquiror to enter into this Agreement, the Target Stockholders who
are stockholders, officers or directors have on the date hereof entered into an
agreement to vote the shares of Target's Capital Stock owned by such persons to
approve the Merger and against any competing proposals.
G. Concurrent with the execution of this Agreement and as an
inducement to the Principal Stockholders to enter into this Agreement, Acquiror
has entered into a letter agreement with Edmond Routhier (the "Employment
Agreement") and a letter agreement with Shawn Sharp (the "Consulting Agreement")
pursuant to which each has agreed to perform certain services for Acquiror as
set forth therein and may be entitled to receive as partial consideration for
such services and for their shares of Target Common Stock an option to purchase
certain Performance Option Shares (as defined therein, the "Performance Option
Shares").
<PAGE>
NOW, THEREFORE, in consideration of the covenants and representations
set forth herein, and for other good and valuable consideration, the parties
agree as follows:
ARTICLE I
THE MERGER
----------
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement, the Certificate
of Merger attached hereto as Exhibit A (the "Certificate of Merger") and the
---------
applicable provisions of the Delaware General Corporations Law ("Delaware Law"),
Merger Sub shall be merged with and into Target, the separate corporate
existence of Merger Sub shall cease and Target shall continue as the surviving
corporation, with the end result that Target shall be a wholly-owned subsidiary
of Acquiror. Target as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation." The holders of Target
capital stock at the Effective Time are sometimes referred to herein as the
"Target Stockholders."
1.2 Closing; Effective Time. The closing of the transactions contemplated
-----------------------
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
Closing shall take place at the offices of Brobeck, Phleger & Harrison LLP, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger, together with the required officers' certificates, with
the Secretary of State of the State of Delaware in accordance with the relevant
provisions of Delaware Law (the time of such filing being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Target and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation, and the Surviving Corporation shall be a wholly-owned subsidiary of
Acquiror.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation.
(b) At the Effective Time, the Bylaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by Delaware Law, the
Certificate of Incorporation and such Bylaws.
2
<PAGE>
1.5 Directors and Officers. At the Effective Time, the directors of Merger
----------------------
Sub, as in effect immediately prior to the Effective Time, shall be the
directors of the Surviving Corporation, until their respective successors are
duly elected or appointed and qualified. The officers of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the officers of the
Surviving Corporation, until their respective successors are duly elected or
appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
-----------------------
action on the part of Acquiror, Target or the holders of any of Target's
securities:
(a) Conversion of Target Capital Stock. The maximum number of
----------------------------------
shares of Acquiror Common Stock to be issued in exchange for the
acquisition by Acquiror of all outstanding Target Capital Stock
(including shares owned by Acquiror, the "Merger Shares") shall be equal
to 400,000 shares (as such number may be appropriately adjusted for stock
splits, stock dividends and other subdivisions and combinations of
Acquiror Common Stock subsequent to the date hereof) less a pro rata
portion of such shares which corresponds to the number of Dissenting
Shares (as defined below). No adjustment shall be made in the number of
Merger Shares as a result of any cash proceeds received by Target from
the date hereof to the Closing Date pursuant to the exercise of currently
outstanding warrants to acquire Target Capital Stock. Subject to the
terms and conditions of this Agreement and the Certificate of Merger as
of the Effective Time, by virtue of the Merger and without any action on
the part of the holder of any shares of Target Capital Stock, at the
Effective Time, each share of Target Common Stock and any Target
Preferred Stock issued and outstanding immediately prior to the Effective
Time (other than shares to be cancelled pursuant to Sections 1.6(b) and
1.6(c) and shares, if any, held by persons who have not voted such shares
for approval of the Merger and with respect to which such persons shall
become entitled to exercise dissenters' rights in accordance with Delaware Law
("Dissenting Shares")) shall be converted and exchanged for the right to receive
such percentage of Merger Shares as shall be determined in accordance with
Exhibit B hereof (the "Exchange Ratio"). For purposes of determining the
- ---------
consideration for shares of Target Capital Stock exchanged pursuant to this
Agreement, the parties hereto acknowledge and agree that the fair market value
of Acquiror Common Stock on the date hereof is $0.22 per share.
(b) Termination of Unexercised Convertible Securities of Target. At
the Effective Time, each option, warrant or other convertible security which is
exercisable for, or convertible into shares of Target Capital Stock which has
not been exercised or converted prior to the Effective Time shall be terminated
and shall not be assumed by Acquiror, including, without limitation, any stock
options granted to employees, consultants and suppliers of Target and any Series
A Preferred Stock Warrants.
(c) Cancellation of Target Capital Stock Owned by Target. At the
----------------------------------------------------
Effective Time, all shares of Target Capital Stock that are owned by Target as
treasury stock, immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Acquiror Common Stock or Target Capital Stock),
3
<PAGE>
reorganization, recapitalization or other like change with respect to Acquiror
Common Stock or Target Capital Stock occurring after the date hereof and prior
to the Effective Time.
(e) Conversion of Merger Sub Capital Stock. Each share of common
--------------------------------------
stock of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one newly and validly issued,
fully paid and non-assessable share of common stock of the Surviving
Corporation.
(f) Dissenters' Rights. Any Dissenting Shares shall not be
------------------
converted into Acquiror Common Stock but shall instead be converted into the
right to receive such consideration as may be determined to be due with respect
to such Dissenting Shares pursuant to Delaware Law. Target agrees that, except
with the prior written consent of Acquiror, or as required under Delaware Law,
it will not voluntarily make any payment with respect to, or settle or offer to
settle, any such purchase demand. Each holder of Dissenting Shares ("Dissenting
Stockholder") who, pursuant to the provisions of Delaware Law, becomes entitled
to payment of the fair value for shares of Target Capital Stock shall receive
payment therefor (but only after the value therefor shall have been agreed upon
or finally determined pursuant to such provisions). If, after the Effective
Time, any Dissenting Shares shall lose their status as Dissenting Shares,
Acquiror shall issue and deliver, upon surrender by such stockholder of
certificate or certificates representing shares of Target Capital Stock, the
number of shares of Acquiror Common Stock to which such stockholder would
otherwise be entitled under this Section 1.6 and the Certificate of Merger less
the number of shares allocable to such stockholder that have been deposited in
the Escrow Fund (as defined below) in respect of such shares of Acquiror Common
Stock pursuant to Section 1.7(b) and Article VIII hereof and the number of
Merger Shares shall be correspondingly increased by the same amount by which it
was reduced at the time that such shares became Dissenting Shares pursuant to
the first sentence of Section 1.6(a).
1.7 Surrender of Certificates.
-------------------------
(a) Acquiror to Provide Common Stock. At the Closing, Acquiror
--------------------------------
shall deliver to Target the Merger Shares in exchange for shares of Target
Capital Stock outstanding immediately prior to the Effective Time less the
number of shares of Acquiror Common Stock to be deposited into an escrow fund
(the "Escrow Fund") pursuant to the requirements of Article VIII, which Acquiror
Common Stock shall be issuable to the persons and in the amounts set forth on
Exhibit C, and Target will deliver certificates representing at least 90% (at
- ---------
the Closing) of the issued and outstanding shares of Target Capital Stock to
Acquiror properly endorsed for transfer.
(b) Exchange Procedures. Upon surrender of a certificate or
-------------------
certificates which immediately prior to the Effective Time represented
outstanding shares of Target Capital Stock (a "Certificate") for cancellation at
the Closing or to such agent or agents as may be appointed by Acquiror, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Acquiror Common Stock
less the number of shares of Acquiror Common Stock to be deposited in the Escrow
Fund on such holder's behalf pursuant to Article VIII hereof, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Target Capital Stock will be deemed from and after the Effective Time,
for all
4
<PAGE>
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Acquiror Common Stock into which such
shares of Target Capital Stock shall have been so converted. As soon as
practicable after the Effective Time, and subject to and in accordance with the
provisions of Article VIII hereof, Acquiror shall cause to be distributed to the
Escrow Agent (as defined in Article VIII hereof) a certificate or certificates
representing ten percent (10%) of the Merger Shares (other than shares issuable
upon exercise of outstanding options or warrants) which shall be registered in
the name of the Escrow Agent as nominee for the holders of Certificates
cancelled pursuant to this Section 1.7. The shares distributed to the Escrow
Agent shall be shares that are not subject to any repurchase rights by Target.
The portion of the Escrow Fund contributed on behalf of each stockholder of
Target shall be in proportion to the aggregate Acquiror Common Stock to which
such holder would otherwise be entitled to receive under Section 1.6(a) hereof.
The shares distributed to the Escrow Agent shall be beneficially owned by such
holders and shall be held in escrow and shall be available to compensate
Acquiror for damages as provided in Article VIII. To the extent not used for
such purposes, such shares shall be released, all as provided in Article VIII
hereof.
(c) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
theretofore payable (but for the provisions of this Section 1.7(c)) with respect
to such shares of Acquiror Common Stock.
(d) Transfers of Ownership. If any certificate for shares of Acquiror
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Acquiror Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the satisfaction of Acquiror or
any agent designated by it that such tax has been paid or is not payable.
(e) Dissenting Shares. The provisions of this Section 1.7 shall also
-----------------
apply to Dissenting Shares that lose their status as such, except that the
obligations of Acquiror under this Section 1.7 shall commence on the date of
loss of such status and the holder of such shares shall be entitled to receive
in exchange for such shares the number of shares of Acquiror Common Stock to
which such holder is entitled pursuant to Section 1.6 hereof.
(f) Fractional Shares. No fraction of a share of Acquiror Common
-----------------
Stock will be issued, but in lieu thereof each holder of shares of Target
Capital Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock pursuant to Section 1.6(a) shall receive from Acquiror an
amount of cash (rounded to the nearest whole cent) equal to the
5
<PAGE>
product of (i) such fraction, multiplied by $0.22, the fair market value of a
share of Acquiror Common Stock on the date hereof.
(g) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.7, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to any person for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(h) Conditions to Receiving Acquiror Common Stock. Notwithstanding the
---------------------------------------------
foregoing provisions of this Section 1.7 or any other provision of this
Agreement or any agreement executed in connection herewith, neither Acquiror,
Merger Sub nor the Exchange Agent shall have any obligation to make available
shares of Acquiror Common Stock to any holder of Target Capital Stock who has
not either first (y) executed a Stockholder Agreement, substantially in the form
attached hereto as Exhibit D (a "Stockholders' Agreement") or (z) executed a
---------
Stockholder Representation Agreement, substantially in the form attached hereto
as Exhibit E (a "Stockholders' Representation Agreement").
---------
1.8 No Further Ownership Rights in Target Capital Stock. All shares of
---------------------------------------------------
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Capital Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Capital Stock which were outstanding
immediately prior to the Effective Time.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Acquiror Common
Stock as may be required pursuant to Section 1.6; provided, however, that
Acquiror may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Acquiror with respect to the Certificates alleged
to have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the Merger
----------------
shall constitute a reorganization within the meaning of Section 368 of the Code.
1.11 Exemption from Registration; Restricted Stock; Certificate Legends The
------------------------------------------------------------------
shares of Acquiror Common Stock to be issued in connection with the Merger will
be issued in a transaction exempt from registration under the Securities Act,
by reason of Section 4(2) thereof and corresponding provisions of state
securities laws. The shares of Acquiror Common Stock issued pursuant to this
Agreement shall be characterized as "restricted securities" under the federal
securities laws, and under such laws such shares may be resold without
registration under the Securities Act only in limited circumstances.
Each certificate evidencing shares of Acquiror Common Stock to be
issued pursuant to Article I shall bear a legend substantially similar to the
following legend, in addition
6
<PAGE>
to any appropriate legend which may be required by state securities laws (which
may be affixed to such certificates in the reasonable discretion of Acquiror):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). SUCH
SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER RULE 144(K) OF
THE SECURITIES ACT OR AN OPINION OF LEGAL COUNSEL REASONABLY
ACCEPTABLE TO FOGDOG, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Acquiror and the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of Target, the officers and directors of
Target, Acquiror and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TARGET
----------------------------------------
AND THE PRINCIPAL STOCKHOLDERS
------------------------------
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, prospects, operations or results of operations of such
entity or group of entities. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is materially adverse to the condition (financial or
otherwise), properties, assets, liabilities, business, operations or results of
prospects, operations of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge" means
knowledge after due and diligent inquiry of such party's officers, directors and
other employees of such party reasonably believed to have knowledge of such
matters and, with respect to representations regarding the knowledge of Target,
expressly includes, without limitation, the knowledge of the Principal
Stockholders.
Except as disclosed in a document of even date herewith and delivered
by Target to Acquiror prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Schedule"), Target and the Principal Stockholders represent and
warrant to Acquiror as follows:
7
<PAGE>
2.1 Organization, Standing and Power. Target is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect on Target. Target has delivered a true and
correct copy of the Certificate of Incorporation and Bylaws or other charter
documents, as applicable, of Target as amended to date, to Acquiror. Target is
not in violation of any of the provisions of its Certificate of Incorporation or
Bylaws. Target does not own and never has owned directly or indirectly any
equity or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation, subsidiary,
partnership, joint venture or other business association or entity.
2.2 Capital Structure. The authorized capital stock of Target consists of
-----------------
25,000,000 shares of Common Stock, all of which were issued and outstanding as
of the close of business on the date hereof. Target has not authorized or issued
any shares of preferred stock. There are no other outstanding shares of capital
stock or voting securities and no outstanding commitments to issue any shares of
capital stock or voting securities after the date hereof other than pursuant to
certain Series A Preferred Stock Warrants (hereinafter referred to as the
"Series A Preferred Warrants") (which rights will be waived or terminated prior
to the Closing). All outstanding shares of Target Capital Stock are duly
authorized, validly issued, fully paid and non-assessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof, and are not subject to preemptive rights or rights of
first refusal created by statute, the Certificate of Incorporation or Bylaws of
Target or any agreement to which Target is a party or by which it is bound,
except that certain Restricted Stock Purchase Agreements which are set forth in
Section 2.2 of the Target Disclosure Schedule contain rights of first refusal.
Section 2.2 of the Target Disclosure Schedule sets forth all of the Target
securityholders and the number of shares (or rights to purchase such shares) of
Target Capital Stock held by each of them on the date hereof (such portion of
Section 2.2 of the Target Disclosure Schedule being hereinafter referred to as
the "Target Capitalization Table"). Except for (i) the rights created pursuant
to this Agreement, (ii) the rights created pursuant to any Series A Preferred
Warrant (which rights will be waived or terminated prior to the Closing), and
(iii) Target's right to repurchase any unvested shares under any stock purchase
agreement or stock purchase warrant, there are no other options, warrants,
calls, rights, commitments or agreements of any character to which Target is a
party or by which it is bound obligating Target to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of capital stock of Target or obligating Target to grant,
extend, accelerate the vesting of, change the price of, or otherwise amend,
modify or enter into any such option, warrant, call, right, commitment or
agreement. The consummation of the Merger shall not cause an acceleration in the
vesting or lapse of any restriction or right of any of Target's securities.
Except as set forth in Section 2.2 of the Target Disclosure Schedule, there are
no contracts, commitments or agreements relating to voting, purchase or sale of
Target's capital stock (i) between or among Target and any of its
securityholders and (ii) to the Target's knowledge, between or among any of
Target's securityholders. True and complete copies of all agreements and
instruments relating to stock purchases have been provided to Acquiror and such
agreements and instruments have not been amended, modified or supplemented, and
there are no agreements to amend, modify or supplement such agreements or
instruments in any case from the form
8
<PAGE>
provided to Acquiror. All outstanding shares of Target Capital Stock were issued
in compliance with all applicable federal and state securities laws.
2.3 Authority. Target has all requisite corporate power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval of the
Merger by Target's stockholders as contemplated by Section 6.3(p). This
Agreement has been duly executed and delivered by Target and constitutes the
valid and binding obligation of Target enforceable against Target in accordance
with its terms, except that such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to creditors'
rights generally, and is subject to general principles of equity. The execution
and delivery of this Agreement by Target does not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (i) any provision of the Certificate
of Incorporation or Bylaws of Target as amended, or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Target or any of its properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to Target in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger, together with the required
officers' certificates, as provided in Section 1.2; (ii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the securities laws
of any foreign country; and (iii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not have a
Material Adverse Effect on Target and would not prevent, or materially alter or
delay any of the transactions contemplated by this Agreement.
2.4 Financial Statements. Target has delivered to Acquiror its unaudited
--------------------
financial statements for the fiscal year ended December 31, 1998, and its
unaudited financial statements (balance sheet, statement of operations and
statement of cash flows) as at, and for the four-month period ended April 30,
1999 (collectively, the "Financial Statements"). Except as set forth in Section
2.4 of the Target Disclosure Schedule, and except for the fact that unaudited
financial statements do not have notes thereto, to Target's knowledge, the
Financial Statements have been prepared in accordance with standard accounting
procedures and practices applied on a consistent basis throughout the periods
indicated and with each other. The Financial Statements fairly present the
financial condition and operating results of Target as of the dates, and for the
periods, indicated therein, subject to normal year-end audit adjustments. Target
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with standard accounting procedures
and practices, consistently applied.
2.5 Absence of Certain Changes. Since April 30, 1998 (the "Target Balance
--------------------------
Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance)
9
<PAGE>
that has resulted in, or might reasonably be expected to result in, a Material
Adverse Effect to Target; (ii) any acquisition, sale or transfer of any material
asset of Target; (iii) any change in accounting methods or practices (including
any change in depreciation or amortization policies or rates) by Target or any
revaluation by Target of any of its assets; (iv) any declaration, setting aside,
or payment of a dividend or other distribution with respect to the shares of
Target, or any direct or indirect redemption, purchase or other acquisition by
Target of any of its shares of capital stock, except repurchases of its capital
stock pursuant to existing agreements with Target's employees and consultants
and as otherwise expressly set forth in the capitalization table included in
Section 2.2 of the Target Disclosure Schedule; (v) any material contract entered
into by Target, or any material amendment or termination of, or default under,
any material contract to which Target is a party or by which it is bound; (vi)
any amendment or change to the Certificate of Incorporation or Bylaws of Target;
(vii) other than in the ordinary course of business consistent with past
practice, any increase in or modification of the compensation or benefits
payable or to become payable by Target to any of its directors or employees or
(viii) any negotiation or agreement by Target to do any of the things described
in the preceding clauses (i) through (vii) (other than negotiations with
Acquiror and its representatives regarding the transactions contemplated by this
Agreement).
2.6 Absence of Undisclosed Liabilities. Target has no obligations or
----------------------------------
liabilities of any nature (matured or unmatured, fixed or contingent) other than
(i) those set forth or adequately provided for in the Balance Sheet included in
the Financial Statements as of the Target Balance Sheet Date (the "Target
Balance Sheet") or as set forth in Section 2.6 of the Target Disclosure
Schedule.
2.7 Litigation. There is no private or governmental action, suit,
----------
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to Target's knowledge, threatened against
Target or any of its properties or any of its officers or directors (in their
capacities as such). There is no judgment, decree or order against Target, or,
to Target's knowledge, any of its directors or officers (in their capacities as
such), that could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement, or that could reasonably be
expected to have a Material Adverse Effect on Target or that now or in the
future may prohibit or impair the conduct of the business of Target. Target has
no litigation of any kind pending against another party.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
-----------------------------------
injunction, order or decree binding upon Target which has or could reasonably be
expected to have the effect of prohibiting or impairing any current or future
business practice of Target, any acquisition of property by Target or the
conduct of business by Target as currently conducted or as currently proposed to
be conducted by Target.
2.9 Governmental Authorization. Target has obtained and maintains in full
--------------------------
force and effect each federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
required for the lawful conduct and operations of Target's business except where
the failure to obtain or have any such Target Authorizations could not
reasonably be expected to have a Material Adverse Effect on Target.
