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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27437
FOGDOG, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0388602
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
500 Broadway, Redwood City, California 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 980-2500
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 5, 2000
----- --------------------------
<S> <C>
Common Stock, $0.001 par value 36,447,317
</TABLE>
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<TABLE>
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)...... 3
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999........................................... 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999........................ 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999........................ 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 26
PART II. OTHER INFORMATION............................................ 27
Item 1. Legal Proceedings............................................ 27
Item 2. Changes in Securities and Use of Proceeds.................... 27
Item 3. Defaults Upon Senior Securities.............................. 27
Item 4. Submission of Matters to a Vote of Security Holders.......... 27
Item 5. Other Information............................................ 27
Exhibits, Financial Statement Schedules, and Reports on Form
Item 6. 8-K......................................................... 27
Signatures............................................................ 29
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOGDOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 24,388 $ 26,451
Short-term investments................................ 35,856 46,450
Accounts receivable, net of allowances of $143 and $3,
respectively......................................... 227 216
Merchandise inventory................................. 3,333 2,765
Prepaid expenses and other current assets............. 7,393 1,963
-------- --------
Total current assets................................ 71,197 77,845
Property and equipment, net............................. 3,080 2,427
Intangible assets, net.................................. 1,880 2,212
Other assets, net....................................... 22,352 25,708
-------- --------
Total assets........................................ $ 98,509 $108,192
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 6,389 $ 5,638
Current portion of long-term debt..................... 454 473
Other current liabilities............................. 2,057 3,283
-------- --------
Total current liabilities........................... 8,900 9,394
-------- --------
Long-term debt, less current portion.................... 200 300
-------- --------
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value, 5,000
shares authorized and zero outstanding............... -- --
Common Stock, $0.001 par value, 100,000 shares
authorized; 36,186 and 35,792 issued and
outstanding.......................................... 36 36
Additional paid-in capital............................ 147,599 145,441
Notes receivable...................................... (50) (50)
Unearned stock-based compensation..................... (8,034) (11,534)
Accumulated deficit................................... (50,142) (35,395)
-------- --------
Total stockholders' equity.......................... 89,409 98,498
-------- --------
Total liabilities and stockholders' equity.......... $ 98,509 $108,192
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Net revenues................................................ $ 4,706 $ 353
Cost of revenues............................................ 4,559 323
-------- -------
Gross profit................................................ 147 30
-------- -------
Operating expenses:
Marketing and sales....................................... 11,232 1,445
Technology and content.................................... 1,321 482
General and administrative................................ 1,681 304
Amortization of intangible assets......................... 332 12
Amortization of stock-based compensation.................. 1,329 331
-------- -------
Total operating expenses................................ 15,895 2,574
-------- -------
Operating loss.............................................. (15,748) (2,544)
Interest income, net........................................ 1,001 22
-------- -------
Net loss.................................................... $(14,747) $(2,522)
======== =======
Basic and diluted net loss per share........................ $ (0.41) $ (0.65)
======== =======
Basic and diluted weighted average shares used in the
computation of
net loss per share......................................... 35,912 3,855
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(14,747) $(2,522)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowances for bad debt and sales returns............... 541 --
Depreciation and amortization........................... 259 67
Amortization of intangible assets....................... 332 --
Amortization of stock-based compensation................ 1,364 331
Non-employee stock based expense........................ 3,249 --
Changes in assets and liabilities:
Accounts payable and other current liabilities........ (475) 68
Other assets.......................................... 107 --
Accounts receivable................................... (552) (14)
Merchandise inventory................................. (568) --
Prepaid expenses and other current assets............. (5,430) (151)
-------- -------
Net cash used in operating activities............... (15,920) (2,221)
-------- -------
Cash flows from investing activities:
Sale of short-term investments............................ 33,650 --
Purchase of short-term investments........................ (23,056) --
Purchase of property and equipment........................ (912) (219)
-------- -------
Net cash provided by (used in) investing
activities......................................... 9,682 (219)
-------- -------
Cash flows from financing activities:
Proceeds from the sale of Common Stock.................... 4,298 --
Proceeds from the sale of Preferred Stock................. -- 9,961
Proceeds from term loan................................... -- 172
Payments under capital leases............................. -- (3)
Payments under line of credit............................. (119) --
Repurchase of Common Stock................................ (4) --
Payments under sofware loan............................... -- (28)
-------- -------
Net cash provided by financing activities........... 4,175 10,102
-------- -------
Net increase (decrease) in cash and cash equivalents........ (2,063) 7,662
Cash and cash equivalents at the beginning of the period.... 26,451 1,694
-------- -------
Cash and cash equivalents at the end of the period.......... $ 24,388 $ 9,356
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1--The Company and basis of presentation
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. The Company was incorporated
in California in October 1994 as Cedro Group, Inc. and in November 1998,
changed its name to Fogdog, Inc. The Company was reincorporated in the state
of Delaware as Fogdog, Inc. in September 1999. The accompanying unaudited
condensed financial statements reflect all adjustments, which in the opinion
of management, are necessary for the fair presentation of the financial
position, results of operations and cash flows for the periods shown. The
results of operations for such periods are not necessarily indicative of the
results to be expected for the full fiscal year or any future period. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the 1999 Annual Report on Form
10-K. Certain amounts in this Form 10-Q have been reclassified to conform the
financial statement presentation.