10
<PAGE>
2.10 Title to Property. Target has good and marketable title to all of its
-----------------
properties, interests in properties and assets, real and personal, reflected in
the Target Balance Sheet or acquired after the Target Balance Sheet Date (except
properties, interests in properties and assets sold or otherwise disposed of
since the Target Balance Sheet Date in the ordinary course of business). With
respect to leased properties and assets, Target has valid leasehold interests
in, free and clear of all mortgages, liens, pledges, charges or encumbrances of
any kind or character, except (i) the lien of current taxes not yet due and
payable, (ii) such imperfections of title, liens and easements as do not and
will not materially detract from or interfere with the use of the properties
subject thereto or affected thereby, or otherwise materially impair business
operations involving such properties and (iii) liens securing debt which is
reflected on the Target Balance Sheet. The plants, property and equipment of
Target that are used in the operations of its business are in good operating
condition and repair, subject to normal wear and tear. All properties used in
the operations of Target are reflected in the Target Balance Sheet to the extent
generally accepted accounting principles require the same to be reflected.
Section 2.10 of the Target Disclosure Schedule identifies each parcel of real
property owned or leased by Target.
2.11 Intellectual Property.
---------------------
(a) Target owns, or is licensed or otherwise possesses legally
enforceable rights to use all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, maskworks, net lists, schematics,
technology, know-how, trade secrets, inventory, ideas, algorithms, processes,
computer software programs or applications (in source code and/or object code
form), and tangible or intangible proprietary information or material
("Intellectual Property") that are used or currently proposed to be used in the
business of Target as currently conducted or as currently proposed to be
conducted by Target. Target has not (i) licensed any of its Intellectual
Property in source code form to any party or (ii) entered into any exclusive
agreements relating to its Intellectual Property with any party.
(b) Section 2.11 of the Target Disclosure Schedule lists (i) all
patents and patent applications and all trademarks, trade names and service
marks, copyrights, internet domain names (in each case, whether or not
registered), and any applications therefor, included in the Intellectual
Property and all licenses, sublicenses and other agreements pursuant to which
any person is authorized to use any Intellectual Property, and (ii) all
licenses, sublicenses and other agreements pursuant to which Target is
authorized to use any third party patents, trademarks or copyrights, including
software ("Third Party Intellectual Property Rights") which are incorporated in,
are, or form a part of any Target product.
(c) There is no unauthorized use, disclosure, infringement or
misappropriation of any Intellectual Property rights of any third party to the
extent licensed by or through Target by Target, the Principal Stockholders, any
employee, agent or consultant or independent contractor of Target or any former
employee, agent or consultant or independent contractor of Target, to the extent
that the actions of any of such individuals could result in liability to the
Company. To Target's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of Target
by any third party, including the Principal Stockholders, any employee, agent or
consultant or independent contractor of Target or any former employee, agent or
consultant or independent contractor of Target, to the extent that the actions
of any of such individuals could result in liability to the Company or diminish
the value
11
<PAGE>
of the Company's Intellectual Property rights. Target has not entered into any
agreement to indemnify any other person against any charge of infringement of
any Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(d) Target is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights.
(e) All patents, registered trademarks, service marks and copyrights
held by Target are valid and subsisting. Target (i) has not been sued in any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party; (ii) has no knowledge that the
manufacturing, marketing, licensing or sale of its products infringes any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party and (iii) has not brought any action, suit or
proceeding for infringement of Intellectual Property or breach of any license or
agreement involving Intellectual Property against any third party.
(f) Target has secured valid written assignments from all consultants
and employees and other service providers who contributed to the creation or
development of Intellectual Property of the rights to such contributions that
Target does not already own by operation of law. Each service provider of Target
has executed a Confidentiality and Assignment of Inventions Agreement
substantially in the form delivered to Acquiror or its counsel. Target is not
aware that any of its employees or consultants is in violation thereof, and
Target will use reasonable efforts to prevent any such violation.
(g) Target has taken all necessary and appropriate steps to protect
and preserve the confidentiality of all Intellectual Property not otherwise
protected by patents, patent applications or copyright ("Confidential
Information"). Neither Target, nor its employees, agents, consultants,
independent contractors or the Principal Stockholders (to the extent that the
actions of any of such individuals could result in liability to the Company) has
misused, disclosed or misappropriated Confidential Information owned by any
third party and Target has no knowledge that any third party has misused,
disclosed or misappropriated Confidential Information owned by Target.
(h) Target has obtained valid assignments for any inventions of any of
its employees (or persons it currently intends to hire) made prior to their
employment by Target which are necessary for the conduct of its business.
(i) Prior to the Closing Date, there was no unauthorized use,
infringement or misappropriation of any internet domain name by Target, the
Principal Stockholders, any employee, agent or consultant or independent
contractor of Target or any former employee, agent or consultant or independent
contractor of Target, to the extent that the actions of any of such individuals
could result in liability to the Company.
12
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2.12 Manufacturing and Marketing Rights. Target has not granted rights to
----------------------------------
any of its products or services except as listed in Section 2.9 of the Target
Disclosure Schedule and has the exclusive right to develop, manufacture,
assemble, distribute, market, or sell its products and services.
2.13 Taxes. Target and any consolidated, combined, unitary or aggregate
-----
group for Tax (as defined below) purposes of which Target is or has been a
member, have timely filed all Tax Returns required to be filed by them and have
paid all Taxes shown thereon to be due. Target has provided adequate accruals in
accordance with generally accepted accounting principles in its financial
statements for any Taxes that have not been paid, whether or not shown as being
due on any Tax Returns. There is (i) no material claim for Taxes that is a lien
against the property of Target is currently being asserted against Target other
than liens for Taxes not yet due and payable, (ii) no audit of any Tax Return of
Target being conducted by a Tax authority, (iii) no extension of the statute of
limitations on the assessment of any Taxes granted by Target and currently in
effect, and (iv) no agreement, contract or arrangement to which Target is a
party that may result in the payment of any amount that would not be deductible
by reason of Sections 280G (other than agreements or arrangements for which
stockholder approval meeting the requirements of Section 280G(b)(5)(B) will be
obtained prior to the Closing) or 404 of the Code. For purposes of this
Agreement, the following terms have the following meanings: "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report or
form (including, without limitation,) estimated Tax Returns and reports,
withholding Tax Returns and reports and information reports and Returns required
to be filed with respect to Taxes.
2.14 Employee Benefit Plans.
----------------------
Target does not have and has never had or maintained a material
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
2.15 Certain Agreements Affected by the Merger. Neither the execution and
-----------------------------------------
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Target, (ii) materially increase any benefits
otherwise payable by Target or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
13
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2.16 Employee Matters. Target is not aware of any facts or circumstances
----------------
which could reasonably be expected to give rise to a private or governmental
claim or action arising for the violation of any State or Federal employment
law, including but not limited to any such laws respecting discrimination in
employment, terms and conditions of employment, wages, hours and occupational
safety and health and employment practices, unemployment compensation,
disability insurance and social security. Target has withheld all amounts
required by law or by agreement to be withheld from the wages, salaries, and
other payments to employees; and is not liable for any arrears of wages or any
taxes or any penalty for failure to comply with any of the foregoing. No
employee of Target whom Acquiror has identified in Section 3.10 of the Acquiror
Disclosure Schedule as an employee that Acquiror would like to retain following
the Merger (individually, a "Key Employee" and collectively, the "Key
Employees") has given notice to Target, nor is Target otherwise aware, that any
such employee intends to terminate his or her employment with Target. There are
no written employment or separation agreements, or oral employment or separation
agreements other than those establishing an "at-will" employment relationship
between Target and any of its employees. Target does not have any obligation (a)
to provide any particular form or period of notice prior to termination except
such obligations as are imposed by law generally or (b) to pay any of such
employees any severance benefits in connection with their termination of
employment service. In addition, no severance pay will become due to any Target
employees or other service providers in connection with the Merger, as a result
of any Target agreement, plan or program.
2.17 Interested Party Transactions. Target is not indebted to any director,
-----------------------------
officer, employee or agent of Target (except for amounts due as normal salaries
and bonuses and in reimbursement of ordinary expenses), and no such person is
indebted to Target.
2.18 Insurance. Target has complied with all workers compensation laws in
---------
any relevant jurisdiction, has obtained all insurance required thereby, and has
paid all premiums and fees required to be paid in respect of such insurance.
Except for the foregoing, Target has no policies of insurance of any kind,
including, without limitation, general comprehensive liability insurance, key
man insurance and directors' and officers' liability insurance.
2.19 Compliance With Laws. Target has complied with, is not in violation
--------------------
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Target.
2.20 Minute Books. The minute books of Target made available to Acquiror
------------
contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Target through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
2.21 Disclosure; Delivery of Relevant Documents; Complete Copies of
--------------------------------------------------------------
Materials. Target acknowledges the receipt of a letter from Acquiror dated July
- ----------
7, 1999 requesting due diligence materials in connection with this Agreement and
the Merger (the "Due Diligence Request"). Target has delivered or made available
true and complete copies of each document which has been requested by Acquiror
or its counsel pursuant to the Due Diligence Request or
14
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otherwise in connection with their legal and accounting review of Target and the
documents delivered to Acquiror constitute all relevant documents requested by
the Due Diligence Request and any supplemental due diligence request. Neither
this Agreement nor any other information, statements or certificates made,
provided or delivered in connection herewith contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
herein or therein not misleading.
2.22 Brokers' and Finders' Fees. Target has not incurred, nor will it
--------------------------
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.23 Vote Required; Affiliate and Stockholder Agreement; Irrevocable
---------------------------------------------------------------
Proxies. The affirmative vote of the holders of a majority of the shares of
- -------
Target Capital Stock outstanding on the record date set for the Target
Stockholders Meeting (as defined below) is the only vote of the holders of any
of Target's Capital Stock necessary to approve this Agreement and the
transactions contemplated hereby.
2.24 Board Approval. The Board of Directors of Target has unanimously (i)
--------------
approved this Agreement and the Merger, (ii) determined that in its opinion the
Merger is in the best interests of the stockholders of Target and is on terms
that are fair to such stockholders and (iii) recommended that the stockholders
of Target approve this Agreement and the Merger.
2.25 Material Contracts. Except for the material contracts described in
------------------
Section 2.25 of the Target Disclosure Schedule (collectively, the "Material
Contracts"), Target is not a party to or bound by any material contract,
including without limitation:
(a) any distributor, sales, advertising, agency or manufacturer's
representative contract;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving, in the case of any such contract, more than
$20,000 over the life of the contract;
(c) any contract that expires or may be renewed at the option of any
person other than the Target so as to expire more than one year after the date
of this Agreement;
(d) any trust indenture, mortgage, promissory note, loan agreement or
other contract for the borrowing of money, any currency exchange, commodities or
other hedging arrangement or any leasing transaction of the type required to be
capitalized in accordance with generally accepted accounting principles;
(e) any contract for capital expenditures in excess of $20,000 in the
aggregate;
(f) any contract limiting the freedom of the Target to engage in any
line of business or to compete or which requires Target to maintain the
confidentiality of any proprietary information of any third party or any other
material confidentiality, secrecy or non-disclosure contract;
15
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(g) any contract pursuant to which the Target is a lessor of any
machinery, equipment, motor vehicles, office furniture, fixtures or other
personal property involving in the case of any such contract more than $50,000
over the life of the contract;
(h) any contract with any person with whom the Target does not deal at
arm's length within the meaning of the Internal Revenue Code; or
(i) any agreement of guarantee, support, indemnification, assumption
or endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness
of any other Person.
2.26 No Breach of Material Contracts. The Target has performed all of the
-------------------------------
obligations required to be performed by it and is entitled to all benefits
under, and is not alleged to be in default in respect of any Material Contract.
Each of the Material Contracts is in full force and effect, unamended, and there
exists no default or event of default or event, occurrence, condition or act,
with respect to Target or to Target's knowledge with respect to the other
contracting party, which, with the giving of notice, the lapse of the time or
the happening of any other event or conditions, would become a default or event
of default under any Material Contract. True, correct and complete copies of all
Material Contracts have been delivered to the Acquiror.
2.27 Material Third Party Consents. Section 2.27 of the Target Disclosure
-----------------------------
Schedule includes every contract which, if no novation occurs to make Acquiror a
party thereto or if no consent to assignment is obtained, would have a material
adverse effect on Acquiror's ability to operate the business in the same manner
as the business was operated by Target prior to the Effective Time.
2.28 Representations Complete. None of the representations or warranties
------------------------
made by Target herein or in any schedule hereto, including any section of the
Target Disclosure Schedule, or certificate furnished by Target pursuant to this
Agreement, when all such documents are read together in their entirety, contains
or will contain at the Effective Time any untrue statement of a material fact,
or omits or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
2.29 Year 2000. To Target's knowledge, the software and hardware required
---------
to operate the Sports Universe web site and all computer software products that
are owned by Target, exclusively licensed to Target, licensed, sold or otherwise
distributed to others by Target or are otherwise required for the conduct of its
business ("Software") are Year 2000 Compliant. As used herein, "Year 2000
Compliant" shall mean, with respect to any such Software, the ability of such
Software to perform the following date-related functions:
(i) consistently handle date information before, during and
after January 1, 2000, including, but not limited to, accepting date input,
providing date output and performing calculations on dates or portions of
dates;
16
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(ii) function accurately in accordance with the
documentation relating to the applicable software and without interruption
before, during and after January 1, 2000, without any change in operations
associated with the advent of the new century;
(iii) respond to two-digit date input in a way that resolves
any ambiguity as to the century; and
(iv) store and provide output of date information in ways
that are unambiguous as to century.
2.30 Products Liability. There are no known defects in the design or
------------------
technology embodied in any product which Target or an of its subsidiaries
markets or has marketed in the past that impair or are likely to impair the
intended use of the product or injure any consumer of the product or third
party, except that warranty claims may arise in the normal course of business
for products shipped prior to the Effective Time in an aggregate amount of no
more than the warranty reserves established on the Target Balance Sheet Date.
There are no claims against Target, fixed or contingent, asserting (a) any
damage, loss or injury caused by any product or (b) any breach of any express or
implied product warranty or any other similar claim with respect to any product
other than standard warranty obligations (to replace, repair or refund) made by
Target in the ordinary course of business, except for those claims that, if
adversely determined against Target, would not have a material adverse effect on
the business condition of Target. As used herein, "product" shall mean any
products manufactured, designed, developed, distributed, sold, re-sold,
customized or serviced by Target.
2.31 Service Provider Agreements. No service provider of Target is in
---------------------------
violation of any term of any employment agreement with Target (whether written
or verbal) or any contract or agreement relating to the relationship of any such
service provider with Target or to Target's knowledge, any other party
(including prior employers), nor is any service provider of Target in violation
of any term of any judgment, decree or order, because of the nature of, and
resulting in a material adverse effect upon, the business condition or future
prospects of Target. To Target's knowledge, no service provider of Target is in
violation of any employment agreement (whether written or verbal) with any other
party. Each current service provider of Target has executed a proprietary
information and inventions agreement (or similar agreement) with Target in the
form then being used by Target, which forms have been previously delivered to
Acquiror by Target. Target has the rights to any and all Intellectual Property
Rights developed by each former service provider of Target while such provider
was providing services to Target. To the extent Target has ever utilized
consultants or independent contractors, each consultant or independent
contractor has executed a written agreement, validly assigning to Target his or
her rights in and to all copyrights and works of authorship relating to
products, services or technology designed, developed, manufactured, licensed,
sold, marketed or serviced by Target and its business to the extent that the
failure to obtain such written agreements is material to the business condition
or future prospects of Target and none of Target's service providers is in
violation thereof. None of Target's service providers is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of Target or that would materially conflict
with Target's business as
17
<PAGE>
conducted or as proposed to be conducted or that would prevent any such service
provider from assigning inventions to Target.
2.32 Customers and Suppliers. No customer which individually accounted for
-----------------------
more than 1% of Target's gross revenues during the 12-month period preceding the
date hereof, and no supplier of Target, has canceled or otherwise terminated, or
made any written threat to Target to cancel or otherwise terminate its
relationship with Target, or has decreased materially its services or supplies
to Target in the case of any such supplier, or its usage of the services or
products of Target in the case of such customer, and to Target's knowledge, no
such supplier or customer intends to cancel or otherwise terminate its
relationship with Target or to decrease materially its services or supplies to
Target or its usage of the services or products of Target, as the case may be.
Target has not knowingly breached, so as to provide a benefit to Target that was
not intended by the parties, any agreement with, or engaged in any fraudulent
conduct with respect to, any customer or supplier of Target.
2.33 Accounts Receivable. Subject to any reserves set forth in the
-------------------
Financial Statements, the accounts receivable shown on the Financial Statements
represent and will represent bona fide claims against debtors for sales and
other charges, and are not subject to discount except for normal cash and
immaterial trade discounts. The amount carried for doubtful accounts and
allowances disclosed in the Financial Statements is sufficient to provide for
any losses which may be sustained on realization of the receivables.
2.34 Inventory. The inventories shown on the Financial Statements or
---------
thereafter acquired by Target, consisted of items of a quantity and quality
usable or salable in the ordinary course of business. Since the Target Balance
Sheet Date, Target has continued to replenish inventories in a normal and
customary manner consistent with past practices. Target has not received written
or oral notice that it will experience in the foreseeable future any difficulty
in obtaining, in the desired quantity and quality and at a reasonable price and
upon reasonable terms and conditions, the raw materials, supplies or component
products required for the manufacture, assembly or production of its products.
The values at which inventories are carried reflect the inventory valuation
policy of Target, which is consistent with its past practice and in accordance
with generally accepted accounting principles applied on a consistent basis.
Since the Balance Sheet Date, due provision was made on the books of Target in
the ordinary course of business consistent with past practices to provide for
all slow-moving, obsolete, or unusable inventories to their estimated useful or
scrap values and such inventory reserves are adequate to provide for such slow-
moving, obsolete or unusable inventory and inventory shrinkage. As of the Target
Balance Sheet Date, the inventory of Target in the distribution channel does not
exceed an aggregate of $25,000 and Target has no commitments to purchase
inventory in an amount that exceeds $25,000.
18
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
---------------------------------------------------------
Except as disclosed in a document of even date herewith and delivered
by Acquiror to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Acquiror
Disclosure Schedule"), Acquiror and Merger Sub, jointly and severally, represent
and warrant to Target as follows:
3.1 Organization, Standing and Power. Each of Acquiror and its
--------------------------------
subsidiaries (including Merger Sub) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries (including Merger Sub) has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on
Acquiror. Neither Acquiror nor any of its subsidiaries (including Merger Sub) is
in violation of any of the provisions of its corporate charter or Bylaws or
equivalent organizational documents.
3.2 Capital Structure of Acquiror. The authorized capital stock of
-----------------------------
Acquiror consists of 60,000,000 shares of Common Stock, no par value per share,
and 30,060,426 shares of Preferred Stock, no par value per share, consisting of
2,813,046 shares of Series A Preferred Stock, 9,678,700 shares of Series B
Preferred Stock and 17,568,680 shares of Series C Preferred Stock of which there
were issued and outstanding as of the close of business on August 9, 1999,
7,549,217 shares of Common Stock, 2,679,268 shares of Series A Preferred Stock,
9,678,700 shares of Series B Preferred Stock and 17,447,058 shares of Series C
Preferred Stock. All outstanding shares of Acquiror have been duly authorized,
validly issued, fully paid and are non-assessable and free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon the
holders thereof. The shares of Acquiror Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid and
non-assessable.