Note 2--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.
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>
Three Months
Ended March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Numerator:
Net loss.............................................. $(14,747) $(2,522)
======== =======
Denominator:
Weighted average shares............................... 36,186 4,925
Weighted average Common Stock subject to repurchase
agreements........................................... (274) (1,070)
-------- -------
Demoninator for basic and diluted calculation......... 35,912 3,855
======== =======
Basic and diluted net loss per share................ $ (0.41) $ (0.65)
======== =======
</TABLE>
6
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FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 stockholder's calculation above because to do so would be
antidilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------------------
<S> <C> <C>
Weighted average effect of dilutive securities:
Preferred Stock......................................... -- 10,223
Warrants to purchase Preferred Stock.................... -- 89
Warrants to purchase Common Stock....................... 4,319 21
Employee stock options.................................. 5,047 2,465
Common Stock subject to repurchase...................... 274 1,070
-------- ---------
9,640 13,868
======== =========
</TABLE>
Note 3--Short-term investments
The Company considers all investments with original maturities of less than
one year but greater than 90 days at the respective balance sheet date to be
short-term investments. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" the Company has categorized its marketable securities as
"available-for-sale." At March 31, 2000, amortized cost approximated fair
value and unrealized gains and losses were insignificant.
Note 4--Common Stock
In January 2000, the Company sold an additional 425,000 shares of Common
Stock at $11.00 per share which generated proceeds of approximately $4.3
million, net of issuance costs, in connection with the exercise of the
underwriters over-allotment.
Note 5--Comprehensive income
Comprehensive income is comprised of net income (loss) and other
comprehensive earnings such as unrealized gains or losses on available-for-
sale marketable securities. The Company's unrealized gains/losses on
available-for-sale marketable securities have been insignificant for all
periods presented.
Note 6--Accounting Pronouncements
Technology and content expenses primarily consist of payroll and related
costs for web site maintenance, information technology personnel, Internet
access, hosting charges and logistics engineering and web content and design
costs. Effective January 1, 1999, the Company adopted Statement of Position
98-1 ("SOP 98-1"), "Accounting for the cost of Computer Software Developed or
Obtained for Internal Use". In accordance with SOP 98-1, the Company
classifies technology and content costs into one of three categories (I)
preliminary project stage (II) application development stage and (III)
operational stage. For the three months ended March 31, 2000, costs associated
with the preliminary projects stage were insignificant and charged to
technology and content expense as incurred. Costs associated with the
application development stage primarily consist of external software purchased
and internal costs to develop software with a life in excess of three months.
For the three months ended March 31, 2000, the Company capitalized
approximately $339,000 of costs associated with the application development
stage and is amortizing such amounts to technology and content expense over
the estimated useful life of one to three years. Costs associated with the
operational stage primarily consist of internal costs to maintain and enhance
the Company's web site and internal costs to develop software with an expected
life three months or less. For the three months ended March 31, 2000 the
Company expensed approximately $1.3 million, to technology and content expense
associated with the operational stage.
7
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In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25 ("FIN 44"). FIN 44 establishes guidance for the accounting for
stock option grants or modifications to existing stock option awards and is
effective for option grants made after June 30, 2000. FIN 44 also establishes
guidance for the repricing of stock options and determining whether a grantee
is an employee, for which the guidance was effective after December 15, 1998
and modifying a fixed option to add a reload feature, for which the guidance
was effective after January 12, 2000. The adoption of certain of the
provisions of FIN 44 prior to March 31, 2000 did not have a material effect on
the financial statements. The Company does not expect that the adoption of the
remaining provisions will have a material effect on the financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended-- regarding Fogdog,
Inc. our business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause our actual business, prospects and results of operations to differ from
those that may be anticipated by such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. We undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made by us in this report and in
our other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
our business.
Overview
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 80,000
distinct stock keeping units representing more than 800 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. 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 twenty one specialty shops and eleven brand concept
shops. We provide information and analysis authored by experts, helpful
shopping services and innovative merchandising.
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 40% of our
transactions are shipped from inventory held at third party warehouses. We
expect this percentage to increase in future periods.
8
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Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total net revenues.
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
2000 1999
------ ------
<S> <C> <C>
Net revenues............................................... 100 % 100 %
Cost of revenues........................................... 97 92
------ ------
Gross profit............................................... 3 8
------ ------
Operating expenses:
Marketing and sales...................................... 239 409
Technology and content................................... 28 137
General and administrative............................... 36 86
Amortization of intangible assets........................ 7 3
Amortization of stock-based compensation................. 28 94
------ ------
Total operating expenses............................... 338 729
------ ------
Operating loss............................................. (335) (721)
Interest income, net....................................... 21 6
------ ------
Net loss................................................... (314)% (715)%
====== ======
</TABLE>
Net Revenues
Net revenue increased by 1233% to $4.7 million from $353,000 for the three
months ended March 31, 2000 and 1999. The increase in our net revenue was due
to increased transactions on our fogdog.com web site. The top sports in the
first three months ended March 31, 2000 were baseball, fitness, snowboarding
and fan with each individual category representing between 7% and 11% of net
revenue with the exception of baseball which was in excess of 15%. Net revenue
from merchandise shipped outside the United States was approximately 3% and
14% of total merchandise revenue for the three months ended March 31, 2000 and
1999, respectively. The decline in international merchandise revenues in the
first quarter of 2000 was due to the increased volume of North American sales.
Cost of Revenues
Cost of revenues consists of product costs, shipping and handling costs,
credit card processing fees, out-bound freight costs and certain promotional
expenses. Cost of revenues were $4.6 million and $323,000 or 97% and 92% of
merchandise revenues for the three months ended March 31, 2000 and 1999,
respectively. Cost of revenues increased in total dollars and as a percentage
of net revenues in 2000 compared to 1999 as a result of the significant
increase in volume of transactions, product mix, higher freight costs and
increased promotional expenses.
Marketing and Sales Expenses
Marketing and sales expenses consist primarily of advertising 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 $11.2 million and $1.4 million for the three
months ended March 31, 2000 and 1999, respectively. As a percentage of net
revenues, marketing and sales expenses were 239% and 409% for the three months
ended March 31, 2000 and 1999, respectively. The increase in marketing and
sales expenses in dollars year over year was attributable to an increase in
advertising, merchandising, customer service, distribution, and marketing
9
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personnel and related costs as we continued to expand our online store and
establish the Fogdog brand. The decrease in marketing and sales expenses as a
percentage of net revenues was due to the growth in net revenue without a
proportionate increase in marketing and sales expenses during 2000.
In September 1999, the Company entered into a two year strategic agreement
with Nike USA, Inc. to distribute Nike products on our web site. In exchange
for certain online exclusivity rights, we granted Nike a fully-vested warrant
to purchase 4,114,349 shares of our common stock at an exercise price of $1.54
per share. Our marketing and sales 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, amortized on a straight-line basis. For
the three months ended March 31, 2000, the Company recorded $3.2 million of
amortization related to the Nike warrant. We paid $250,000 to Nike upon
execution of the agreement and an additional $250,000 was paid in the first
quarter of 2000 in accordance with the agreement. These payments are being
amortized to marketing and sales expense over the life of the agreement. We
expect to continue to substantially increase our marketing and promotional
efforts and hire additional marketing, merchandising, customer service and
operations personnel in the future.