3.3 Authority. Acquiror and Merger Sub have all requisite corporate power
---------
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub. This
Agreement has been duly executed and delivered by Acquiror and Merger Sub and
constitutes the valid and binding obligations of Acquiror and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Articles of
Incorporation or Bylaws of Acquiror or Certificate of Incorporation or Bylaws of
Merger Sub, or (ii) any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Acquiror or Merger Sub or any of their properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity, is required by or with respect to Acquiror or
Merger Sub in connection with the execution and
19
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delivery of this Agreement by Acquiror or Merger Sub or the consummation by
Acquiror or Merger Sub of the transactions contemplated hereby, except for (i)
the filing of the Certificate of Merger, together with the required officers'
certificates, as provided in Section 1.2, (ii) any filings as may be required
under applicable state securities laws and the securities laws of any foreign
country, (iii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Acquiror or Merger Sub and would not prevent, materially alter or
delay any of the transactions contemplated by this Agreement.
3.4 Financial Statements of Acquiror. Acquiror has made available to
--------------------------------
Target the financial statements of Acquiror, including the notes thereto, for
the fiscal year ended December 31, 1998 and for the five-month period ended May
31, 1999 (the "Acquiror Financial Statements"). The Acquiror Financial
Statements are complete and correct in all material respects as of their
respective dates, complied as to form in all material respects with applicable
accounting requirements, and have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent throughout the
periods indicated and consistent with each other. The Acquiror Financial
Statements fairly present the consolidated financial condition and operating
results of Acquiror and its subsidiaries at the dates and during the periods
indicated therein (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments).
3.5 Absence of Undisclosed Liabilities. Neither Acquiror nor Merger Sub
----------------------------------
have any material obligations or liabilities of any nature (matured or
unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the balance sheet dated May 31, 1999 of Acquiror (the "Acquiror
Balance Sheet"), (ii) those incurred in the ordinary course of business and not
required to be set forth in the Acquiror Balance Sheet under generally accepted
accounting principles, and (iii) those incurred in the ordinary course of
business since the Acquiror Balance Sheet Date and consistent with past
practice.
3.6 Representations Complete. None of the representations or warranties
------------------------
made by Acquiror or Merger Sub herein or in any schedule hereto, including any
section of the Acquiror Disclosure Schedule, or certificate furnished by
Acquiror or Merger Sub pursuant to this Agreement, when all such documents are
read together in their entirety, contains or will contain at the Effective Time
any untrue statement of a material fact, or omits or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which made,
not misleading.
3.7 Board and Stockholder Approvals. The Board of Directors of each of
-------------------------------
Acquiror and Merger Sub has approved this Agreement and the Merger. The approval
of the shareholders of Acquiror for this Agreement and the Merger is not
required. Acquiror, as the sole stockholder of Merger Sub, has approved this
Agreement and the Merger.
3.8 Broker's and Finders' Fees. Neither Acquiror nor Acquisition Sub has
--------------------------
incurred, nor will incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
20
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3.9 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending as to which Acquiror has received any written notice of
assertion against Acquiror which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement.
3.10 Key Employees of Target. Acquiror has set forth in Section 3.10 of
-----------------------
the Acquiror Disclosure Schedule all of the Key Employees of Target.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
-----------------------------------
4.1 Conduct of Business of Target and Acquiror. During the period from the
------------------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, each of Target and Acquiror agrees (except
to the extent expressly contemplated by this Agreement or as consented to in
writing by the other), to carry on its business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted. Target
further agrees to pay debts and Taxes when due subject (i) to good faith
disputes over such debts or Taxes and (ii) to Acquiror's consent to the filing
of material Tax Returns if applicable, to pay or perform other obligations when
due, and to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organizations, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it to the end that its goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Each of Target and
Acquiror agrees to promptly notify the other of any event or occurrence not in
the ordinary course of business, and of any event which could have a Material
Adverse Effect. Each of Target and Acquiror agrees not to take any action which
would interfere with Acquiror's ability to account for the Merger as a pooling
of interests.
4.2 Conduct of Business of Target. During the period from the date of this
-----------------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as set forth in the Target Disclosure Schedule or
as expressly contemplated by this Agreement, Target shall not do, cause or
permit any of the following, without the prior written consent of Acquiror:
(a) Charter Documents. Cause or permit any amendments to its
-----------------
Certificate of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any cash
-----------------------------------
dividends on or make any other distributions in cash in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any preferred stock, or issue or authorize the
issuance of other securities in respect of, in lieu of or in substitution for
shares of its capital stock, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to it,
provided, however, that, notwithstanding the foregoing clause, issuances of
- -------- -------
shares of Target
21
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Common Stock to holders of Series A Preferred Warrants in the course of
obtaining waivers of rights granted pursuant to such warrants or to holders of
debt classified as "Related Party Debt" ("Related Party Debt") or "Unrelated
Party Debt" ("Unrelated Party Debt") as set forth on Schedule 6.3(r) hereof in
consideration of the forgiveness or satisfaction of such debt are expressly
permitted, if such shares have been previously authorized by Target under
Delaware law prior to the date hereof;
(c) Material Contracts. Enter into any material contract or
------------------
commitment, or violate, amend or otherwise modify or waive any of the terms of
any of its material contracts, other than in the ordinary course of business
consistent with past practice;
(d) Issuance of Securities. Issue, deliver or sell or authorize or
----------------------
propose the issuance, delivery or sale of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities; provided, however, that,
notwithstanding the foregoing clause, issuances of shares of Target Common Stock
to holders of Series A Preferred Warrants in the course of obtaining waivers of
rights granted pursuant to such warrants or to holders of Related Party Debt or
Unrelated Party Debt in consideration of the forgiveness or satisfaction of such
debt are expressly permitted, if such shares have been previously authorized by
Target under Delaware law prior to the date hereof;
(e) Intellectual Property. Transfer to any person or entity any rights
---------------------
to its Intellectual Property other than in the ordinary course of business
consistent with past practice;
(f) Exclusive Rights. Enter into or amend any agreements pursuant to
----------------
which any other party is granted exclusive marketing or other exclusive rights
of any type or scope with respect to any of its products or technology;
(g) Dispositions. Sell, lease, license or otherwise dispose of or
------------
encumber any of its properties or assets which are material, individually or in
the aggregate, to its business, except for sales of products in the ordinary
course;
(h) Leases. Enter into any operating lease in excess of $10,000;
------
(i) Payment of Obligations. Pay, discharge or satisfy in an amount in
----------------------
excess of $10,000 in any one case or $25,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted, contingent
or otherwise) arising other than (i) in the ordinary course of business, (ii)
the payment, discharge or satisfaction of liabilities reflected or reserved
against in the Target Financial Statements, (iii) the discharge of all Related
Party Debt as required by Section 6.3(r) hereof, provided, however, that not
-------- -------
more than $35,000 in cash of Target on August 6, 1999 or received by Target or
Acquiror from orders placed through the Closing Date, less cancellations and
returns, ("Cash on Hand") shall be used to repay liabilities of any kind owed to
Shawn Sharp nor shall any Cash on Hand be used to repay any other Related Party
Debt; (iv) the discharge of any Unrelated Party Debt as required by Section
6.3(r) hereof; and (v) such payments as are necessary to obtain waivers of
rights granted pursuant to the Series A Preferred Stock Purchase Warrants;
22
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(j) Capital Expenditures. Make any capital expenditures, capital
--------------------
additions or capital improvements except in the ordinary course of business and
consistent with past practice;
(k) Termination or Waiver. Terminate or waive any right of
---------------------
substantial value, other than in the ordinary course of business;
(l) Employee Benefit Plans; New Hires; Pay Increases. Adopt any
------------------------------------------------
employee benefit or stock purchase or option plan, or hire any new director
level or officer level employee, pay any special bonus or special remuneration
to any employee or director or, other than in the ordinary course consistent
with past practice, increase the salaries or wage rates of its employees;
(m) Severance Arrangements. Grant any severance or termination pay
-----------------------
(i) to any director or officer or (ii) to any other employee except payments
made pursuant to standard written agreements outstanding on the date hereof;
(n) Lawsuits. Commence a lawsuit other than (i) for the routine
--------
collection of bills, (ii) in such cases where it in good faith determines that
failure to commence suit would result in the material impairment of a valuable
aspect of its business, provided that it consults with Acquiror prior to the
filing of such a suit, or (iii) for a breach of this Agreement;
(o) Acquisitions. Acquire or agree to acquire by merging or
------------
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to its business, taken as a whole;
(p) Taxes. Other than in the ordinary course of business, make or
-----
change any material election in respect of Taxes, adopt or change any accounting
method in respect of Taxes, file any material Tax Return or any amendment to a
material Tax Return other than Target's corporate Tax Return for the year ended
December 31, 1998, enter into any closing agreement, settle any claim or
assessment in respect of Taxes, or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes;
(q) Notices. Target shall give all notices and other information
-------
required to be given to the employees of Target, any collective bargaining unit
representing any group of employees of Target, and any applicable government
authority under applicable law in connection with the transactions provided for
in this Agreement;
(r) Revaluation. Revalue any of its assets, including without
-----------
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business; or
(s) Other. Take or agree in writing or otherwise to take, any of the
-----
actions described in Sections 4.2(a) through (u) above, or any action which
would make any of its representations or warranties contained in this Agreement
untrue or incorrect in any material respect or prevent it from performing or
cause it not to perform its covenants hereunder in any material respect.
23
<PAGE>
4.3 No Solicitation. Until the earlier of the Effective Time or the
---------------
termination of this Agreement pursuant to Article VII hereof, Target and the
officers, directors, employees or other agents of Target will not, directly or
indirectly, (i) take any action to solicit, initiate or encourage any
acquisition of or investment in Target or (ii) engage in negotiations with, or
disclose any nonpublic information relating to Target to, or afford access to
the properties, books or records of Target to, any person that has advised
Target that it may be considering making, or that has made, a proposal to
acquire an interest in Target. Target shall not, and shall not permit any of its
officers, directors, employees or other representatives to agree to or endorse
any acquisition of or investment in Target. Target will promptly notify Acquiror
after receipt of any offer for Target or any notice that any person is
considering making an offer for Target or any request for nonpublic information
relating to Target or for access to the properties, books or records of Target
by any person that has advised Target that it may be considering making, or that
has made, an offer for Target and will keep Acquiror fully informed of the
status and details of any such offer for Target notice, request or any
correspondence or communications related thereto and shall provide Acquiror with
a true and complete copy of such offer for Target notice or request or
correspondence or communications related thereto, if it is in writing, or a
written summary thereof, if it is not in writing.
ARTICLE V
ADDITIONAL AGREEMENTS
---------------------
5.1 Preparation of Disclosure Statement. As soon as practicable after the
-----------------------------------
execution of this Agreement, Target shall cooperate with Acquiror in the
preparation of a disclosure statement for Target's stockholders to approve this
Agreement, the Certificate of Merger and the transactions contemplated hereby
and thereby (the "Disclosure Statement"), which Target shall distribute to each
of the holders of its stock listed in the Target Capitalization Table dated as
of the Closing by U.S. Mail with proof of mailing, such Disclosure Statement to
be mailed no later than 10 days prior to the Target Stockholders Meeting (as
defined in Section 5.2 below). Target acknowledges that the disclosure statement
sent out to certain Target Stockholders on or about July 28, 1999 via email does
not constitute the Disclosure Statement for purposes of this Agreement. The
Disclosure Statement to Target's stockholders shall constitute a private
placement memorandum for the offer and issuance of the Merger Shares. Target
shall use its reasonable commercial efforts to cause the Disclosure Statement to
comply with applicable federal and state securities laws requirements. Acquiror
agrees to provide promptly to the other such information concerning its business
and financial statements and affairs as, in the reasonable judgment of Acquiror
or its counsel, may be required or appropriate for inclusion in the Disclosure
Statement, or in any amendments or supplements thereto, and to cause its counsel
and auditors to cooperate with Acquiror's counsel and auditors in the
preparation of the Disclosure Statement. Target will promptly advise Acquiror,
and Acquiror will promptly advise Target, in writing if at any time prior to the
Effective Time either Target or Acquiror shall obtain knowledge of any facts
that might make it necessary or appropriate to amend or supplement the
Disclosure Statement in order to make the statements contained or incorporated
by reference therein not misleading or to comply with applicable law. The
Disclosure Statement shall contain the recommendation of the Board of Directors
of Target that Target's stockholders approve the Merger and this Agreement and
the conclusion of the Target Board of Directors that the terms
24
<PAGE>
and conditions of the Merger are fair and reasonable to the stockholders of
Target. Anything to the contrary contained herein notwithstanding, Target shall
not include in the Disclosure Statement any information with respect to Acquiror
or its affiliates or associates, the form and content of which information shall
not have been approved by Acquiror prior to such inclusion.
5.2 Meeting of Target Stockholders.
------------------------------
Target shall promptly after the date hereof take all action necessary
in accordance with Delaware Law and its Certificate of Incorporation and Bylaws
to convene a meeting of its stockholders (the "Target Stockholders Meeting"),
including, without limitation, giving written notice of such meeting at least 10
days prior to such meeting (such notice to be sent by U.S. Mail with proof of
mailing) to each of the holders of its stock listed in the Target Capitalization
Table dated as of the Closing, or to secure the written consent of all of such
holders no later than September 7, 1999. Target shall consult with Acquiror
regarding the date of the Target Stockholders Meeting and use all reasonable
efforts and shall not postpone or adjourn (other than for the absence of a
quorum) the Target Stockholders Meeting without the consent of Acquiror. Target
shall use its best efforts to solicit from stockholders of Target proxies in
favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger. Target
acknowledges that the meeting of its stockholders held on July 30, 1999 (and any
postponement or adjournment thereof) does not constitute the Target Stockholders
Meeting for purposes of this Agreement. Target may cancel the Target
Stockholders' Meeting if it receives Irrevocable Proxies (as defined below) and
written consents to the Merger (in a form agreed to by Acquiror, acting
reasonably) from the holders of at least 95% of Target Capital Stock as of the
Closing Date.
5.3 Access to Information.
---------------------
(a) Target shall afford Acquiror and its accountants, counsel and
other representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Target's properties, books,
contracts, commitments and records, (ii) senior management of Target for the
purpose of preparing a business plan, and (iii) all other information concerning
the business, properties and personnel of Target as Acquiror may reasonably
request. Target agrees to provide to Acquiror and its accountants, counsel and
other representatives copies of internal financial statements promptly upon
request.
(b) Subject to compliance with applicable law, from the date hereof
until the Effective Time, each of Acquiror and Target shall confer on a regular
and frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant
to this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
(d) Target shall cause Target's accountants to cooperate with Acquiror
in auditing the financial statements of Target's business, including but not
limited to, executing any and all representation or other letters or agreements
reasonably required by Acquiror's accountants.
25
<PAGE>
5.4 Confidentiality. The parties acknowledge that Acquiror and Target have
---------------
previously executed a non-disclosure agreement (the "Confidentiality
Agreement"), which Confidentiality Agreement shall continue in full force and
effect in accordance with its terms.
5.5 Public Disclosure. Target shall consult with Acquiror before issuing
-----------------
any press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and shall not issue any such press release or make any such statement or
disclosure without the prior approval of Acquiror (which approval shall not be
unreasonably withheld). Notwithstanding the foregoing, this section shall not be
construed to prohibit Target from informing its securityholders of the nature
and terms of the Merger in connection with obtaining their consent to the Merger
or any waiver necessary to consummate the Merger.
5.6 Consents; Cooperation. Each of Acquiror and Target shall promptly
---------------------
apply for or otherwise seek, and use its best efforts to obtain, all consents
and approvals required to be obtained by it for the consummation of the Merger,
and shall use commercially reasonable efforts to obtain all necessary consents,
waivers and approvals under any of its material contracts in connection with the
Merger for the assignment thereof or otherwise. The parties hereto will consult
and cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations, memoranda,
briefs, arguments, opinions and proposals made or submitted by or on behalf of
any party hereto in connection with all proceedings under or relating to any
federal or state antitrust or fair trade law.
5.7 Stockholder Agreement/Irrevocable Proxies/Stockholder Representation
--------------------------------------------------------------------
Agreements. Target shall use its best efforts, on behalf of Acquiror, to cause
- ----------
(i) all affiliates of Target and (ii) holders of 90% or more of the sum of all
shares of Target Capital Stock to execute and deliver to Acquiror a Stockholder
Agreement and an Irrevocable Proxy in the form attached thereto as Exhibit A (an
---------
"Irrevocable Proxy") concurrently with the execution of this Agreement. Target
shall use its best efforts to deliver or cause to be delivered to Acquiror,
concurrently with the execution of this Agreement (and in each case at least
three (3) days prior to the Effective Time) from each of the securityholders of
Target who has not executed a Stockholder Agreement, an executed Stockholder
Representation Agreement.
5.8 Legal Requirements. Each of Acquiror and Target will, and will cause
------------------
their respective subsidiaries to, take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon such other party
in connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.9 Blue Sky Laws. Acquiror shall take such steps as may be necessary to
-------------
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the
26
<PAGE>
Acquiror Common Stock in connection with the Merger. Target shall use its best
efforts to assist Acquiror as may be necessary to comply with the securities and
blue sky laws of all jurisdictions which are applicable in connection with the
issuance of Acquiror Common Stock and options and warrants in connection with
the Merger.
5.10 Assignment of Repurchase Rights.
-------------------------------
All outstanding rights of Target which it may hold immediately prior
to the Effective Time to repurchase unvested shares of Target Common Stock (the
"Repurchase Options") shall be assigned to Acquiror in the Merger and shall
thereafter be exercisable by Acquiror upon the same terms and conditions in
effect immediately prior to the Effective Time, except that the shares
purchasable pursuant to the Repurchase Options and the purchase price per share
shall be adjusted to reflect the Exchange Ratio.
5.11 Employees. Edmond Routhier will enter into the Employment Agreement,
---------
which shall be substantially in the form attached as Exhibit G hereto and shall
---------
provide for his employment with Acquiror on an at-will basis as Director of
Action Sports, subject to the other terms set forth therein. Shawn Sharp will
enter into the Consulting Agreement , which shall be substantially in the form
attached as Exhibit H hereto and shall provide for his retention as an
---------
independent contractor (and not an employee) for up to eighty (80) hours,
subject to the other terms set forth therein. Employees of Target other than the
Principal Stockholders will be invited to apply for open positions at Acquiror,
but will not be given preference in hiring decisions over other candidates for
such positions.
5.12 Treatment as Reorganization. Neither Target nor Acquiror shall
---------------------------
knowingly take any action prior to or following the Closing that would cause the
merger to fail to qualify as a "reorganization" within the meaning of Section
368(a) of the Code.
5.13 Reasonable Efforts and Further Assurances. Each of the parties to this
-----------------------------------------
Agreement shall use its commercially reasonable efforts to effectuate the
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement. Each party hereto, at the reasonable
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.14 Disclosure Schedule Supplement. From time to time prior to the Closing
------------------------------
Date, with the written consent of Acquiror, Target may supplement or amend the
Target Disclosure Schedule with respect to any matter arising after the date of
this Agreement which, if existing or occurring at or prior to the date of this
Agreement, would have been required to be set forth or described in the Target
Disclosure Schedule or which is necessary to correct any information in the
Target Disclosure Schedule or in any representation or warranty of Target which
has been rendered inaccurate by such after-occurring event. Notwithstanding any
other provision of this Agreement, if the Closing occurs, the Target Disclosure
Schedule, as amended and supplemented through the Closing Date, with the written
consent of Acquiror, shall be deemed to be the Target Disclosure Schedule for
all purposes of this Agreement, and no claim for breach of this Agreement or
indemnification hereunder may be made with respect to any inaccuracy on the
27
<PAGE>
initial Target Disclosure Schedule or any supplement or amendment thereto which
has been corrected in the Target Disclosure Schedule as amended or supplemented
through the Closing Date. Acquiror hereby consents to Target amending Section
2.2 of the Target Disclosure Schedule by attaching an updated Target
Capitalization Table that is current as of the Closing Date showing any
additional Target Common Stock issued to holders of Series A Preferred Warrants
in the course of obtaining waivers of rights granted pursuant to such warrants
or to holders of Related Party Debt or Unrelated Party Debt in consideration of
the forgiveness or satisfaction of such debt, if such updated Target
Capitalization Table does not include any Target Stockholder whose name was not
set forth on the Target Capitalization Table attached to this Agreement on the
date hereof.