Technology and Content
Technology and content expenses consist of payroll and related expenses for
web site maintenance and information technology personnel, Internet access,
hosting charges and logistics engineering, and web content and design
expenses. Technology and content expenses were $1.3 million and $482,000 for
the three months ended March 31, 2000 and 1999, respectively. As a percentage
of net revenues, technology and content expenses were 28% and 137% for the
three months ended March 31, 2000 and 1999, respectively. The increase in
technology and content expenses in dollars in 2000 compared to 1999 was due to
higher costs of maintaining and hosting the web site. The decrease in
technology and content expenses as a percentage of net revenues was due to the
growth in net revenue without a proportionate increase in technology and
content expenses during 2000. We expect to continue to increase our technology
and content efforts and hire additional engineering and design support in the
future.
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 $1.7 million and $304,000 for the three months
ended March 31, 2000 and 1999, respectively. As a percentage of net revenues,
general and administrative expenses were 36% and 86% for the three months
ended March 31, 2000 and 1999, respectively. The increase in general and
administrative expenses in dollars were due to increased personnel and related
costs to support the implementation of our business strategy. The decrease in
general and administrative as a percentage of net revenues was due to the
growth in net revenue without a proportionate increase in general and
administrative expenses during 2000.
Amortization of Intangible Assets
Amortization of intangible assets was $332,000 and $12,000 for the three
months ended March 31, 2000 and 1999, respectively. As a percentage of net
revenues, amortization of intangible assets as a percentage of net revenues
was 7% and 3% for the three months ended March 31, 2000 and 1999,
respectively. The increase in amortization assets in dollars and as a
percentage of net revenues was due to the acquisition of Sports Universe, Inc.
in September of 1999.
Amortization of Stock-Based Compensation
In connection with the grant of employee stock options, we recorded
aggregate unearned stock-based compensation of $11.5 million through March 31,
2000. Employee stock-based compensation expense is amortized over the vesting
period of the options, which is generally four years, using the multiple-
option
10
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approach. We recorded employee stock-based compensation expenses of
approximately $1.3 million and $331 for the three months ended March 31, 2000
and 1999, respectively. The increase in stock-based compensation expense in
dollars was due to the increased headcount in 1999. Unearned stock-based
compensation expense will be reduced in future periods to the extent that
options are terminated prior to full vesting.
Interest Income, Net
Interest income, 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, net was $1.0 million and $22,000, for the
three months ended March 31, 2000 and 1999, respectively. The increase in
interest income, net in 2000 was due to higher average cash balances from the
Company's initial public offering in the fourth quarter of 1999 as well as the
proceeds from the exercise of the underwriters' over-allotment in January
2000, and the additional sales of preferred stock completed in the first three
quarters of 1999, and increased merchandise revenue.
Liquidity and Capital Resources
We raised approximately $59.7 million in December 1999 from an initial
public offering of 6,000,000 shares of our Common Stock, net of underwriting
discounts and issuance costs. We raised an additional $4.3 million in January
2000 from the sale of 425,000 shares from the underwriters' over-allotment.
Prior to the offering, we had 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 $15.9 million and $2.2 million for the
three months ended March 31, 2000 and 1999, respectively. This negative
operating cash flow resulted primarily from our net losses experienced during
these periods in addition to prepaid advertising and the amortization of
employee and non-employee stock based compensation in the three months ended
March 31, 2000. In 2000 and through out 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 the sale and purchase of short-term
investments and purchase of furniture, fixtures and computer equipment to
support our growing number of employees, generated cash of $9.7 million for
the three months ended March 31, 2000 and used cash of $219,000 for the three
months ended March 31,1999. During 2000, $23.1 million was used to purchase
short-term investments, respectfully, and the remainder was used for
furniture, fixtures and computer equipment.