ARTICLE VI
CONDITIONS TO THE MERGER
------------------------
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.
(b) Governmental Approval. Acquiror and Target and their
---------------------
respective subsidiaries (including, in the case of Acquiror, Merger Sub) shall
have timely obtained from each Governmental Entity all approvals, waivers and
consents, if any, necessary for consummation of or in connection with the Merger
and the several transactions contemplated hereby, including such approvals,
waivers and consents as may be required under the Securities Act and under state
Blue Sky laws.
(c) Escrow Agreement. Acquiror, Target, Escrow Agent and the
----------------
Stockholder's Agent (as defined in Article VIII hereto) shall have entered into
an Escrow Agreement substantially in the form attached hereto as Exhibit F.
---------
6.2 Additional Conditions to Obligations of Target. The obligations of
----------------------------------------------
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
28
<PAGE>
(a) Representations, Warranties and Covenants. Except as disclosed in
-----------------------------------------
the Acquiror Disclosure Schedule dated the date of this Agreement, (i) the
representations and warranties of Acquiror and Merger Sub in this Agreement
shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a reference
to materiality which representations and warranties as so qualified shall be
true and correct in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time and (ii)
Acquiror and Merger Sub shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by them as of the Effective Time.
(b) Certificate of Acquiror and Merger Sub. Target shall have been
--------------------------------------
provided with a certificate executed on behalf of Acquiror and Merger Sub by its
President and its Chief Financial Officer to the effect that, as of the
Effective Time:
(i) except as disclosed in the Acquiror Disclosure Schedule
dated the date of this Agreement, all representations and warranties made
by Acquiror and Merger Sub under this Agreement are true and complete in
all material respects (except for such representations and warranties that
are qualified by their terms by reference to materiality which
representations and warranties as so qualified shall be true and correct in
all respects); and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Acquiror and Merger Sub on or before such date
have been so performed in all material respects.
(c) Legal Opinion. Target shall have received a legal opinion from
-------------
Acquiror's legal counsel substantially in the form of Exhibit I hereto.
---------
(d) Employment Agreement. Acquiror shall have entered into the
--------------------
Employment Agreement, which shall be substantially in the form attached hereto
as Exhibit G.
---------
(e) Consulting Agreement. Acquiror shall have entered into the
--------------------
Consulting Agreement, which shall be substantially in the form attached hereto
as Exhibit H.
---------
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub.
-------------------------------------------------------------------
The obligations of Acquiror to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Acquiror and Merger Sub:
(a) Representations, Warranties and Covenants. Except as disclosed in
-----------------------------------------
the Target Disclosure Schedule (as updated through the date of this Agreement
with the consent of Acquiror), (i) the representations and warranties of Target
and the Principal Stockholders in this Agreement shall be true and correct in
all material respects (except for such representations and warranties that are
qualified by their terms by a reference to materiality which representations and
warranties as so qualified shall be true in all respects) on and as of the
Effective Time as though such representations and warranties were made on and as
of such time, without giving effect to any supplement or amendment to the Target
Disclosure Schedule, and (ii) Target and
29
<PAGE>
the Principal Stockholders shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by them as of the Effective Time.
(b) Certificate of Target and the Principal Stockholders. Acquiror
----------------------------------------------------
shall have been provided with a certificate executed on behalf of Target by its
President and Chief Financial Officer and by the Principal Stockholders to the
effect that, as of the Effective Time:
(i) except as set forth in the Target Disclosure Schedule
(as updated through the date of this Agreement with the consent of
Acquiror), all representations and warranties made by Target and the
Principal Stockholders under this Agreement are true and complete in all
material respects (except for such representations and warranties that are
qualified by their terms by reference to materiality which representations
and warranties as so qualified shall be true and correct in all respects);
and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Target and the Principal Stockholders on or
before such date have been so performed.
(c) Third Party Consents. Acquiror shall have been furnished with
--------------------
evidence satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under the
contracts of Target set forth in Section 2.27 of the Target Disclosure Schedule
or Schedule 6.3(c) hereof.
(d) Injunctions or Restraints on Merger and Conduct of Business. No
-----------------------------------------------------------
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation of
the business of Target, following the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
Governmental Entity, domestic or foreign, seeking the foregoing be pending.
(e) Legal Opinion. Acquiror shall have received a legal opinion from
-------------
Target's legal counsel, in substantially the form of Exhibit J.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the condition, (financial or otherwise), properties,
technology rights, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Target and Acquiror shall be
satisfied with its due diligence investigation of Target's business.
(g) Stockholder Agreements; Stockholder Representation Agreements.
-------------------------------------------------------------
Acquiror shall have received from holders of at least 90% of shares of Target
Capital Stock an executed Stockholder Agreement in substantially the form
attached hereto as Exhibit D. At the time of the Closing, no more than 5% of the
---------
Target Stockholders shall have not executed either a Stockholder Agreement or a
Stockholder Representation Agreement.
30
<PAGE>
(h) FIRPTA Certificate. Target shall, prior to the Closing Date,
------------------
provide Acquiror with a properly executed FIRPTA Notification Letter,
substantially in the form of Exhibit K attached hereto, which states that shares
---------
of capital stock of Target do not constitute "United States real property
interests" under Section 897(c) of the Code, for purposes of satisfying
Acquiror's obligations under Treasury Regulation Section 1.1445-2(c)(3). In
addition, simultaneously with delivery of such Notification Letter, Target shall
have provided to Acquiror, as agent for Target, a form of notice to the Internal
Revenue Service in accordance with the requirements of Treasury Regulation
Section 1.897-2(h)(2) and substantially in the form of Exhibit K attached hereto
along with written authorization for Acquiror to deliver such notice form to the
Internal Revenue Service on behalf of Target upon the Closing of the Merger.
(i) Resignation of Directors and Officers. The directors and officers
-------------------------------------
of Target in office immediately prior to the Effective Time shall have resigned
as directors and officers, as applicable, of Target effective as of the
Effective Time.
(j) Employment and Non-Competition Agreement. Edmond Routhier shall
----------------------------------------
have entered into the Employment Agreement, which shall be substantially in the
form attached hereto as Exhibit G.
---------
(k) Consulting Agreement. Shawn Sharp shall have entered into the
--------------------
Consulting Agreement, which shall be substantially in the form attached hereto
as Exhibit H.
---------
(l) Certificates of Good Standing. Target shall, prior to the Closing
-----------------------------
Date, provide Acquiror with certificates from the Secretary of State and the
Franchise Tax Board of the State of Delaware dated no earlier then five business
days prior to closing as to, respectively, Target's corporate good standing and
payment of all applicable taxes. Prior to the Closing Date, Target shall also
provide Acquiror with certificates from the Secretary of States of Texas and
California as to Target's good standing as a foreign corporation doing business
in the states of Texas and California, respectively.
(m) Board Approval. Acquiror's Board shall have approved the
--------------
transaction.
(n) Investment Banker Opinion. Acquiror shall have received an
-------------------------
opinion from its banker that the closing of this Agreement will not unfavorably
impact the timing and succession of an offering for Acquiror.
(o) Securityholder Approval. This Agreement, the Escrow Agreement and
-----------------------
the Certificate of Merger shall have been approved and adopted by the
affirmative vote of the holders of at least 90% of Target's Capital Stock and
the holders of not more than 5% of the issued and outstanding shares of Target
Capital Stock shall have exercised their appraisal rights pursuant to Section
262 of the Delaware Law.
(p) Proprietary Agreements. All of Target's service providers as of
----------------------
the Closing Date shall have entered into Acquiror's standard proprietary
information and inventions agreement.
31
<PAGE>
(q) Waiver of Warrant Rights. Any rights to purchase or receive
securities of Acquiror, Merger Sub or Target granted pursuant to certain Series
A Preferred Warrants issued by Target shall have been waived or terminated in
their entirety.
(r) Discharge of Debt.
-----------------
(i) Target shall have discharged all Related Party Debt,
provided, that not more than $35,000 in Cash on Hand may be used to discharge
- --------
liabilities of any kind owed to Shawn Sharp and no Cash on Hand may be used to
discharge any other Related Party Debt; and
(ii) Target shall have discharged all Unrelated Party Debt other
than such Unrelated Party Debt as shall not exceed $415,000.00, excluding (i) up
to $22,000 of debt owed pursuant to the lease for Dell Computer Corporation
equipment with Dana Commercial Credit, #515385 and (ii) up to $15,000 of debt
relating to the purchase of inventory from Arnette Optics Inc., provided that
any additional cash from all other sales and inventory of Target is transferred
to Acquiror at the Closing;
(s) Exemption from Registration Requirements. The shares of Acquiror
----------------------------------------
Common Stock to be issued to Stockholders of Target pursuant to Article I hereof
shall be exempt from registration under (i) the Securities Act of 1933, as
amended, by reason of Section 4(2) thereof and (ii) corresponding provisions of
state securities laws.
(t) Due Diligence Review. Acquiror shall have completed to its
--------------------
satisfaction a due diligence review of the financial and legal information
delivered to Acquiror by Target and such review shall not have disclosed a
material item which has not previously been disclosed to Acquiror.
(u) Abandonment of Certain Domain Names. Target shall abandon any
-----------------------------------
internet domain names currently employed by Target that reflects the name of an
individual (living or dead) or tradename or trademark of another individual or
entity.
(v) Obtain Certain Assignments. Target shall have obtained valid
--------------------------
written assignments from Priscilla Hayes, Rodrigo Diaz and In Vision of the
rights to any contributions to the creation or development of Intellectual
Property.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
7.1 Termination. At any time prior to the Effective Time, whether before
-----------
or after approval of the matters presented in connection with the Merger by the
stockholders of Target, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Board of Directors
of Acquiror and Target;
32
<PAGE>
(b) by either Acquiror or Target, if the Closing shall not have
occurred on or before September 8, 1999 (provided, a later date may be agreed
upon in writing by the parties hereto, and provided further that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
party whose action or failure to act has been the cause or resulted in the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes a breach of this Agreement) or if any permanent injunction or
other order of a court or other competent authority preventing the consummation
of the Merger shall have become final and nonappealable;
(c) by Acquiror, if (i) Target shall breach in any material respect
any representation, warranty, obligation or agreement hereunder (except for such
representations and warranties that are qualified by their terms by reference to
materiality which representations and warranties as so qualified shall have been
breached in any respect) and such breach shall not have been cured within ten
(10) business days of receipt by Target of written notice of such breach
provided that the right to terminate this Agreement by Acquiror under this
Section 7.1(c)(i) shall not be available to Acquiror where Acquiror is at that
time in breach of this Agreement, (ii) the Board of Directors of Target shall
have withdrawn or modified its recommendation of this Agreement or the Merger in
a manner adverse to Acquiror or shall have resolved to do any of the foregoing,
or (iii) if any required approval of the stockholders of Target shall not have
been obtained by reason of the failure to obtain the required vote upon a vote
held at a duly held meeting of stockholders or at any adjournment thereof; or if
for any reason Target fails to call and hold the Target Stockholders Meeting by
September 7, 1999;
(d) by Target, if Acquiror shall breach in any material respect any
representation, warranty, obligation or agreement hereunder (except for such
representations and warranties that are qualified by their terms by reference to
materiality which representations and warranties as so qualified shall have been
breached in any respect) and such breach shall not have been cured within ten
(10) days following receipt by Acquiror of written notice of such breach,
provided that the right to terminate this Agreement by Target under this Section
7.1(d) shall not be available to Target where Target is at that time in breach
of this Agreement;
7.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror or Target or their
respective officers, directors, stockholders or affiliates, except to the extent
that such termination results from the willful breach by a party hereto of any
of its representations, warranties or covenants set forth in this Agreement;
provided that the provisions of Section 5.4 (Confidentiality), Section 7.3
(Expenses) and this Section 7.2 shall remain in full force and effect and
survive any termination of this Agreement.
7.3 Expenses. Whether or not the Merger is consummated, all costs and
--------
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, the fees and expenses of its
advisers, accountants and legal counsel) shall be paid by the party incurring
such expense.
7.4 Extension; Waiver. At any time prior to the Effective Time any party
-----------------
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and
33
<PAGE>
warranties made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
7.5 Amendment. The parties hereto may cause this Agreement to be amended
---------
at any time by execution of an instrument in writing signed on behalf of each of
the parties hereto; provided that an amendment made subsequent to adoption of
the Agreement by the Target Stockholders shall not (i) alter or change the
amount or kind of consideration to be received in exchange for the Target
Capital Stock or (ii) alter or change any of the terms and conditions of the
Agreement if such alteration or change would materially adversely affect the
Target Stockholders other than the Principal Stockholders.
ARTICLE VIII
ESCROW AND INDEMNIFICATION
--------------------------
8.1 Escrow Fund. As soon as practicable after the Effective Time, ten
-----------
percent (10%) of the Merger Shares (the "Escrow Shares") shall be registered in
the name of, and be deposited with State Street Bank and Trust Company of
California, N.A. (or other entity selected by Acquiror with the reasonable
consent of Target) as escrow agent (the "Escrow Agent"), such deposit (together
with interest and other income thereon) to constitute the Escrow Fund and to be
governed by the terms set forth herein and in the Escrow Agreement attached
hereto as Exhibit F. The Escrow Fund shall be available to compensate Acquiror
---------
pursuant to the indemnification obligations of the stockholders of Target. The
portion of the Escrow Fund contributed on behalf of each stockholder of Target
shall be in proportion to the aggregate Acquiror Common Stock to which such
holder would otherwise be entitled to receive under Section 1.6(a) hereof. In
addition to the Escrow Shares, the Principal Stockholders shall deposit the
Performance Option Shares they receive under the Employment Agreement or the
Consulting Agreement (as applicable) in the Escrow Fund upon purchase of such
shares and, except as indicated otherwise herein, such shares shall be governed
by the terms set forth herein applicable to the Escrow Shares. Distribution of
Escrow Shares and Performance Option Shares to Acquiror as compensation for
Damages shall be made as provided below in Sections 8.5, 8.6 and 8.7.
8.2 Indemnification.
(a) The Target Stockholders will indemnify and hold harmless
Acquiror and its officers, directors, agents and employees, and each person, if
any, who controls or may control Acquiror within the meaning of the Securities
Act of 1933, as amended, (hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
any and all losses, costs, damages, liabilities and expenses arising from
claims, demands, actions, causes of action, including, without limitation, legal
fees and any and all expenses incurred in investigating, preparing, and
defending against any litigation, commenced or threatened, and any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, "Damages") arising out of any misrepresentation or
breach of or default
34
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in or nonfulfillment of or in connection with any of the representations,
warranties, covenants and agreements given or made by Target or the Principal
Stockholders in this Agreement, the Target Disclosure Schedules or any exhibit
or schedule to this Agreement.
(b) Notwithstanding the foregoing, the Target Stockholders shall be
jointly liable for Damages up to the limit of the value of the Escrow Shares and
any Damages recovered pursuant to this Article VIII shall be paid from the
Escrow Shares prior to recovery from any other source. With respect to claims
made for Damages in excess of the value of the Escrow Shares, each Target
Stockholder shall be liable only to the extent of the value of his or her pro
rata amount of Damages paid pursuant to any Officer's Certificate (such pro rata
amount to be based upon, and (except for the Principal Stockholders) limited to
a maximum of his or her pro rata amount of the Merger Shares), irrespective of
relative fault for such Damages paid. If the Merger Shares have been sold by any
Target Stockholder or are otherwise unavailable to compensate the Indemnified
Persons for Damages, the Indemnified Persons shall have recourse to the personal
assets of the Target Stockholders whose Merger Shares are unavailable up to the
value of such Target Stockholder's respective Merger Shares, as determined in
accordance with Section 8.5(b) hereof. The Principal Stockholders shall each be
personally liable for 50% of any Damages in excess of the value of the Merger
Shares recovered or any cash value recovered in lieu of the Merger Shares. The
value of any Escrow Shares, Merger Shares or Performance Option Shares shall be
determined in accordance with Section 8.5(b) hereof.
(c) The Escrow Fund shall be security for, but not a limitation upon,
the indemnity obligations of the Target Stockholders, subject to the limitations
in this Agreement. The Performance Option Shares shall be additional security
for, but not a limitation upon, the indemnity obligations of the Principal
Stockholders as indicated herein.
(d) No investigation made by or on behalf of Acquiror with respect to
Target and the Principal Stockholders shall be deemed to affect Acquiror's
reliance on the representations, warranties, covenants and agreements made by
Target and the Principal Stockholders contained in this Agreement and shall not
be a waiver of Acquiror's rights to indemnity as herein provided for the breach
or inaccuracy of, or failure to perform or comply with, any of Target's or the
Principal Stockholders' representations, warranties, covenants or agreements
under this Agreement. All representations and warranties of each party set forth
in this Agreement shall be deemed to have been made again by such party at and
as of the Closing. No performance or execution of this Agreement in whole or in
part by any party hereto, no course of dealing between or among the parties
hereto or any delay or failure on the part of any party in exercising any rights
hereunder or at law or in equity, and no investigation by any party hereto shall
operate as a waiver of any rights of such party.
(e) Nothing in this Agreement shall be construed as limiting in any
way the remedies that may be available to a party in the event of fraud relating
to the representations, warranties, agreements or covenants made by any other
party in this Agreement.
(f) The Principal Stockholders shall have liabilities and obligations
for Damages (as defined herein) under this Article VIII only with respect to
claims submitted or notice of claims provided during the time period of
survivability of the specific representation, warranty, covenant or agreement as
set forth herein. Notwithstanding the expiration date of the
35
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representations, warranties, covenants and agreements set forth herein, if
Acquiror shall notify the Escrow Agent with respect to the submission of a claim
during the time period of survivability of such representation, warranty,
covenant or agreement in conformity with the terms of the Escrow Agreement, each
party's liability or obligation for Damages shall continue in full force and
effect until those claims timely made are finally settled.
(g) Notwithstanding that Acquiror has participated in drafting the
Target Disclosure Schedule, Target and the Principal Stockholders shall
nonetheless remain fully liable (except to the extent that recovery against
certain individuals may be limited by other provisions of this Article VIII) for
any violation of the representations and warranties contained in Article II
hereof, regardless of whether or not Acquiror or the Merger Sub or any agent or
officer thereof had knowledge (actual or imputed) of any violation of such
representations or warranties prior to the date hereof by virtue of such
participation. The Indemnified Persons shall be able to rely on the specific
disclosures made in the Target Disclosure Schedule as the only exceptions to the
representations and warranties set forth in Article II hereof.
8.3 Damage Threshold. Notwithstanding the foregoing, Acquiror may not
----------------
receive any distribution from the Escrow Fund unless and until an Officer's
Certificate or Certificates (as defined in Section 8.5 below) identifying
Damages the aggregate amount of which exceeds $5,000 have been delivered to a
Stockholders Agent and the Escrow Agent as provided in Section 8.5 below and
such amount is determined pursuant to this Article VIII to be payable, in which
case Acquiror shall receive a distribution of Escrow Shares and/or Performance
Option Shares equal in value to the full amount of Acquiror Damages.
8.4 Escrow Period. The escrow period (the "Escrow Period") shall terminate
-------------
at 5:00 p.m. San Francisco Time upon the one year anniversary of the date on
which the Effective Time occurs; provided, however, that a portion of the Escrow
Shares and the Performance Option Shares, which in the judgment of Acquiror, is
necessary to satisfy any unsatisfied claims specified in any Officer's
Certificate theretofore delivered to the Escrow Agent prior to termination of
the Escrow Period with respect to facts and circumstances existing prior to
expiration of the Escrow Period ("Unresolved Claims"), shall remain in the
Escrow Fund until such Unresolved Claims have been resolved. As soon as all
Unresolved Claims have been resolved, the Escrow Agent shall deliver to all
former Target Stockholders the remaining portion of the Escrow Fund and shall
deliver to the Principal Stockholders the remaining portion of the Performance
Option Shares. Deliveries of Escrow Shares to the Target Stockholders and
deliveries of Performance Option Shares to the Principal Stockholders pursuant
to this Section 8.4 shall be made in proportion to their respective original
contributions to the Escrow Fund.
8.5 Claims upon Escrow Fund.
-----------------------
(a) Upon receipt by the Escrow Agent on or before the last day of
the Escrow Period of a certificate signed by any officer of Acquiror (an
"Officer's Certificate") specifying in reasonable detail the individual items of
such Damages included in the amount so stated, the date each such item was paid,
or properly accrued or arose, the nature of the misrepresentation, breach of
warranty or claim to which such item is related, the Escrow Agent shall deliver
to Acquiror out of the Escrow Fund, as promptly as practicable, Escrow Shares,
Performance Option Shares or other assets held in the Escrow Fund having a value
equal to such Damages,
36
<PAGE>
provided, however, that except in such instance where a Target Stockholder has
- -------- -------
delivered cash in lieu of surrendering Escrow Shares pursuant to Section 8.5(c)
below (in which instance such cash may be delivered alongside any Escrow
Shares), the Escrow Agent shall deliver all of the Escrow Shares prior to
delivering any Performance Option Shares or other assets held in the Escrow
Fund. All shares of Acquiror Common Stock subject to such claims shall remain in
the Escrow Fund until Damages are actually incurred or paid or the Acquiror
determines in its reasonable good faith judgment and certifies to the Escrow
Agent that no Damages will be incurred or paid (in which event such shares shall
be distributed to the Target Stockholders in accordance with Section 8.4 above).
(b) For the purpose of compensating Acquiror for its Damages pursuant
to this Agreement, the Escrow Shares, the Merger Shares and the Performance
Option Shares shall be valued at the greater of the fair market value on the
date of certification of such claim pursuant to this section, as determined by
the Board of Directors of Acquiror acting in good faith, or $2.00 per share,
provided, however, that if such certification occurs after the initial public
offering of the Acquiror's Common Stock (the Acquiror IPO"), the Escrow Shares,
the Merger Shares and the Performance Option Shares shall be valued at the
closing price on such date as quoted by the Wall Street Journal (or if such
paper is not published on such date, the next preceding date of publication).
Acquiror shall set forth such value in each Officer's Certificate identifying
Damages. The Escrow Agent may rely on such certificate without inquiry and may
assume that the value set forth therein has been determined in good faith in
accordance with this Section 8.5(b).
(c) Prior to the Acquiror IPO, if any Target Stockholder shall
disagree with the fair market value of the Escrow Shares (or if any Principal
Stockholder shall disagree with the fair market value of the Performance Option
Shares) as determined by the Board of Directors of Acquiror and set forth in an
Officer's Certificate as such, such Target Stockholder or Principal Stockholder
(as applicable) may elect to pay all (but not less than all) of his or her
respective portion of the Damages claimed in such Officer's Certificate in cash
in lieu of surrendering Escrow Shares or Performance Option Shares. Any Target
Stockholder electing to pay his or her respective Damages in cash must deliver
such cash in immediately available funds to the Escrow Agent together with a
letter indicating the purpose of such funds not later than 10 calendar days
following the receipt of the Officer's Certificate relating to such Damages by
either Stockholders' Agent. The date of receipt of any Officer's Certificate
shall be determined in accordance with Section 9.2 hereof. If the Escrow Agent
shall not receive such funds prior to such time, the Escrow Agent shall, at
Acquiror's option, distribute such Target Stockholder's Escrow Shares, or such
Principal Stockholder's Performance Option Shares, to the Indemnified Persons
and shall return any funds received to such Target Stockholder or Principal
Stockholder, as applicable. No interest shall accrue on any cash so delivered
irrespective of the amount of time that such cash is held by the Escrow Agent.
8.6 Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate certificate shall be delivered to
the Stockholders' Agents and for a period of thirty (30) days after such receipt
by the Escrow Agent, the Escrow Agent shall make no delivery of Escrow Shares or
Performance Option Shares unless the Escrow Agent or Acquiror shall have
received written authorization from a Stockholders' Agent to make such delivery.
After the expiration of such thirty (30) day period, the Escrow Agent shall make
37
<PAGE>
delivery of Escrow Shares or Performance Option Shares, provided, that no such
--------
delivery may be made if a Stockholders' Agent shall object in a written
statement to the claim made in the Acquiror Officer's Certificate, and such
statement shall have been received by the Escrow Agent prior to the expiration
of such thirty (30) day period.
8.7 Resolution of Conflicts; Arbitration.
------------------------------------
(a) In case a Stockholders' Agent shall so object in writing to any
claim or claims by Acquiror made in any Officer's Certificate, Acquiror shall
have thirty (30) days after receipt by the Escrow Agent or Acquiror of an
objection by the Stockholders' Agent to respond in a written statement to the
objection of the Stockholders' Agent.
(b) If after such thirty (30) day period there remains a dispute as to
any claims, the Stockholders' Agents and Acquiror shall attempt in good faith
for sixty (60) days to agree upon the rights of the respective parties with
respect to each of such claims. If a Stockholders' Agent and Acquiror should so
agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties. The Escrow Agent shall be entitled to rely on any such memorandum
and shall deliver the Escrow Shares and/or the Performance Option Shares in
accordance with the terms thereof.
(c) If no such agreement can be reached after good faith negotiation,
either Acquiror or a Stockholders' Agent may, by written notice to the other,
demand arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event arbitration shall
not be commenced until such amount is ascertained or both parties agree to
arbitration; and in either such event the matter shall be settled by arbitration
conducted by three arbitrators. Within fifteen (15) days after such written
notice is sent, Acquiror and a Stockholders' Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The decision of the arbitrators as to the validity and amount of any claim in an
Officer's Certificate shall be binding and conclusive upon the parties to this
Agreement, and notwithstanding anything in this Article VIII, the Escrow Agent
shall be entitled to act in accordance with such decision and make or withhold
payments out of the Escrow Fund in accordance therewith.
(d) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration shall be held in Santa
Clara or San Mateo County, California under the commercial rules then in effect
of the American Arbitration Association. For purposes of this section, in any
arbitration hereunder in which any claim or the amount thereof stated in an
Officer's Certificate is at issue, Acquiror shall be deemed to be the Non-
Prevailing Party unless the arbitrators award Acquiror more than one-half (1/2)
of the amount in dispute, plus any amounts not in dispute; otherwise, the Target
Stockholders shall be deemed to be the Non-Prevailing Party. The Non-Prevailing
Party to an arbitration shall pay its own expenses, the fees of each arbitrator,
the administrative fee of the American Arbitration Association, and the
expenses, including without limitation, attorneys' fees and costs, reasonably
incurred by the other party to the arbitration.
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8.8 Stockholders' Agent.
-------------------
(a) In the event that the Merger is approved by the stockholders of
Target, effective upon such approval and without further act of any Target
Stockholder, Edmond Routhier and Shawn Sharp shall each be appointed and
constituted as agents (each in such capacity, together with any successor
thereto, a "Stockholders' Agent" and together in such capacity, the
"Stockholders' Agents") for and on behalf of the Target Stockholders to give and
receive notices and communications, to authorize delivery to Acquiror of the
Acquiror Common Stock or other property from the Escrow Fund in satisfaction of
claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Stockholders'
Agent for the accomplishment of the foregoing. No bond shall be required of the
Stockholders' Agents. Upon resignation, disability or death of either
Stockholders' Agent, the holders of a majority in interest in the Escrow Fund
(excluding the Performance Option Shares) may designate a successor
Stockholders' Agent who shall succeed to all of the rights and privileges of the
former Stockholders' Agent; provided that any successor must be a Target
Stockholder and, provided further, that such successor may be selected only with
the prior written consent of Acquiror, which consent may not be unreasonably
withheld. Notices or communications to or from either of the Stockholders'
------
Agents shall constitute notice to or from each of the Target Stockholders. In
the event of any conflict between communications from the Stockholders Agents,
the Company shall be entitled to rely on the communications of either
Stockholders' Agent, in the Company's sole discretion.
(b) The Stockholders' Agents shall not be liable for any act done or
omitted hereunder as Stockholders' Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith. The Target
Stockholders shall severally indemnify the Stockholders' Agents and hold them
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Stockholders' Agents or either of
them and arising out of or in connection with the acceptance or administration
of their duties hereunder.
(c) The Stockholders' Agents shall have reasonable access to
information about Target and the reasonable assistance of Target's officers and
employees for purposes of performing their duties and exercising their rights
hereunder, provided that the Stockholders' Agents shall treat confidentially and
not disclose any nonpublic information from or about Target to anyone (except on
a need to know basis to individuals who agree to treat such information
confidentially).
8.9 Actions of the Stockholders' Agent. A decision, act, consent or
----------------------------------
instruction of either Stockholders' Agent shall constitute a decision of all
Target Stockholders for whom shares of Acquiror Common Stock otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each such Target Stockholder and the other Stockholders' Agent,
and the Escrow Agent and Acquiror may rely upon any decision, act, consent or
instruction of either Stockholders' Agent as being the decision, act, consent or
instruction of each and every such Target Stockholder. The Escrow Agent and
Acquiror are hereby relieved from
39
<PAGE>
any liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of either Stockholders' Agent.
8.10 Third-Party Claims. In the event Acquiror becomes aware of a
------------------
third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall promptly notify a Stockholders' Agent of such claim,
and the Stockholders' Agents and the Target Stockholders for whom shares of
Acquiror Common Stock otherwise issuable to them are deposited in the Escrow
Fund shall be entitled, at their expense, to participate in any defense of such
claim. Acquiror shall have the right in its sole discretion to settle any such
claim; provided, however, that Acquiror may not effect the settlement of any
such claim without the consent of either Stockholders' Agent, which consent
shall not be unreasonably withheld. In the event that a Stockholders' Agent has
consented to any such settlement, neither Stockholders' Agent shall have power
or authority to object under Section 8.6 or any other provision of this Article
VIII to the amount of any claim by Acquiror against the Escrow Fund for
indemnity with respect to such settlement.
8.11 Sole Remedy; Waiver of Rights. Each party hereby acknowledges and
-----------------------------
agrees that from and after the Effective Time, its sole and exclusive remedy
with respect to any and all claims relating to this Agreement shall be pursuant
to the indemnification provisions set forth in this Article VIII, except for
claims of fraud. In furtherance of the foregoing, each party hereby waives, from
and after the Effective Time, to the fullest extent permitted under applicable
law, any and all claims, rights and causes of action (other than claims of fraud
and claims arising under this Article VIII) it may have relating to this
Agreement arising under or based upon any federal, state, local or foreign
statute, law, ordinance, rule or regulation or otherwise. Nothing in this
Section 8.11 shall be construed to limit any claim which could be made for
breach of any other agreement among the parties hereto, including, without
limitation, the Stockholders' Agreement, the Stockholders' Representation
Agreement, the Employment Agreement, the Consulting Agreement, the FIRPTA
Certificate, the Escrow Agreement, the Promissory Note which may be delivered by
Edmond Routhier in connection with the Employment Agreement, the Confidentiality
Agreement, any Proprietary Information and Invention Agreement (or similar
agreement) entered into with Target, Acquiror or the Surviving Corporation, or
any legal opinion delivered in connection with this Agreement.
ARTICLE IX
GENERAL PROVISIONS
9.1 Survival at Effective Time. The representations and warranties set
--------------------------
forth in Article II will survive until the expiration of the Escrow Period,
except in the event of fraud, in which case they shall survive until the limit
of any applicable statute of limitations. The representations and warranties set
forth in Article III shall not survive the Closing. The agreements set forth in
this Agreement shall terminate at the Effective Time, except that the agreements
set forth in Article I, Section 5.3 (Access to Information), Section 5.4
(Confidentiality), 5.7 (Stockholder Agreement/Irrevocable Proxies/Stockholder
Representation Agreements), 5.16 (Reasonable Efforts and Further Assurances),
7.3 (Expenses and Termination Fees), 7.4 (Extension), Article VIII and this
Article IX shall survive the Effective Date and the Closing.
40
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9.2 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given one business day following personal delivery
or overnight delivery by commercial delivery service or if sent via facsimile
(with confirmation of receipt), or three business days after being mailed by
registered or certified mail (return receipt requested) to the parties at the
following address (or at such other address for a party as shall be specified by
like notice):
(a) if to Acquiror or Merger Sub, to:
Fogdog, Inc.
500 Broadway
Redwood City, CA 94063
Attention: General Counsel
Facsimile No.: (650) 980-2600
Telephone No.: (650) 980-2546
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: David A. Makarechian, Esq.
Facsimile No.: (650) 496-2885
Telephone No.: (650) 424-0160
(b) if to Target or to the Principal Stockholders, to:
Sports Universe, Inc.
13706 Research Boulevard, Suite 216
Austin, TX 78750
Attention: Edmond Routhier
Facsimile No.: (650) 323-5576
Telephone No.: (650) 323-2100
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Robert P. Latta
Facsimile No.: (650) 493-6811
Telephone No.: (650) 493-9300
9.3 Interpretation. When a reference is made in this Agreement to Exhibits,
--------------
such reference shall be to an Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
The phrase "made available" in this Agreement
41
<PAGE>
shall mean that the information referred to has been made available if requested
by the party to whom such information is to be made available. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
9.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.5 Attorneys Fees. If any action at law or in equity is necessary to
--------------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
9.6 Entire Agreement; Nonassignability; Parties in Interest. This
-------------------------------------------------------
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Target Disclosure Schedule and the Acquiror Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a) and (d)-(e), 1.7, 1.9-1.11, 5.10 and 5.12; and (c) shall not be assigned
by operation of law or otherwise except as otherwise specifically provided.
9.7 Severability. In the event that any provision of this Agreement, or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.8 Remedies Cumulative. Except as otherwise provided herein, any and all
-------------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.9 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of California without reference to such state's
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the County of Santa
Clara, State of California, in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, agrees that process
may be served upon them in any manner authorized by the laws of the State of
California for such
42
<PAGE>
persons and waives and covenants not to assert or plead any objection which they
might otherwise have to such jurisdiction and such process.
9.10 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
[Signature Page Follows]
43
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IN WITNESS WHEREOF, Target, Merger Sub, Acquiror and each of the
Principal Stockholders have caused this Agreement and Plan of Reorganization to
be executed and delivered by their respective officers and persons thereunto
duly authorized, all as of the date first written above.
ACQUIROR: FOGDOG, INC.
By /s/ Timothy Harrington
--------------------------------------
Timothy Harrington
President, Chief Executive Officer
MERGER SUB: FOGDOG ACQUISITION CORP.
By /s/ Marcy von Lossberg
--------------------------------------
Marcy von Lossberg
Vice President
TARGET: SPORTS UNIVERSE, INC.
By /s/ Edmond Routhier
--------------------------------------
Edmond Routhier
President and Chief Executive Officer
PRINCIPLE STOCKHOLDERS: EDMOND ROUTHIER
/s/ Edmond Routhier
----------------------------------------
SHAWN SHARP
/s/ Shawn Sharp
----------------------------------------
<PAGE>
EXHIBIT 4.4
THIS WARRANT AND THE SHARES OF CAPITAL STOCK ISSUABLE UPON CONVERSION AND
EXERCISE HEREOF ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN.
NEITHER THIS WARRANT NOR THE CAPITAL STOCK ISSUABLE UPON CONVERSION AND EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). NEITHER THIS WARRANT NOR SUCH CAPITAL STOCK MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS A REGISTRATION STATEMENT RELATED
THERETO IS IN EFFECT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE
ACT IS APPLICABLE.
Void after March 24, 2003
FOGDOG, INC.
WARRANT TO PURCHASE SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK
THIS CERTIFIES THAT, for value received, Nike USA, Inc. ("Holder") is
entitled at any time prior to expiration of this Warrant to subscribe for and
purchase Six Million One Hundred Seventy-One Thousand Five Hundred and Twenty-
Four (6,171,524) shares (as adjusted pursuant to Paragraph 4 hereof) of the
fully paid and nonassessable Series C Preferred Stock (the "Shares") of Fogdog,
Inc., a California corporation (the "Company"), at the price of $1.0294 per
share (such price as adjusted from time to time pursuant to the terms hereof is
herein referred to as the "Warrant Price"), subject to the provisions and upon
the terms and conditions hereinafter set forth. As used herein, the term "Series
C Preferred Stock" shall mean the Company's presently authorized Series C
Convertible Preferred Stock, any securities of the Company into or for which
such Series C Convertible Preferred Stock may hereafter be changed, converted or
exchanged, including the underlying Common Stock, and the term "Date of Grant"
shall mean September 24, 1999.
Upon the conversion of the Company's Preferred Stock into Common Stock
pursuant to the Company's charter documents, this Warrant shall represent a
warrant to purchase the Company's Common Stock for the same number of shares of
Common Stock that such Series C Preferred Stock would have converted into had
this Warrant been exercised immediately prior to such conversion.
1. Term.
(a) Period of Exercise. Subject to earlier termination under
Subparagraph 1 (b), this Warrant shall be exercisable, in whole or in part, at
any time and from time to time from the Date of Grant through March 24, 2003
(the "Expiration Date").
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Notwithstanding such Expiration Date, the rights and obligations of the parties
hereto shall survive such termination in accordance with their terms set forth
herein.
(b) Company Acquisition. In the event the Company or the Majority
Holders (as defined below) should enter into any written agreement providing for
a Sale of the Company (as defined below), the Company shall give written notice
to the Holder of such intended Sale of the Company not fewer than five (5) days
prior to the closing date thereof. This Warrant shall automatically be exercised
pursuant to Paragraph 2 hereof one (1) business day preceding the closing date
of such Sale of the Company (the "Exercise Date"), if not previously exercised;
provided however, that such exercise shall be contingent upon the closing of the
Sale of the Company actually occurring. The term "Sale of the Company" shall
mean a sale, lease, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all the property or
assets of the Company or the consolidation or merger of the Company with one or
more other corporations or other entity or person, or any corporate
reorganization, in which shareholders of the Company immediately prior to such
consolidation, merger or reorganization, own less than 50% of the Company's
voting power immediately after such consolidation, merger or reorganization,
other than a merger effected solely for the purpose of reincorporation. The term
"Majority Holders" shall mean holders of at least eighty percent (80%) of the
Company's then outstanding Series A, B, C and D Convertible Preferred Stock,
measured as if all such Preferred Stock had been converted to Common Stock.
2. Exercise.
(a) Method of Exercise; Payment; Issuance of New Warrant.
Subject to Paragraph 1 hereof, the purchase right represented by this Warrant
may be exercised by the Holder, in whole or in part, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
---------
executed) at the principal office of the Company and by the payment to the
Company, by check or wire transfer, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased.
In the event of any exercise of the rights represented by this Warrant,
certificates for the Shares so purchased shall be delivered to the Holder within
thirty days of receipt of such notice and, unless this Warrant has been fully
exercised or has expired, a new Warrant representing the portion of the Shares,
if any, with respect to which this Warrant shall not then have been exercised
shall also be issued to the Holder within such thirty-day period. Upon receipt
by the Company of this Warrant and such notice of exercise form, together with
the applicable Warrant Price, the Holder shall be deemed for all purposes to be
the Holder of record of the Shares, notwithstanding that certificates
representing the Shares shall not then be actually delivered to such Holder or
that such Shares are not then set forth on the stock transfer books of the
Company.
(b) Other Property. In case cash, property or securities other
than Common Stock shall be payable, deliverable or issuable by the Company upon
exercise of this Warrant, then references to Series C Preferred Stock in this
Warrant shall be deemed to apply, so far as appropriate and as nearly as may be,
to such cash, property or other securities.