Our financing activities generated cash of $4.2 million and $10.1 million,
for the three months ended March 31, 2000 and 1999. The cash generated from
these financing activities was primarily related to the exercise of the
underwriters' over-allotment of 425,000 shares of Common Stock for $4.3
million, net of discounts and issuance costs in January 2000, and the issuance
and sale of our Series B Preferred Stock in the first quarter of 1999.
At March 31, 2000, we had cash and cash equivalents and short-term
investments aggregating $60.2 million. Approximately $150,000 of 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 $5.0 million, subject to specified
limitations. The agreement provides for the following:
. a revolving line of credit facility for $3,000,000 expiring in December
of 2000;
. an equipment term loan facility for $2,000,000 limited to 75% of the
invoice amount of the equipment;
. an equipment term loan for $88,552 payable in 26 equal installments
commencing December 22, 1998; and
. an equipment term loan for $766,667 payable in 24 equal installments
commencing September 30, 1999.
11
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We had an outstanding aggregate debt balance at March 31, 2000 of $654,000.
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
March 31, 2000.
During the first quarter of 2000, we entered into commitments for online and
traditional offline advertising. As of March 31, 2000, our remaining
commitments were approximately $7.8 million. In addition, we have remaining
commitments under the lease for our headquarters of $4.6 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 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 at present we do not have any legally binding
agreements or commitments with respect to any acquisition of other businesses,
products or technologies, from time to time we 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.
Year 2000 Readiness
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.
Prior to December 31, 1999, we completed our Year 2000 compliance program.
The program was directed by our information technology group. We have not
experienced any material Year 2000 related difficulties in either our IT or
non-IT systems, or otherwise.
We may discover Year 2000 compliance problems in our systems in the future.
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 could adversely affect our
business.
12
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RISKS RELATED TO OUR BUSINESS
We expect significant increases in our operating expenses and continuing
losses.
We incurred a cumulative net loss of $50.1 million for the period from
inception through March 31, 2000. Our operating loss for the three months
ended March 31, 2000 was $14.7 million and for the three months ended
March 31, 1999 was $2.5 million. Our operating loss for the year ended
December 31, 1999 was $29.6 million and for the year ended December 31, 1998
was $4.1 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 losses 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;
. 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 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;
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. 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 inbound 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.
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, the fourth calendar
quarter accounted for a large percentage of our total annual sales for 1999.
We expect that the fourth calendar quarter will account for a large percentage
of our total annual sales in this and future years. 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
may 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
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.
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.
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
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through additional debt or equity financing 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 35
distributors and manufacturers. However, our contracts or arrangements with
these parties do not guarantee the availability of merchandise, establish
guaranteed prices or provide for the continuation of particular pricing
practices. In addition, we do not have a written contract with most of our
major suppliers. Although we have alternative sources of supply for a small
percentage of the products we offer, we may have difficulty establishing
alternative sources for many of our products. Our current suppliers may not
continue to sell products to us on current terms or at all, and we may not be
able to establish new supply relationships to ensure delivery of merchandise
in a timely and efficient manner or on terms acceptable to us. Some sporting
goods manufacturers may be slow to adopt the use of the Internet as a
distribution channel. In addition, our supply contracts typically do not
restrict a supplier from selling products to other retailers, which could
limit our ability to supply the quantity of merchandise requested by our
customers. If we cannot supply our products to consumers at acceptable prices,
we may lose sales and market share as consumers make purchases elsewhere.
Further, an increase in supply costs could cause our operating losses to
increase beyond current expectations.
If we are unable to establish and maintain relationships with key brand
manufacturers, our sales will decrease.
If we are unable to establish and maintain relationships with important
brand manufacturers, we may be unable to obtain sufficient quantities of
popular products and in-depth product information. This could result in lower
sales. We have never derived more than 40% of our revenues in any quarter from
products purchased directly from manufacturers, although we cannot predict
whether we will exceed this percentage in future periods. For the three months
ended March 31, 2000, we derived approximately 19% of our net revenues from
sales of Nike. We entered into an agreement with Nike in September 1999 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, we believe
our relationship with Nike has caused other existing suppliers or could cause
future suppliers to modify their existing relationships with us or prevent new
relationships from being formed. We believe that some of Nike's competitors
have been and may in the future be reluctant to enter into an agreement with
us or to provide products for sale on our online store because of our
agreement with Nike. For example, we believe that some competitors may not
want to be featured on our web site because of Nike's involvement with us.