(c) Net Exercise. In lieu of exercising this Warrant in the
manner provided above in Section 2(a), the Holder may elect to receive shares
equal to the value of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal
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office of the Company together with notice of such election, in which event the
Company shall issue to the Holder a number of shares computed using the
following formula:
X = Y(A-B)
------
A
X = The number of shares of Series C Preferred Stock (or Common
Stock) to be issued to Holder.
Y = The number of shares of Series C Preferred Stock (or Common
Stock) purchasable under this Warrant (at the date of exercise),
or, if this Warrant is exercised in part, the number of shares
for which this Warrant is then being exercised.
A = The fair market value of one share of Series C Preferred Stock
(or Common Stock) at the date of exercise.
B = The Warrant Price (in effect on the date of exercise).
For purposes of this Section 2(c), fair market value of one share of the Series
C Preferred Stock shall be determined in good faith by the Company's Board of
Directors; provided, however, (i) if the exercise is done in connection with or
contingent upon the Company's initial public offering of its Common Stock, the
fair market value per share shall be the product of (a) the price to public as
set forth in the final prospectus relating to such initial public offering and
(b) the number of shares of Common Stock into which each share of Series C
Preferred Stock is convertible at the time of exercise, or (ii) after the
initial public offering of the Company's Common Stock, if the Company's Common
Stock is traded on a national exchange or over-the-counter market, the fair
market value per share shall be the average price per share at which trading of
the Company's Common Stock closed on the exchange on which such stock is listed,
on the thirty (30) consecutive trading days ending one (1) trading day prior to
the date of exercise.
3. Fractional Shares.
No fractional shares of Series C Preferred Stock will be issued in
connection with any exercise hereunder or any Common Stock issuable upon
conversion thereof, but in lieu of such fractional shares the Company shall make
a cash payment therefor upon the basis of the Warrant Price then in effect.
4. Adjustment of Warrant Price and Number of Shares.
The number and kind of securities purchasable under the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Stock Dividends, Subdivisions or Combinations. In case the
Company shall (i) pay a dividend or make a distribution on its outstanding
shares of Series C
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<PAGE>
Preferred Stock in shares of its Series C Preferred Stock, (ii) subdivide the
then outstanding shares of its Series C Preferred Stock into a greater number of
shares of Series C Preferred Stock, (iii) combine the then outstanding shares of
its Series C Preferred Stock into a smaller number of shares of Series C
Preferred Stock, or (iv) issue by reclassification of its shares of Series C
Preferred Stock any shares of capital stock of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then (A) in the case of clauses (i) and
(ii) the Warrant Price in effect immediately prior to the opening of business on
the record date for such dividend or distribution or the effective date of such
subdivision shall be proportionately decreased, (B) in the case of clause (iii)
the Warrant Price in effect immediately prior to the opening of business on the
effective date of such combination shall be proportionately increased, and (C)
in the case of clause (iv) the Company shall execute and deliver to the Holder a
new Warrant providing that the holder of this Warrant shall upon exercise of
such new Warrant be entitled to receive the number and kind of shares of capital
stock of the Company which it would have owned or been entitled to receive
immediately following such action had this Warrant been exercised in full
immediately prior to such time. The aggregate exercise price of such new Warrant
shall be equal to the aggregate Warrant Price of this Warrant at the time of
such exchange; and effective provision shall be made in such new Warrant so that
the provisions set forth herein of the protection of the exercise rights of the
Holder of this Warrant (including, without limitation, this Section 4) shall
thereafter be made applicable as nearly as reasonably may be, to such new
Warrant. An adjustment made pursuant to this Section 4(a) for a dividend or
distribution shall become effective immediately after the record date for the
dividend or distribution and an adjustment made pursuant to this Section 4(a)
for a subdivision, combination or reclassification shall become effective
immediately after the effective date of the subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any action
listed above shall be taken. In any case in which this Section 4(a) shall
require that an adjustment shall become effective immediately after a record
date for an event, the adjustment shall be subject to the occurrence of such
event.
(b) Adjustment for Reclassifications, Consolidation or Merger.
In the case of any reclassification or change of outstanding Series C Preferred
Stock (other than those referred to in Section 4(a) other than a change in par
value), or in case of any consolidation of the Company with any other
corporation or any merger of the Company into another corporation or of another
corporation into the Company (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value, or as a result
of a subdivision or combination to which Section 4(a) hereof is applicable) in,
the outstanding Series C Preferred Stock), or in case of any sale or transfer to
another company or entity (other than by mortgage or pledge) of all or
substantially all of the properties and assets of the Company, the Company (or
its successor in such consolidation or merger) or the purchaser of such
properties and assets shall made appropriate provision so that the holder of
this Warrant shall have the right thereafter to exercise this Warrant for the
kind and amount of shares of stock and other securities and property (including
cash) receivable upon such reclassification, change, consolidation, merger, sale
or transfer by a holder of the number of shares of Series C Preferred Stock for
which this Warrant might have been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer, and the
holder of this Warrant shall have no other exercise rights under these
provisions; provided, that effective provision shall be made, in a new Warrant
to be issued
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<PAGE>
to the Holder of this Warrant (the aggregate exercise price of which shall be
equal to the aggregate Warrant Price of this Warrant), so that the provisions
set forth herein for the protection of the exercise rights of the Holder of this
Warrant (including, without limitation, this Section 4) shall thereafter be made
applicable, as nearly as reasonably may be, to any other shares of stock and
other securities and property deliverable upon exercise of such new Warrant; and
provided, further, that any such resulting or surviving corporation or purchaser
shall expressly assume the obligation to deliver, upon the exercise of the new
Warrant, such shares, securities or property as the holders of the Series C
Preferred Stock shall be entitled to receive in connection with such
transaction, and to make provisions for the protection of the exercise rights as
above provided.
(c) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price pursuant to paragraph 4(a) or (b), the number of Shares
purchasable hereunder shall be adjusted, to the nearest whole share (with one-
half share rounded up to the next whole share), to the product obtained by
multiplying the number of Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.
(d) Notice of Other Events. The Company shall provide written
notice to the Holder of any dividend or distribution that (i) is not otherwise
provided for in this Section 4, and (ii) would result in the Holder's receipt of
cash, property or securities of the Company pursuant to the Company's Articles
of Incorporation, as amended, if the Holder were, at the record date for such
dividend or distribution, a holder of shares of Series C Preferred Stock. Such
notice shall be provided to Holder at least five (5) days prior to the record
date for such dividend or distribution.
5. Representations and Warranties of the Holder and the Company.
(a) Representations and Warranties of the Holder.
(i) Purchase Entirely for Own Account: Restricted
Securities. This Warrant is made with the Holder in reliance upon Holder's
representation to the Company, which by Holder's execution of this Warrant
Holder hereby confirms, that the Shares are being acquired for investment for
its own account, and Holder has no present intention of selling or distributing
the Shares or the shares of Common Stock issuable upon conversion of the Shares
(the "Conversion Stock"). The Holder also represents and warrants that it does
not have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participation to such person or to any third person,
with respect to the Warrant or the Conversion Stock. The Holder understands that
the Shares and the Conversion Stock to be purchased by it have not been
registered under the Act by reason of a specific exemption from the registration
provisions of the Act which depends upon, among other things, the bona fide
nature of the investment intent as expressed herein. The Holder hereby confirms
that it has been informed that the Shares may not be resold or transferred
unless the Shares are first registered under the Act or unless an exemption from
such registration is available. Accordingly, the Holder hereby acknowledges that
it is prepared to hold the Shares and the Conversion Stock for an indefinite
period and that it is aware that Rule 144 of the Securities and Exchange
Commission promulgated under the Act is not presently available to exempt the
sale of such securities from
5
<PAGE>
the registration requirements of the Act. Should Rule 144 subsequently become
available, the Holder is aware that any sale of such securities effected
pursuant to the Rule may, depending upon the status of the Holder as an
"affiliate" or "non-affiliate" under the Rule, be made only in limited amounts
in accordance with the provisions of the Rule, and that in no event may any of
such securities be sold pursuant to the Rule until the Holder has held such
securities for the requisite holding period.
(ii) Disclosure of Information. The Holder believes it has
received all of the information it considers necessary or appropriate for
deciding whether to purchase the Warrant. The Holder has made its own
investigation whether or not to invest in the Shares and the Conversion Stock.
The Holder further represents that it has had an opportunity to ask questions
and receive answers from the Company regarding the Company's business and the
terms and conditions pursuant to which it will purchase such securities.
(iii) Experience. The Holder is experienced in evaluating and
investing in private placement transactions of securities in companies such as
the Company and is an "accredited investor" as such term is defined in Rule 501
under the Act. Holder represents and warrants that it has not been organized for
the purpose of acquiring the Warrant.
(iv) Restrictive Legends. In order to reflect the restrictions
on disposition of the securities issuable hereunder, the stock certificates
representing the Shares and the Conversion Stock will be endorsed with the
following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO THE SECURITIES UNDER SUCH SECURITIES ACT OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD
PURSUANT TO RULE 144 OF SUCH SECURITIES ACT."
(v) Authority. Holder has all requisite corporate power and
authority to enter into this Warrant and to consummate the transactions
contemplated hereby. The execution and delivery of this Warrant and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Holder. This Warrant has been
duly executed and delivered by Holder and constitutes the valid and binding
obligations of Holder. The execution and delivery of this Warrant do not, and
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under (i) any provision of
the certificate of incorporation or bylaws of Holder, or (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Holder or any of its properties or assets. No consent,
approval, order or authorization of, or registration,
6
<PAGE>
declaration or filing with, any government entity, is required by or with
respect to Holder in connection with the execution and delivery of this Warrant
by Holder or the consummation by Holder of the transactions contemplated hereby.
(vi) Further Limitations on Disposition. Holder further agrees
not to make any disposition of all or any portion of the Warrant, the Shares or
the Conversion Stock unless and until the transferee has agreed in writing for
the benefit of the Company to be bound by this Section and:
(A) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(B) (i) Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) Holder shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
shares under the Act.
(b) Representation and Warranties of the Company.
(i) Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has full corporate power and authority to
conduct its business as presently conducted and to enter into and perform this
Warrant and to carry out the transactions contemplated by this Warrant. The
Company has furnished or made available to the Holder true and complete copies
of the Articles of Incorporation and the Bylaws of the Company, each as amended
to date and currently in effect.
(ii) Issuance of Securities. The issuance, sale and delivery of
this Warrant in accordance with this Warrant, the issuance and delivery of the
Shares issuable upon exercise of this Warrant and the issuance and delivery of
the Conversion Stock issuable upon conversion of the Shares have been duly
authorized by all necessary corporate action on the part of the Company, and all
such Shares Conversion Stock have been duly reserved for issuance. The Shares,
when so issued, sold and delivered against payment therefor in accordance with
the provisions of this Warrant, and the Conversion Stock issuable upon
conversion of the Shares, when issued upon such conversion in accordance with
the Company's Articles of Incorporation, as amended, will be duly and validly
issued, fully paid and non-assessable.
(iii) Authority for Warrant. The execution, delivery and
performance by the Company of this Warrant and the consummation by the Company
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action. This Warrant has been duly executed and delivered by
the Company and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
7
<PAGE>
The sale of the Shares, and the subsequent conversion of the Shares into the
Conversion Stock, are not and will not be subject to any preemptive rights that
have not been properly waived or complied with.
(iv) Governmental Consents. No consent, approval,
order or authorization of, or registration, qualification, designation,
declaration or filing with, any governmental authority is required on the part
of the Company in connection with the execution and delivery of this Warrant and
the offer, issuance, sale and delivery of the Shares, except such filings as
shall have been made prior to and shall be effective on and as of the date of
this Warrant, and except for filings required by federal and state securities
laws.
6. Notices of Adjustments.
Whenever there shall be any adjustment in the Warrant Price
and/or the number of shares, or securities or property, issuable upon exercise
of this Warrant pursuant to Section 4 hereof, the Company shall execute and
deliver a certificate signed by its Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the Warrant
Price or Prices and the resulting number of shares of Series C Preferred Stock
or other securities or property issuable upon exercise of this Warrant after
giving effect to such adjustment, and shall cause copies of such certificate to
be mailed (by first-class mail, postage prepaid) to the holder of this Warrant.
7. Governing Law.
The terms and conditions of this Warrant shall be governed by and
construed in accordance with California law without regard to conflicts of law
provisions.
8. Rights of Shareholders.
No holder of this Warrant shall be entitled to vote or receive
dividends or be deemed the holder of Series C Preferred Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the holder of this Warrant, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
9. "Market Stand-Off" Agreements.
(a) The Holder hereby agrees that, during the period of
duration specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of the Company's initial
public offering of Common Stock, Holder shall not, to the extent requested by
the Company and such underwriter, directly or
8
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indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any securities of the
Company held by it at any time during such period except Common Stock included
in such registration; provided, however, that:
(i) such above-described agreement shall be
applicable only to the first such registration statement of the Company which
covers Common Stock to be sold on its behalf to the public in an underwritten
offering;
(ii) all officers and directors of the Company enter
into similar agreements; and
(iii) such above-described market stand-off time period
shall not exceed one hundred eighty (180) days.
(b) The Holder will sign, concurrently with the execution
of this Warrant, the form of "Lock-Up Agreement" and the form of NASD
Questionnaire that Credit Suisse First Boston has provided to the Company's
shareholders.
(c) Without limiting the generality of the foregoing or
anything contained in the Company's Registration Rights Agreement, as amended
and in effect from time to time (the "Registration Rights Agreement"), the
Holder also agrees that for the three-year period after the closing date of the
Company's initial public offering of its Common Stock, Holder shall not directly
or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (each, a "Transfer") any securities of the Company held by it at
--------
any time during such period; provided, however, that the Holder may effect
Transfers (in accordance with the state and federal securities laws) as follows:
(i) on and after the first-year anniversary of the
closing date of the initial public offering of the Company's Common Stock, the
Holder may transfer up to an aggregate of forty percent (40%) of the securities
of the Company held by it on the closing date of the initial public offering of
the Company's Common Stock;
(ii) on and after the second-year anniversary of the
closing date of the initial public offering of the Company's Common Stock, the
Holder may transfer up to additional aggregate of thirty percent (30%) of the
securities of the Company held by it on the closing date of the initial public
offering of the Company's Common Stock; and
(iii) on and after the third-year anniversary of the
closing date of the initial public offering of the Company's Common Stock, the
Holder may transfer up to an additional aggregate of thirty percent (30%) of the
securities of the Company held by it on the closing date of the initial public
offering of the Company's Common Stock.
(d) In order to enforce the foregoing covenants, the
Company may impose stop-transfer instructions with respect to the Shares (and
the Common Stock issuable upon the conversion of the Shares) until the end of
such period.
9
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(e) The market standoff provision of paragraph (c) hereof
shall be in addition to, and not in lieu of, the market standoff provisions
contained in the Registration Rights Agreement and the other provisions of this
Warrant.
(f) The provisions of this Section 9 shall terminate upon a
Sale of the Company.
10. Covenants of the Holder and the Company.
(a) Standstill Covenant. The Holder hereby covenants and
agrees that from the time that the Company first sells its securities pursuant
to an effective registration statement under the Act, covering the initial
public offering and sale of the Company's Common Stock, until March 24, 2003,
neither the Holder nor any of its directors, officers, employees, affiliates,
agents and advisors shall without the prior written consent of the Company:
(i) acquire, offer to acquire, or agree to acquire,
directly or indirectly, by purchase or otherwise, any voting securities or
direct or indirect rights to acquire any voting securities of the Company or any
subsidiary thereof, or of any successor to or person in control of the Company,
or any assets of the Company or any subsidiary or division thereof or of any
such successor or controlling person;
(ii) make, or in any way participate, directly or
indirectly, in any "solicitation" of "proxies" to vote (as such terms are used
in the rules of the Securities and Exchange Commission ("SEC")), or seek to
advise or influence any person or entity with respect to the voting of any
voting securities of the Company;
(iii) make any public announcement with respect to, or
submit a proposal for, or offer of (with or without conditions) any
extraordinary transaction involving the Company or any of its securities or
assets;
(iv) form, join or in any way participate in a "group"
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in connection with any of the foregoing;
(v) otherwise act or seek to control or influence the
management, Board of Directors or policies of the Company;
(vi) take any action that could reasonably be expected
to require the Company to make a public announcement regarding the possibility
of any of the events described in clauses (i) through (v) above; or
(vii) request the Company or any of its directors,
officers, employees, agents or advisors, directly or indirectly, to amend or
waive any provision of this Section 10(a).
The Holder shall promptly advise the Company of any inquiry or
proposal made by or to it with respect to any of the foregoing.
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<PAGE>
(b) Transfers to Competitors. Except in connection with a Sale of the
Company, the Holder hereby covenants and agrees that neither the Holder nor any
of its affiliates shall at any time, directly or indirectly, effect a Transfer
of any of the Company's securities to an entity or person that is "Competitive"
with the business of the Company. Any person or entity who sells sporting goods
in a retail format, including online, mail order or brick and mortar, or any new
channel of distribution shall be considered "Competitive" with the business of
the Company. Notwithstanding the foregoing in this Section 10(b), this Section
10(b) shall not restrict sales by the Holder in the open market pursuant to a
broker/dealer securities transaction or to an affiliate of the Holder that may
be Competitive with the business of the Company.
(c) Merger or Acquisition of the Company. If at any time hereafter a
Sale of the Company shall occur, then the Holder shall vote all of its shares of
capital stock in favor of such transaction or series of related transactions,
and all actions required in connection therewith, including but not limited to,
amending the then existing Articles of Incorporation of the Company, if eighty
percent (80%) or more of the shares of capital stock of the Company held by the
holders of the Company's then outstanding preferred stock (other than the
Holder) vote in favor of such transaction. If the Company or any shareholder of
the Company shall receive an offer from a third party to purchase fifty percent
(50%) or more of the issued and outstanding shares of capital stock of the
Company either for cash or securities and if such purchase or sale would not
otherwise trigger a vote of the shareholders of the Company and, following
appropriate shareholder approval, impose a statutory obligation to participate
in the transaction, then if eighty percent (80%) or more of the shares of
capital stock of the Company held by the holders of the Company's then
outstanding preferred stock (other than the Holder), agree to participate in
such sale, then the Holder shall agree to participate fully in any such sale.
(d) The Company's Right of First Refusal.
(i) If at any time prior to the Company's initial public
offering of its Common Stock, except in connection with a Transfer by Holder to
an affiliate, the Holder proposes to sell, assign, pledge, hypothecate or
otherwise dispose of the any of the Company's securities held by Holder, to one
or more third parties pursuant to an understanding with such third parties in a
transaction, then the Holder shall give the Company written notice of its
intention (the "Transfer Notice"), describing the offered shares ("Offered
Shares"), the identity of the prospective transferee and the consideration and
the material terms and conditions upon which the proposed Transfer is to be
made. The Transfer Notice shall certify that the Holder has received a firm
offer from the prospective transferee and in good faith believes a binding
agreement for Transfer is obtainable on the terms set forth, and shall also
include a copy of any written proposal or letter of intent or other agreement
relating to the proposed Transfer. The Company shall have an option for a period
of twenty (20) days from receipt of the Transfer Notice to purchase the Offered
Shares at the same price and subject to the same material terms and conditions
as described in the Transfer Notice. The Company may exercise such purchase
option, in whole or in part, by notifying the Holder in writing, before
expiration of the initial twenty (20) day period, as to the number of such
shares which it wishes to purchase. If the Company gives the Holder notice that
it desires to purchase such shares, then payment for the Offered Shares shall be
by check or wire transfer, against delivery of the Offered Shares to be
11
<PAGE>
purchased at a place agreed upon between the parties and at the time of the
scheduled closing therefor.