Also, we believe that Nike's competitors may fear that Nike may use its
relationship with us to attempt to gain access to competitive information
concerning those competitors.
We have experienced difficulty in obtaining sufficient product allocations
from some of our key vendors. If we have to rely exclusively on distributors
and not manufacturers, we may not be able to obtain the types and quantities
of the products we desire because of varying demand from their other customers
or temporal
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limitations on the availability of products from their suppliers. In addition,
Nike and some of our other key vendors have established, and may continue to
expand, their own online retailing efforts, which may impair our ability to
acquire sufficient product allocations from these vendors. In connection with
this expansion, or a decision by manufacturers not to offer products online or
through our web site, manufacturers have asked us and may again ask us to
remove their products from our web site.
We depend on third parties to fulfill all of our customer orders, and any
problems with these parties could impair our operating results and harm our
reputation.
Currently, we rely primarily on third-party distributors and product
manufacturers to fulfill our customers' orders. These fulfillment partners are
responsible for packaging products and arranging for them to be shipped to our
customers. We may be unable to ensure that our fulfillment partners fill our
customers' orders accurately and that orders are shipped promptly and in
appropriate packaging. In addition, we have no written contracts with some of
these fulfillment partners, and our contracts with the others are generally
terminable upon short notice. If any of our existing fulfillment arrangements
were to be terminated, our business could be disrupted and we could incur
significant costs in attempting to make alternative arrangements. Our
distribution network is also heavily dependent upon third-party carriers,
primarily United Parcel Service, for product shipments. UPS accounted for
approximately 91% of our customer shipments by units for the three months
ended March 31, 2000. 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. We can not assure you that we will be able to enter into any such
agreements on terms acceptable to us or at all. It may be difficult for us to
assimilate new partners into our distribution system. 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 have
increased the amount of inventory we carry and the percentage of sales made
from our own inventory has increased. We anticipate that we will continue to
increase our inventory levels, and that the percentage of sales made from our
own inventory will continue to rise. As a result, it will be
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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. 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. An 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 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;
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. 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 the past, a number of online retailers have been the target of "denial of
service" attacks by outside third parties. These attacks seek to overburden
the online companies' capacity so that others trying to access the web site
cannot do so. If we are the victim of a successful attack of this kind
resulting in denial of access to our customers, our business, reputation,
operations and financial condition may be adversely affected. Further, we may
be the target of other types of computer attacks and hacking by third parties
which could have similar adverse effects.
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.
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 a competing online presence and existing online providers with
better name recognition than Fogdog Sports may begin selling sporting goods.
Establishing the Fogdog brand as a widely recognized and trusted source of
sporting goods will depend largely on our success in providing a high-quality
online experience supported by a high level of customer service, which cannot
be assured. We expect that we will need to increase substantially our spending
on programs designed to create and maintain strong brand loyalty among
customers and we cannot be certain that our efforts will be successful.
Our inability to secure and protect our Internet domain name may adversely
affect our business operation.
The www.fogdog.com Internet domain name is our brand on the Internet. In
October 1999, a third party challenged the use of the domain name as a
violation of a registered trademark. If we are unable to adequately protect
our Internet domain name, our trademarks and other intellectual property
rights, or must incur costs in doing so, it could harm our business. The
acquisition and maintenance of Internet domain names generally is regulated by
governmental agencies and their designees. Until recently, Network Solutions,
Inc. was the exclusive registrar for the ".com," ".net" and ".org" generic
top-level Internet domains in the U.S. In April 1999, however, the Internet
Corporation for Assigned Names and Numbers, or ICANN, a new global non-profit
corporation formed to oversee a set of the Internet's core technical
management functions, opened the market for registering Internet domain names
to an initial group of five companies. Network Solutions, Inc. still maintains
the registry containing all the registrations in the generic top-level
Internet domains. The market for registering these Internet domain names in
the U.S. and in foreign countries is expected to undergo further changes in
the near future. We expect the requirements for registering Internet domain
names also to be affected. The relationship between regulations governing
Internet domain names and laws protecting 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:
. retailers selling sporting goods exclusively online such as MVP.com who
has partner relationships with Sportsline.com and Galyans;
. 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 Footstar, Inc.;
. 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 recently 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.
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. New competitors may have the ability to
attract customers through innovative ways including sports celebrities.
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Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can.
Furthermore, our competitors may be able to secure a broader range of products
from or otherwise develop close relationships with primary vendors. Some
competitors may price their products below cost in an attempt to gain market
share. Traditional store-based retailers also enable customers to see and feel
products in a manner that is not possible over the Internet.
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 2000 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.
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 55 employees on March
31, 1999 to 155 employees on March 31, 2000. We also moved into a new
headquarters building in August 1999 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. Also, in October 1999 we received
a letter from a third party alleging that our use of the trademark "Fogdog"
and the domain name for our web site fogdog.com infringed a registered
trademark licensed by this third party, and further alleging unfair
competition under state and federal trademark law. In January 2000, we
received a letter from a third party stating his belief that our Web site
induces infringement by others of a patent for a remote query communication
system, and inviting us to license this technology. We may in the future
receive additional claims that we are engaging in unfair competition or other
illegal trade practices. These claims may increase in the future. We may be
unsuccessful in defending against any such claim, which could result in
substantial damages, fines or other penalties. The resolution of a claim could
also require us to change how we do business, redesign our web site and other
systems, or enter into burdensome royalty or licensing agreements. In
particular, we may have to enter into a license to use our domain name, or we
could even be forced to change our name, either of which would severely harm
our business. These license or royalty agreements, if required, may not be
available on acceptable terms, if at all, in the event of a successful claim
of infringement. Our insurance coverage may not be adequate to cover every
claim that could be asserted against us. Even unsuccessful claims could result
in significant legal fees and other expenses, diversion of management's time
and disruptions in our business. Any such claim could also harm our reputation
and brand.
We intend to expand our business internationally, causing our business to
become increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to pursue or consider pursuing international expansion. We have expanded into
international markets by opening an office in London. Revenue from merchandise
shipped outside the United States was approximately 3% of total merchandise
revenue for the three months ended March 31, 2000, and we expect to increase
our international sales efforts. International sales are subject to inherent
risks and challenges that could affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting goods manufacturers may require that
our international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
effects on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into U.S. dollars may contribute
to fluctuations in our results of operations and fluctuating exchange rates
could cause reduced gross revenues and/or gross margins from dollar-
denominated international sales.
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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. In addition, we contract for the delivery and
assembly of some of the products we sell. We may be subject to claims if any
such product were to cause physical injury or injury to property due to faulty
assembly by our contractors. 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.
As of March 31, 2000, our executive officers and directors, their affiliates
and other substantial stockholders together controlled approximately 69% 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.
The board of directors has 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 has the authority to determine the price,
rights, preferences, privileges and restrictions of the preferred stock. If we
issue preferred stock, it might have preference over and harm the rights of
the holders of common stock. Although the availability of this preferred stock
will provide us with flexibility in connection with possible acquisitions and
other corporate purposes, the issuance of preferred stock may make it more
difficult for a third-party to acquire a majority of our outstanding voting
stock. We currently have no plans to issue preferred stock.
Our certificate of incorporation and bylaws include provisions that may
deter an unsolicited offer to purchase us. These provisions, coupled with the
provisions of the Delaware General Corporation Law, may delay or impede a
merger, tender offer or proxy contest. Further, our board of directors is
divided into three classes, only one of which is elected each year. Our
directors are only removable by the affirmative vote of at least 66 2/3% of
all classes of voting stock. These factors may further delay or prevent a
change of control.
22
<PAGE>
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 three months ended March 31, 2000 and for
the year ended December 31, 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.
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
23
<PAGE>
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 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.
24
<PAGE>
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.
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
25
<PAGE>
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 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.
Prior to December 31, 1999, we completed our Year 2000 compliance program.
The program was directed by our information technology group. We have not
experienced any material Year 2000 related difficulties in either our IT or
non-IT systems, or otherwise.
We may discover Year 2000 compliance problems in our systems in the future.