(ii) If the Company fails to purchase all of the Offered
Shares by exercising the option granted in this Section within the period
provided, the Holder shall be entitled for a period of sixty (60) days
thereafter to complete the proposed Transfer upon the terms and conditions
specified in the Transfer Notice. If the Holder has not so transferred the
Offered Shares during such period, the Holder shall not thereafter make a
Transfer without again first offering such shares to the Company in the manner
provided in this Section.
(e) Financial Statements and Other Information. Until the
earlier of (i) the sale of securities of the Company pursuant to a registration
statement filed by the Company under the Act in connection with the underwritten
offering of its securities to the general public is consummated, (ii) the date
on which the Company first becomes subject to the periodic reporting
requirements of Sections 12(g) or 15(d) of the Exchange Act, or (iii) a Sale of
the Company, the Company shall deliver to the Holder, so long as such Holder
beneficially owns at least 4,000,000 shares of Series C Preferred Stock (subject
to appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations):
(i) as soon as available, but in any event within fifteen
(15) days after the end of each month, monthly unaudited consolidated statements
of income and cash flows of the Company and its subsidiaries and monthly
unaudited consolidated balance sheets of the Company and its subsidiaries, and
all such statements shall be prepared in accordance with U.S. generally accepted
accounting principles ("GAAP"), consistently applied, except that they may not
contain full footnote disclosures and may be subject to normal year-end
adjustments for recurring accruals;
(ii) as soon as available but in any event within one
hundred twenty (120) days after the end of each fiscal year, commencing with
fiscal year 1999, audited consolidated statements of income and cash flows of
the Company and its subsidiaries for the fiscal year, and audited consolidated
balance sheets of the Company and its subsidiaries as of the end of the fiscal
year, all prepared in accordance with GAAP, consistently applied; and
(iii) not fewer than thirty (30) days, but also not greater
than seventy (70) days prior to the end of the Company's fiscal year, an annual
budget and operating plan prepared on a monthly basis for the Company and its
subsidiaries for the following fiscal year requested (displaying anticipated
statements of income and cash flows and balance sheets), approved by the
Company's Board of Directors, and promptly upon preparation thereof any material
revisions of such annual or other budgets and operating plans.
11. Miscellaneous.
(a) Headings. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof.
(b) Amendments. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the Company and the Holder.
12
<PAGE>
(c) Notices. All notices and other communications from the
Company to the Holder shall be mailed by first-class registered or certified
mail, postage prepaid, to the address furnished to the Company in writing by the
Holder who shall have furnished an address to the Company in writing.
(d) Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
(e) Counterparts. This Warrant may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
(f) Survival. Except as expressly set forth herein, the
representations, warranties, covenants and agreements made herein shall survive
the closing of the transactions contemplated hereby.
(g) Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares (or the Conversion Stock) from time
to time.
(h) Entire Agreement. This Warrant and the other documents
delivered pursuant hereto or referred to herein, constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
(i) Severability. In case any provision of this Warrant shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
(j) Attorney's Fees. In the event that any suit or action is
instituted to enforce any provision in this Warrant, the prevailing party in
such dispute shall be entitled to recover form the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Warrant, including without limitation, such reasonable fees and
expenses of attorneys, which shall include, without limitation, all fees, costs
and expenses of appeals.
(k) Confidentiality. The Holder agrees that, except with the
prior written consent of the Company, the Holder shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the Company to which the Holder has been or
shall become privy. The provisions of this Section (k) shall be in addition to,
and not in substitution for, the provisions of any separate nondisclosure
agreement executed by the parties hereto.
13
<PAGE>
September 24, 1999
FOGDOG, INC.
By: /s/ Timothy P. Harrington
---------------------------------
Timothy P. Harrington, Chief
Executive Officer
14
<PAGE>
NIKE USA, INC.
By: [signature illegible]
-------------------------------------
15
<PAGE>
Exhibit A
NOTICE OF EXERCISE
TO: FOGDOG, INC.
500 Broadway
Redwood City, CA 94063
Attention: Chief Financial Officer
The undersigned hereby elects to purchase _________ shares of Series C
Preferred Stock of Fogdog, Inc. pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full,
together with all applicable transfer taxes, if any.
Please issue a certificate or certificates representing said shares of
Series C Preferred Stock in the name of the undersigned.
(Name)
(Address)
___________________________________________
(Signature)
____________________________________
(Date)
16
<PAGE>
EXHIBIT 5.1
November , 1999
Fogdog, Inc.
500 Broadway
Redwood City, CA 94063
Re: Fogdog, Inc. Registration Statement on Form S-1
for 6,000,000 Shares of Common Stock
----------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Fogdog, Inc., a Delaware corporation (the
"Company"), in connection with the proposed issuance and sale by the Company of
up to 6,000,000 shares of the Company's Common Stock (the "Shares") pursuant to
the Company's Registration Statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion,
<PAGE>
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.2
FOGDOG, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Fogdog, Inc., a Delaware corporation, by providing eligible persons in the
Corporation's service with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentives
programs:
- the Discretionary Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested
each year in special option grants,
- the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or
Subsidiary),
- the Automatic Option Grant Program under which eligible non-employee
Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee Board
members may elect to have all or any portion of their annual retainer
fee otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2.
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors of
any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services
to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.
D. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. Only non-employee Board members shall be eligible to participate in
Automatic Option Grant and the Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 9,444,947
shares. Such reserve shall consist of (i) the number of shares estimated to
remain available for issuance, as of the Plan Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to outstanding options under that Predecessor Plan, (ii) plus
an additional increase of 1,200,000 shares to be approved by the Corporation's
stockholders prior to the Underwriting Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January of
each of the calendar years
3.
<PAGE>
from 2001 through 2005, by an amount equal to three percent
(3%) of the total number of shares of Common Stock outstanding on the last
trading day in December of the immediately preceding calendar year, but in no
event shall any such annual increase exceed 3,000,000 shares.
C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
4.
<PAGE>
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for w hich any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and exercise
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plan and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year pursuant to the provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan Administrator
but shall not be less than one hundred percent (100%) of the Fair Market Value
per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article Seven and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares, through
a special sale and remittance procedure pursuant to which the Optionee
shall concurrently provide irrevocable instructions to (a) a Corporation-
designated brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds available on
the settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable Federal, state and
local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver
the certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at such
----------------------------
time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6.
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's cessation of
Service for any reason shall remain exercisable for such period of time
thereafter as shall be determined by the Plan Administrator and set forth
in the documents evidencing the option, but no such option shall be
exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for Misconduct or
should the Optionee otherwise engage in Misconduct while holding one or
more outstanding options under this Article Two, then all those options
shall terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the option
may not be exercised in the aggregate for more than the number of vested
shares for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise period
or (if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Service, terminate and cease to be outstanding
to the extent the option is not otherwise at that time exercisable for
vested shares.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period
of time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable post-
Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
7.
<PAGE>
D. Stockholder Rights. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion to
-----------------
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's family or to a trust established exclusively for one or more such
family members or to Optionee's former spouse, to the extent such assignment is
in connection with the Optionee's estate plan or pursuant to a domestic
relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Seven shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Dollar Limitation. The aggregate Fair Market Value of the shares of
-----------------
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000).
8.
<PAGE>
To the extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become exercisable for all
the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
However, an outstanding option shall not become exercisable on such an
accelerated basis if and to the extent: (i) such option is, in connection with
the Corporate Transaction, to be assumed by the successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and
9.
<PAGE>
(iii) the maximum number and/or class of securities for which any one person may
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year and (iv) the maximum
number and/or class of securities by which the share reserve is to increase
automatically each calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to structure
one or more outstanding options under the Discretionary Option Grant Program so
that those options shall become exercisable for all the shares of Common Stock
at the time subject to those options in the event the Optionee's Service is
subsequently terminated by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those options are assumed and do not
otherwise accelerate. In addition, the Plan Administrator may structure one or
more of the Corporation's repurchase rights so that those rights shall
immediately terminate with respect to any shares held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
10.
<PAGE>
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or a different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem stock
appreciation rights:
(i) One or more Optionees may be granted the right, exercisable upon
such terms as the Plan Administrator may establish, to elect between the
exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is approved
by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.
11.
<PAGE>
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each individual
holding one or more options with such a limited stock appreciation right
shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each such option to
the Corporation. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to the
excess of (A) the Take-Over Price of the shares of Common Stock at the time
subject to such option (whether or not the Optionee is otherwise vested in
those shares) over (B) the aggregate exercise price payable for those
shares. Such cash distribution shall be paid within five (5) days following
the option surrender date.
(iii) At the time such limited stock appreciation right is granted,
the Plan Administrator shall pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no
further approval of the Plan Administrator or the Board shall be required
at the time of the actual option surrender and cash distribution.
12.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
13.
<PAGE>
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
B is the Fair Market Value per share of Common Stock on the option
grant date.
C. Exercise and Term of Options. The option shall become exercisable in a
----------------------------
series of twelve (12) successive equal monthly installments upon the Optionee's
completion of each calendar month of Service in the calendar year for which the
salary reduction is in effect. Each option shall have a maximum term of ten
(10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease Service
--------------------------------
for any reason while holding one or more options under this Article Three, then
each such option shall remain exercisable, for any or all of the shares for
which the option is exercisable at the time of such cessation of Service, until
the earlier of (i) the expiration of the ten (10)-year option term or (ii) the
-------
expiration of the three (3)-year period measured from the date of such cessation
of Service. Should the Optionee die while holding one or more options under
this Article Three, then each such option may be exercised, for any or all of
the shares for which the option is exercisable at the time of the Optionee's
cessation of Service (less any shares subsequently purchased by Optionee prior
to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance or by the designated beneficiary or
beneficiaries of the option. Such right of exercise shall lapse, and the option
shall terminate, upon the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon
the Optionee's cessation of Service for any reason, terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all the shares of Common Stock
14.
<PAGE>
at the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. The option shall remain so
exercisable until the earliest to occur of (i) the expiration of the ten
--------
(10)-year option term, (ii) the expiration of the three (3)-year period measured
from the date of the Optionee's cessation of Service, (iii) the termination of
the option in connection with a Corporate Transaction or (iv) the surrender of
the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each outstanding
option granted him or her under the Salary Investment Option Grant Program. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to the surrendered option (whether or not the
option is otherwise at the time exercisable for those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. The Primary Committee shall, at the time the option with such
limited stock appreciation right is granted under the Salary Investment Option
Grant Program, pre-approve any subsequent exercise of that right in accordance
with the terms of this Paragraph C. Accordingly, no further approval of the
Primary Committee or the Board shall be required at the time of the actual
option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or
16.
<PAGE>
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17.
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
18.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 10,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 2,500 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 2,500-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
10,000-share grant shall vest, and the Corporation's repurchase right shall
lapse, in a series of four (4) successive equal annual installments upon the
Optionee's completion of each year of service as a Board member over the four
(4)-year period measured from the
19.
<PAGE>
option grant date. The shares subject to each annual 2,500-share option grant
shall vest up the Optionee's completion of one (1)-year of Board service
measured from the grant.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with the Optionee's estate plan
or pursuant to domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance or the designated beneficiary or
beneficiaries of such option) shall have a twelve (12)-month period
following the date of such cessation of Board service in which to exercise
each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the
time subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
20.
<PAGE>
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for any
vested shares for which the option has not been exercised. However, the
option shall, immediately upon the Optionee's cessation of Board service
for any reason other than death or Permanent Disability, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become exercisable for
all the option shares as fully-vested shares of Common Stock and may be
exercised for any or all of those vested shares. Immediately following the
consummation of the Corporate Transaction, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become exercisable for all
the option shares as fully-vested shares of Common Stock and may be exercised
for any or all of those vested shares. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such
21.
<PAGE>
Corporate Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same. To
the extent the actual holders of the Corporation's outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation may, in connection with the
assumption of the outstanding options under this Plan, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
22.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
23.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Six, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
24.
<PAGE>
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
- --------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
25.
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
27.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan
Effective Date. However, the Salary Investment Option Grant Program and the
Director Fee Option Grant Program shall not be implemented until such time as
the Primary Committee may deem appropriate. Options may be granted under the
Discretionary Option Grant at any time on or after the Plan Effective Date, and
the initial option grants under the Automatic Option Grant Program shall also be
made on the Plan Effective Date to any non-employee Board members eligible for
such grants at that time. However, no options granted under the Plan may be
exercised, and no shares shall be issued under the Plan, until the Plan is
approved by the Corporation's stockholders. If such stockholder approval is not
obtained within twelve (12) months after the Plan Effective Date, then all
options previously granted under this Plan shall terminate and cease to be
outstanding, and no further options shall be granted and no shares shall be
issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i)
--------
September 30, 2009, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Should the Plan terminate on September 30, 2009, then all option
grants and unvested stock issuances outstanding at that time shall continue to
have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
28.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
29.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority
of the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>
G. Corporation shall mean Fogdog, Inc., a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of Fogdog, Inc. which shall by appropriate action adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director shall mean a non-employee Board member eligible
-----------------
to participate in the Automatic Option Grant Program or the Director Fee Option
Grant Program in accordance with the eligibility provisions of Articles One,
Five and Six.
K. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on the
Nasdaq National Market. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of management
to which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and percentage target
bonus under any corporate-performance based bonus or incentive programs) by
more than fifteen percent (15%) or (C) a relocation of such individual's
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation without
the individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3.
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's Amended and
----------------
Restated 1996 Stock Option Plan in effect immediately prior to the Plan
Effective Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
A-4.
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
HH. Stock Issuance Agreement shall mean the agreement entered into by
------------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
--------- -------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5.
<PAGE>
EXHIBIT 10.3
FOGDOG, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Fogdog, Inc., a Delaware corporation, by providing eligible employees with
the opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to 500,000
shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January of
each of the calendar years from 2001 through 2005, by an amount equal to one
percent (1%) of the total number of shares of Common Stock outstanding on the
last trading day in December of the immediately preceding calendar year, but in
no event shall any such annual increase exceed 1,000,000 shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable in total by all Participants on any one Purchase Date,
(iv) the maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in January
2002. The next offering period shall commence on the first business day in
February 2002, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from the
first business day in August each year to the last business day in January in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in July 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Cash Earnings paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator. The
Participant may not, however, effect more than one (1) such reduction per
Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Rights. A Participant shall be granted a
------------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 750 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date shall not exceed 125,000 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable prior
to the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied
-------------------------
to the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the offering period for
which the terminated purchase right was granted. In order to resume
participation in any subsequent offering period, such individual must re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into that offering
period.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his
or her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates shall be
immediately refunded. However, should the Participant cease to remain in
active service by reason of an approved unpaid leave of absence, then the
Participant shall have the right, exercisable up until the last business
day of the Purchase Interval in which such leave commences, to (a) withdraw
all the payroll deductions collected to date on his or her behalf for that
Purchase Interval or (b) have such funds held for the purchase of shares on
his or her behalf on the next scheduled Purchase Date. In no event,
however, shall any further payroll deductions be collected on the
Participant's behalf during such leave. Upon the Participant's return to
active service (x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan shall
automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant withdraws from
the Plan prior to his or her return. An individual who returns to active
employment following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new Employee for
purposes of subsequent participation in the Plan and must accordingly re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the offering
period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on September __, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Fogdog, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
C. Cash Earnings shall mean the (i) regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall not include any contributions made on
the Participant's behalf by the Corporation or any Corporate Affiliate to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).
B. Change in Control shall mean a change in ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1.
<PAGE>
F. Corporation shall mean Fogdog, Inc., a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of Fogdog, Inc. which shall by appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2.
<PAGE>
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The first Purchase Date shall be July 30, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
Exhibit 10.9
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Employment
Agreement"), effective as of this 17th day of September, 1999 (the "Effective
Date"), is entered into by and between Fogdog, Inc. (the "Company"), and Tim
Harrington ("Executive"). In consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. EMPLOYMENT.
-----------
1.1 Position. During the Employment Term (as hereinafter defined) and
--------
subject to the terms and conditions set forth herein, the Company agrees to
employ Executive as its Chief Executive Officer, reporting directly to its Board
of Directors (the "Board"). During the Employment Term, and subject to the terms
and conditions as set forth herein, Executive will also be a member of the
Board.
1.2 Duties. Executive will be employed as Chief Executive Officer.
------
Executive shall diligently, and to the best of his ability, perform all such
duties incident to his position and use his best efforts to promote the
interests of the Company.
1.3 Time to be Devoted to Employment. During the Employment Term,
--------------------------------
Executive shall devote his full time and energy to the business of the Company.
Executive hereby represents that he is not a party to any agreement which would
be an impediment to entering into this Employment Agreement and that he is
permitted to enter into this Employment Agreement and perform the obligations
hereunder.
2. COMPENSATION AND BENEFITS.
--------------------------
2.1 Annual Salary. In consideration of and as compensation for the
-------------
services agreed to be performed by Executive hereunder, the Company agrees to
pay Executive a starting annual base salary of $170,000, payable in accordance
with the Company's regular payroll schedule ("Base Salary"), less applicable
withholdings and deductions. The Base Salary will be subject to change at the
sole discretion of the Board.
2.2 Bonus Plan. Executive will be eligible to receive an annual bonus
----------
payment of up to 20% of his current base salary. Payment of the bonus will be at
the sole discretion of the Board and will be based on achievement of mutually
agreeable performance goals to be determined by Executive and the Board.
2.3 Stock Options. Executive has been granted an option under the
-------------
Company's 1996 Stock Option Plan (the "Plan") to purchase 1,200,000 shares of
the Company's Common Stock (the "Initial Option") at an exercise price of $0.055
per share. The option shares vest in 48 equal monthly installments over
Executive's period of service with the Company measured from June 2, 1998. In
addition, in March 1999, Executive was granted an option under the Plan to
purchase 800,000 shares of Common Stock at an exercise price of $0.22 per share
(the "1999 Option"). The option shares subject to the 1999 Option vest in vest
in 48 equal monthly installments over Executive's period of service with the
Company measured from the
<PAGE>
grant date of such option. The Initial Option and the 1999 Option are
hereinafter referred to as the "Options".
In the event of an acquisition of the Company, as more particularly
described in Section 11.3.1 of the Plan, (a "Corporate Transaction"), each of
the Initial Option and the 1999 Option, to the extent outstanding at that time
but not otherwise fully exercisable and vested, shall automatically accelerate,
and the Company's repurchase right with respect to any unvested option shares
shall automatically lapse, so such option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
option shares at the time subject to the option as fully-vested shares of the
Company's Common Stock. No such acceleration of the Initial Option or the 1999
Option, however, shall occur if and to the extent: (i) such option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction (the excess of the fair
market value of such option shares over the aggregate exercise price payable)
and provides for subsequent pay-out in accordance with the original vesting
schedule established for that option.
Immediately following the Corporate Transaction, the Initial Option
and the 1999 Option shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof) in connection
with the Corporate Transaction.
Should there occur an Involuntary Termination of Executive's
employment at the time of a Corporate Transaction or within 12 months following
a Corporate Transaction in which the Initial Option or the 1999 Option is
assumed or replaced and the Company's repurchase rights with respect to the
unvested option shares are assigned, then all the option shares at the time
subject to such option but not otherwise vested shall automatically vest, and
the Company's repurchase rights with respect to those option shares shall lapse,
so that the option shall become exercisable for all of the option shares as
fully-vested shares of Common Stock as of the effective date of such Involuntary
Termination and may be exercised for such option shares in accordance with the
provisions of the Plan and the agreements evidencing the option.