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 could adversely affect our
business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We currently market our merchandise in the United States and anticipate
expanding our marketing efforts in Europe in 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.
26
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
3.2** Amended and Restated Bylaws.
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.
10.1** Registrant's 1999 Stock Incentive Plan.
10.2** Registrant's 1999 Employee Stock Purchase Plan.
10.3** Form of registrant's Directors and Officers' Indemnification
Agreement.
10.4+** Agreement, dated June 30, 1999, by and between the registrant and
America Online Inc.
10.5** Amended and Restated Loan Agreement, dated September 16, 1998, by and
between the registrant and Imperial Bank.
10.6** Sublease, dated July 14, 1999, by and between the registrant and Ampex
Corporation.
10.7** Letter Agreement, dated December 9, 1997, by and between the
registrant and Robin Smith.
10.8** Amended and Restated Employment Agreement, effective September 17,
1999, by and between the registrant and Timothy Harrington.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9** Employment Agreement, dated June 12, 1998, by and between the
registrant and Robert Chea.
10.10** Amended and Restated Employment Agreement, dated April 5, 1999, by
and between the registrant and Brett Allsop.
10.11** Letter Agreement, dated August 23, 1999, by and between the
registrant and Timothy Joyce.
10.12+** Order Fulfillment Services Agreement, dated September 17, 1999, by
and between the registrant and Keystone Fulfillment, Inc.
10.13+** Letter Agreement dated September 17, 1999, by and between the
registrant and Nike USA, Inc.
10.14** Letter Agreement, dated November 1, 1999, by and between, the
registrant and Mark Garrett.
21.1** Subsidiaries of the Registrant.
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>
- --------
** Previously filed
+ Confidential Treatment Requested
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form 10-Q
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOGDOG, INC.
(Registrant)
/s/ Bryan LeBlanc
By: _________________________________
Bryan LeBlanc
Vice President, Chief Financial
Officer
May 12, 2000
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
3.2** Amended and Restated Bylaws.
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.
10.1** Registrant's 1999 Stock Incentive Plan.
10.2** Registrant's 1999 Employee Stock Purchase Plan.
10.3** Form of registrant's Directors and Officers' Indemnification
Agreement.
10.4+** Agreement, dated June 30, 1999, by and between the registrant and
America Online Inc.
10.5** Amended and Restated Loan Agreement, dated September 16, 1998, by and
between the registrant and Imperial Bank.
10.6** Sublease, dated July 14, 1999, by and between the registrant and
Ampex Corporation.
10.7** Letter Agreement, dated December 9, 1997, by and between the
registrant and Robin Smith.
10.8** Amended and Restated Employment Agreement, effective September 17,
1999, by and between the registrant and Timothy Harrington.
10.9** Employment Agreement, dated June 12, 1998, by and between the
registrant and Robert Chea.
10.10** Amended and Restated Employment Agreement, dated April 5, 1999, by
and between the registrant and Brett Allsop.
10.11** Letter Agreement, dated August 23, 1999, by and between the
registrant and Timothy Joyce.
10.12+** Order Fulfillment Services Agreement, dated September 17, 1999, by
and between the registrant and Keystone Fulfillment, Inc.
10.13+** Letter Agreement dated September 17, 1999, by and between the
registrant and Nike USA, Inc.
10.14** Letter Agreement, dated November 1, 1999, by and between, the
registrant and Mark Garrett.
21.1** Subsidiaries of the Registrant.
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>
- --------
** Previously filed
+ Confidential Treatment Requested
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,388
<SECURITIES> 35,856
<RECEIVABLES> 370
<ALLOWANCES> 143
<INVENTORY> 3,333
<CURRENT-ASSETS> 71,197
<PP&E> 4,058
<DEPRECIATION> 978
<TOTAL-ASSETS> 98,509
<CURRENT-LIABILITIES> 8,900
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 89,373
<TOTAL-LIABILITY-AND-EQUITY> 98,509
<SALES> 4,706
<TOTAL-REVENUES> 4,706
<CGS> 4,559
<TOTAL-COSTS> 20,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (14,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,747)
<EPS-BASIC> (0.41)
<EPS-DILUTED> 0
</TABLE>