For purposes of the Options, an Involuntary Termination shall be
deemed to occur in the event of (i) Executive's involuntary dismissal or
discharge by the Company or the successor corporation in the Corporate
Transaction for reasons other than cause, as defined in Section 4.1(ii) of this
Employment Agreement, or (ii) Executive's voluntary resignation following (A) a
change in Executive's position which materially reduces Executive's duties and
responsibilities or the level of management to which Executive reports, (B) a
reduction in Executive's then current level of compensation (including base
salary, fringe benefits and target bonuses under any corporate-performance based
incentive programs) by more than five percent (5%) or (C) a relocation of
Executive's place of employment by more than twenty-five (25) miles, provided
and only if such change, reduction or relocation is effected without Executive's
consent.
2
<PAGE>
2.4 Participation in Benefit Plans. During the Employment Term,
------------------------------
Executive shall be entitled to participate in the Company's health insurance,
life insurance and disability insurance plans to the extent permitted by law,
that may from time to time be adopted by the Board. The Company reserves the
right to amend, modify or terminate any employee benefits at any time for any
reason.
2.5 Reimbursement of Expenses. The Company shall reimburse Executive
-------------------------
for all reasonable business expenses incurred by Executive on behalf of the
Company during the Employment Term, provided that: (i) such reasonable expenses
are ordinary and necessary business expenses incurred on behalf of the Company,
and (ii) Executive provides the Company with itemized accounts, receipts and
other documentation for such reasonable expenses as are reasonably required by
the Company.
2.6 Vacation. During the Employment Term, Executive will be entitled
--------
to 18 days of paid vacation per annum. Executive will accrue vacation on a
prorated basis of 1.5 days each month.
3. EMPLOYMENT TERM.
----------------
3.1 Employment Term. The "Employment Term" means the period
---------------
commencing on the Effective Date and terminating on the earlier of one (1) year
from the Effective Date or as set forth in Section 4.1.
3.2 Notice of Renewal. At least sixty (60) days prior to the natural
-----------------
expiration of the period ending one year from the Effective Date and sixty (60)
days prior to each one year anniversary thereafter, if applicable, the Company
shall give Executive written notice of whether the Company will be seeking a
one-year extension of Executive's services under this Employment Agreement or
subsequent one-year period, if applicable. Unless such notice indicates that
there will be no extension, the terms of this Employment Agreement shall be
automatically renewed for successive one-year periods. However, Executive's
employment with the Company will continue unless terminated by Executive or the
Company as set forth in Section 4.1.
4. TERMINATION OF EMPLOYMENT.
--------------------------
4.1 Method of Termination. Executive's employment pursuant to this
---------------------
Employment Agreement and the Employment Term provided for herein shall terminate
upon the first of the following to occur:
(i) Executive's death;
(ii) Date that written notice is deemed given or made by the
Company to Executive that as a result of any physical or mental injury or
disability, he is unable to perform the essential functions of his job, with or
without reasonable accommodation. Such notice may be issued when the Board has
reasonably determined that Executive has become unable to perform substantially
his services and duties hereunder with or without reasonable accommodation
because of any physical or mental injury or disability, and that it is
reasonably
3
<PAGE>
likely that he will not be able to resume substantially performing his services
and duties on substantially the terms and conditions as set forth in this
Employment Agreement;
(iii) Date that written notice is deemed given or made by the
Company to Executive of termination for "cause." For purposes of this Employment
Agreement, "cause" shall mean any one of the following:
(A) Gross negligence or the repeated failure of Executive
to perform his duties and responsibilities to the reasonable satisfaction of the
Board or any breach by Executive of his fiduciary duties to the Company or any
material term of this Employment Agreement. For purposes of this Employment
Agreement, any act or acts or omission or omissions by Executive that have a
material adverse effect on the Company's operations, prospects, reputation or
business shall be deemed to be a breach of his duties and responsibilities to
the Company; or
(B) The conviction of Executive for a felony.
(iv) Executive's resignation or voluntary departure as an
employee of the Company; or
(v) Date that written notice is deemed given or made by the
Company to Executive of Executive's termination without "cause."
Nothing herein alters Executive and the Company's separate right to terminate
the employment relationship at any time, for any reason, with or without cause.
4.2 Effect of Termination for Cause, Executive's Resignation or Other
-----------------------------------------------------------------
Events. Upon (i) the termination of Executive for cause; (ii) Executive's
- ------
resignation or voluntary departure; or (iii) Executive's departure pursuant to
Section 4.1(i) (death) or 4.1(ii) (disability) of this Employment Agreement,
Executive will not be entitled to any additional compensation or other rights or
benefits from the Company; and, as a result, the Company shall be obligated to
pay Executive only that portion of his Base Salary that Executive has earned
prior to the effective date of the termination of Executive's employment with
the Company.
4.3 Effect of Termination without Cause. In the event Executive's
-----------------------------------
employment with the Company is terminated by the Company without cause, at any
time other than at the time of, or within 12 months following, a Corporate
Transaction, the following provisions shall apply:
(a) For the period commencing on Executive's date of
termination of employment and continuing for six (6) calendar months
thereafter, Executive shall remain in the Company's service as an
independent contractor unless such consulting relationship is sooner
terminated in accordance with Sections 4.3(c)(i) or (ii) of this Employment
Agreement. This period of continued service is hereby designated the
Consultancy Period, and during such period, Executive shall make himself
available for consultation with the new Chief Executive Officer, other
officers of the Company and the individual members of the Board with
respect to matters within his area of expertise, including matters which
facilitate the transition period for the new Chief Executive
4
<PAGE>
Officer. However, Executive shall not be required to render more than ten
(10) hours of consulting services per month, and Executive shall have the
right to render services as a consultant, advisor or employee to any other
company or companies during the Consultancy Period, provided Executive will
not accept employment or render services to any company that is in a
business competitive with the Company. A "business competitive with the
Company" would include any business engaged in internet sales or marketing.
This would include, but is not limited to, Venator, REI, Copeland (Sports
Superstore on-line), The Sports Authority, FootZone, CBS Sportsline, CNNSI
and ESPN SportsZone. Executive agrees that each of the aforementioned
companies, among others, are competitors of the Company and that it would
breach Executive's fiduciary duties to the Company to be employed by or to
provide services to any competitor of the Company during the Consultancy
Period.
(b) During the Consultancy Period, Executive shall be
entitled to the following compensation for consulting services which may be
requested of him:
(i) Executive shall be paid in a lump-sum upon the commencement
of the Consultancy Period the greater of: (1) $200,000,
less applicable withholdings and deductions; or (2) his
then current Base Salary, less applicable withholdings and
deductions, and the Company will reimburse Executive for
COBRA payments under COBRA for health insurance coverage.
(ii) Executive shall be entitled to reimbursement of all travel
and other out-of-pocket costs reasonably incurred in
connection with his consulting services under this
Employment Agreement ("Travel and Miscellaneous Expenses").
In order to receive reimbursement for such Travel and
Miscellaneous Expenses, Executive must submit documentation
substantiating those expenses, and the Company shall
reimburse all approved Travel and Miscellaneous Expenses
within thirty (30) business days after Executive's
submission of such documentation; and
(iii) As of the date on which the Consultancy Period begins, the
Options shall accelerate such that Executive shall
immediately vest on an accelerated basis in the option
shares subject to each of the Initial Option and the 1999
Option which are otherwise scheduled to vest, in accordance
with the vesting schedule established for such option, over
the twelve (12)-month period following such date, such
number not to exceed 500,000 option shares in the
aggregate. To the extent option shares subject to the
Options remain unvested following such acceleration, such
option shares shall continue to vest during the Consultancy
Period in accordance with the original vesting schedule
established for the Initial Option and the 1999 Option,
provided, however, that the vest date for each installment
of option shares shall be accelerated by twelve (12) months
to reflect the acceleration effected pursuant to this
provision.
5
<PAGE>
To the extent Executive exercises the Option, or any other
options held by Executive which are designated as incentive stock
options under the federal tax laws, more than three (3) months
after date on which Executive ceases to serve as an employee of
the Company, such options shall be treated as non-qualified stock
options upon exercise and Executive shall be required to satisfy
the applicable tax withholding requirements in connection with
such option exercises.
Upon the termination of the Consultancy Period (including
early termination in accordance with Section 4.3(c)), all
outstanding options held by Executive will terminate, and any
unvested shares held by Executive will be subject to repurchase
by the Company, at the exercise price paid per share, in
accordance with the agreements evidencing such options and
unvested shares.
In the event Executive's termination by the Company without
cause occurs at the time of, or within 12 months following, a
Corporate Transaction, then the provisions of Section 2.3 shall
govern such termination and this Section 4.3 shall have no
effect.
(c) The Consultancy Period may not be terminated prior to six (6)
calendar months after the date on which Executive's employment with the
Company terminates, except in accordance with the following provisions:
(i) The Company may immediately terminate the Consultancy Period in
the event that Executive violates Section 5 of this Employment
Agreement entitled "Confidential Information and Covenant Not to
Compete"; or
(ii) Executive may terminate the Consultancy Period at any time upon
written notice to the Company, and the termination shall become
effective immediately upon Executive's delivery of such notice.
Upon the termination of the Consultancy Period, no further
compensation shall become payable to Executive from and after
that termination date, whether in the form of cash payments or
the additional vesting of option shares.
Should the termination of Executive's employment without cause occur at the
time of, or at any time following, a Corporate Transaction, then the provisions
of this Section 4.3 shall have no effect and Executive will not be entitled to
any additional compensation or other rights or benefits from the Company; and,
as a result, the Company shall be obligated to pay Executive only that portion
of his Base Salary that Executive has earned prior to the effective date of the
termination of Executive's employment with the Company as well as any benefits
described in Section 2.3.
4.4 Resignation as an Officer and Director. In the event Executive's
--------------------------------------
employment with the Company terminates for any reason, Executive agrees to
immediately resign as an officer and/or director of the Company.
5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
----------------------------------------------------
6
<PAGE>
5.1 Executive understands that the Company and its affiliates possess
Proprietary Information (as defined below) which is important to its business
and that this Employment Agreement creates a relationship of confidence and
trust between Executive and the Company and its affiliates with regard to
Proprietary Information. Nothing in this Section 5 shall be deemed modified or
terminated in the event of the termination or expiration of this Employment
Agreement.
5.2 For purposes of this Employment Agreement, "Proprietary Information"
is information that was or will be developed, created, or discovered by or on
behalf of the Company and its affiliates and predecessors, or is developed,
created or discovered by Executive while performing services under this
Employment Agreement, or which became or will become known by, or was or is
conveyed to the Company and its affiliates which has commercial value in the
Company's and its affiliates' business. "Proprietary Information" includes, but
is not limited to, trade secrets, ideas, techniques, business, product, or
franchise development plans, customer information, franchisee information and
any other information concerning the Company's and its affiliates' actual or
anticipated business, development, personnel information, or which is received
in confidence by or for the Company and its affiliates from any other person.
5.3 At all times, both during the term of this Employment Agreement and
after its termination, Executive will keep in confidence and trust, and will not
use or disclose, any Proprietary Information without the prior written consent
of the Board.
5.4 Executive understands that the Company and its affiliates possess or
will possess "Company Documents" which are important to its business. For
purposes of this Employment Agreement, "Company Documents" are documents or
other media that contain or embody Proprietary Information or any other
information concerning the business, operations or plans of the Company and its
affiliates, whether such documents have been prepared by Executive or by others.
"Company Documents" include, but are not limited to, blueprints, drawings,
photographs, charts, graphs, notebooks, customer lists, computer disks,
personnel files, tapes or printouts and other printed, typewritten or
handwritten documents. All Company Documents are and shall remain the sole
property of the Company. Executive agrees not to remove any Company Documents
from the business premises of the Company or deliver any Company Documents to
any person or entity outside the Company, except as required to do in connection
with performance of the services under this Employment Agreement. Executive
further agrees that, immediately upon the Company's request and in any event
upon completion of Executive's services, Executive shall deliver to the Company
all Company Documents, apparatus, equipment and other physical property or any
reproduction of such property.
5.5 During the term of this Employment Agreement and the Consultancy
Period and for six months thereafter, Executive will not encourage or solicit
any employee of the Company or any affiliate to leave the Company or any
affiliate for any reason.
5.6 Non-Competition. During the Employment Term and the Consultancy
---------------
Period, Executive shall not directly or indirectly:
7
<PAGE>
(i) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by or connected
in any manner with, any enterprise which is engaged in any business competitive
with that which the Company is at the time conducting or proposing to conduct;
provided, however, that such restriction shall not apply to any passive
- --------
investment representing an interest of less than two percent (2%) of an
outstanding class of publicly traded securities of any corporation or other
enterprise which is not, at the time of such investment, engaged in a business
geographically competitive with the Company's business; or
(ii) encourage or solicit any Company employee to leave the Company's
employ for any reason or interfere in any material manner with employment
relationships at the time existing between the Company and its current
employees, except as may be required in any bona fide termination decision
regarding any Company employee.
5.7 Executive acknowledges that the specialized nature of his knowledge of
the Company's Proprietary Information, trade secrets and other intellectual
property are such that a breach of his covenant not to compete or
confidentiality obligations contained in this Section 5 of this Employment
Agreement would necessarily and inevitably result in a disclosure,
misappropriation and misuse of such Proprietary Information, trade secrets and
other intellectual property. Accordingly, Executive acknowledges and agrees that
such a breach would inflict unique and irreparable harm upon the Company and
that the Company shall be entitled, in addition to its other rights and
available remedies, to enforce, by injunction or decree of specific performance,
Executive's obligations set forth herein.
6. RESTRICTIVE COVENANT.
---------------------
During the Employment Term:
6.1 Executive shall devote substantially all of his time and energy to the
performance of Executive's duties described herein, except during periods of
illness or vacation periods.
6.2 Executive shall not directly or indirectly provide services to or
through any person, firm or other entity except the Company, unless otherwise
authorized by the Company in writing.
6.3 Executive shall not render any services of any kind or character for
Executive's own account or for any other person, firm or entity without first
obtaining the Company's written consent.
6.4 Notwithstanding the foregoing, Executive shall have the right to
perform such incidental services as are necessary in connection with (i) his
private passive investments, but only if Executive is not obligated or required
to (and shall not in fact) devote any managerial efforts which interfere with
the services required to be performed by him hereunder, (ii) his charitable or
community activities or (iii) participation in trade or professional
organizations, but only if such incidental services do not significantly
interfere with the performance of Executive's services hereunder.
8
<PAGE>
7. MISCELLANEOUS.
--------------
7.1 Notices. All notices, demands and requests required by this
-------
Employment Agreement shall be in writing and shall be deemed to have been given
or made for all purposes (i) upon personal delivery, (ii) one day after being
sent, when sent by professional overnight courier service, (iii) five days after
posting when sent by registered or certified mail, or (iv) on the date of
transmission when sent by telegraph, telegram, telex, or other form of "hard
copy" transmission, to either party hereto at the address set forth below or at
such other address as either party may designate by notice pursuant to this
Section 7.
If to the Company, to:
Fogdog, Inc.
500 Broadway
Redwood City, CA 94063
Attention: President
with a Copy to:
David A. Makarechian, Esq.
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
If to Executive, to:
Tim Harrington
c/o Fogdog, Inc.
500 Broadway
Redwood City, CA 94063
7.2 Assignment. This Employment Agreement shall be binding on, and shall
----------
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns; provided, however, that Executive may
not assign, transfer or delegate his rights or obligations hereunder and any
attempt to do so shall be void.
7.3 Deductions. All amounts paid to Executive hereunder are subject to
----------
all withholdings and deductions required by law, as authorized under this
Employment Agreement, and as authorized from time to time.
7.4 Entire Agreement. This Employment Agreement contains the entire
----------------
agreement of the parties with respect to the subject matter hereof and
supercedes any and all prior agreements either oral or in writing between the
parties with respect to the subject matter hereof including, but not limited to,
the Employment Agreement dated June 2, 1998 and the amendment dated January 17,
1999.
9
<PAGE>
7.5 Amendment. This Employment Agreement may be modified or amended only
---------
by a written agreement signed by the Board and Executive.
7.6 Waivers. No waiver of any term or provision of this Employment
-------
Agreement will be valid unless such waiver is in writing signed by the party
against whom enforcement of the waiver is sought. The waiver of any term or
provision of this Employment Agreement shall not apply to any subsequent breach
of this Employment Agreement.
7.7 Counterparts. This Employment Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but together they shall
constitute one and the same instrument.
7.8 Severability. The provisions of this Employment Agreement shall be
------------
deemed severable, and if any part of any provision is held illegal, void or
invalid under applicable law, such provision may be changed to the extent
reasonably necessary to make the provision, as so changed, legal, valid and
binding. If any provision of this Employment Agreement is held illegal, void or
invalid in its entirety, the remaining provisions of this Employment Agreement
shall not in any way be affected or impaired but shall remain binding in
accordance with their terms.
7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA
AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE
PERFORMED ENTIRELY WITHIN CALIFORNIA.
7.10 Arbitration. Executive understands and agrees that, as a condition
-----------
of his employment with the Company, any and all disputes that Executive may have
with the Company, or any of its employees, officers, directors, agents or
assigns, which arise out of Executive's employment or investment or compensation
shall be resolved through final and binding arbitration, as specified in this
Employment Agreement. This shall include, without limitation, any controversy,
claim or dispute of any kind, including disputes relating to any employment by
the Company or the termination thereof, claims for breach of contract or breach
of the covenant of good faith and fair dealing, infliction of emotional
distress, defamation and any claims of discrimination, harassment or other
claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination
in Employment Act, the Americans With Disabilities Act, the Employee Retirement
Income Securities Act, or any other federal, state or local law or regulation
now in existence or hereinafter enacted and as amended from time to time
concerning in any way the subject of Executive's employment with the Company or
its termination. The only claims not covered by this Employment Agreement are
---
claims for benefits under the unemployment insurance or workers' compensation
laws, and any claims pursuant to paragraph 5 of this Employment Agreement which
will be resolved pursuant to those laws. Any disputes and/or claims covered by
this Employment Agreement shall be submitted to final and binding arbitration to
be conducted in Santa Clara County, California, in accordance with the rules and
regulations of the American Arbitration Association. Executive and the Company
will split the cost of the arbitration filing and hearing fees and the cost of
the arbitrator. Each side will bear its
10
<PAGE>
own attorneys' fees, and the arbitrator will not have authority to award
attorneys' fees unless a statutory section at issue in the dispute authorizes
------
the award of attorneys' fees to the prevailing party, in which case the
arbitrator has authority to make such award as permitted by the statute in
question. The arbitration shall be instead of any civil litigation; this means
that Executive is waiving any right to a jury trial, and that the arbitrator's
---------------------------------
decision shall be final and binding to the fullest extent permitted by law and
enforceable by any court having jurisdiction thereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
"COMPANY"
----
By: /s/ Marcy Von Lossberg
Name: Marcy Von Lossberg
Title: Chief Financial Officer
"EXECUTIVE"
---- /s/ Timothy Harrington
12
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated April 28, 1999 relating to the financial statements of Fogdog,
Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
November 4, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated September 8, 1999 relating to the financial statements of Sports
Universe, Inc., which appears in such Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
San Jose, California
November 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM S-1 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,694 21,880
<SECURITIES> 423 0
<RECEIVABLES> 110 301
<ALLOWANCES> 35 96
<INVENTORY> 0 722
<CURRENT-ASSETS> 132 733
<PP&E> 761 2,154
<DEPRECIATION> 291 533
<TOTAL-ASSETS> 2,840 57,291
<CURRENT-LIABILITIES> 1,734 5,609
<BONDS> 0 0
0 0
8 24
<COMMON> 5 6
<OTHER-SE> 904 51,310
<TOTAL-LIABILITY-AND-EQUITY> 2,840 57,291
<SALES> 765 2,577
<TOTAL-REVENUES> 765 2,577
<CGS> 275 2,070
<TOTAL-COSTS> 4,940 17,989
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 55 276
<INCOME-PRETAX> (4,170) (15,136)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,120) (15,136)
<EPS-BASIC> (.95) (6.04)
<EPS-DILUTED> (.95) (6.04)
</TABLE>
