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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 September 30, 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)
Delaware 77-0388602
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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.
Class Outstanding at October 23, 2000
Common Stock, $0.001 par value 37,159,569
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
FOGDOG, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
September 30, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 41,587 $ 26,451
Short-term investments...................... 987 46,450
Accounts receivable, net of allowances...... 689 216
Merchandise inventory....................... 4,964 2,765
Prepaid expenses and other current assets... 3,044 1,963
------------- ------------
Total current assets........................ 51,271 77,845
Property and equipment, net.................... 3,352 2,427
Other assets and intangibles, net.............. 16,934 27,920
------------- ------------
Total assets................................... $ 71,557 $108,192
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 6,395 $ 5,638
Current portion of long-term debt........... 418 473
Other current liabilities................... 2,952 3,283
------------- ------------
Total current liabilities................... 9,765 9,394
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Long-term debt, less current portion........... - 300
------------- ------------
Stockholders' equity:
Common Stock................................ 37 36
Additional paid-in capital.................. 147,510 145,441
Notes receivable............................ (58) (50)
Unearned stock based compensation........... (4,848) (11,534)
Accumulated deficit......................... (80,849) (35,395)
------------- ------------
Total stockholders' equity..................... 61,792 98,498
------------- ------------
Total liabilities and stockholders' equity..... $ 71,557 $108,192
============= ============
See accompanying notes to condensed consolidated financial statements.
3
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FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue.............................................................. $ 5,893 $ 1,493 $ 16,443 $ 2,577
Cost of revenue.......................................................... 5,004 1,510 14,786 2,551
--------- --------- --------- ---------
Gross profit............................................................. 889 (17) 1,657 26
--------- --------- --------- ---------
Operating expenses:
Marketing and sales............................................. 10,789 6,201 35,710 10,326
Technology and content.......................................... 1,313 997 3,891 2,205
General and administrative...................................... 1,257 429 4,598 1,181
Amortization of intangible assets............................... 332 120 996 144
Amortization of stock-based compensation........................ 1,045 842 4,529 1,582
--------- --------- --------- ---------
Total operating expenses........................................ 14,736 8,589 49,724 15,438
--------- --------- --------- ---------
Operating loss........................................................... (13,847) (8,606) (48,067) (15,412)
Interest income, net..................................................... 726 118 2,613 276
--------- --------- --------- ---------
Net loss................................................................. (13,121) (8,488) (45,454) (15,136)
Deemed preferred stock dividend.......................................... - (12,918) - (12,918)
--------- --------- --------- ---------
Net loss available to common stockholders................................ $(13,121) $(21,406) $(45,454) $(28,054)
========= ========= ========= =========
Basic and diluted net loss per share available to common stockholders.... $ (0.36) $ (4.44) $ (1.26) $ (6.04)
========= ========= ========= =========
Basic and diluted weighted average shares used in computation of net
loss per share available to common stockholders....................... 36,511 4,817 36,154 4,645
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---------------------
<S> <C> <C>
Cash flow from operating activities:
Net loss.................................................. $(45,454) $(15,136)
Adjustments to reconcile net loss to net cash
used in operating activities...........................
Allowances for bad debt and sales returns............... 1,797 80
Depreciation and amortization........................... 965 242
Amortization of intangible assets....................... 996 144
Amortization of stock-based compensation................ 3,719 1,582
Non-employee stock based expense........................ 9,732 475
Changes in assets and liabilities
Accounts payable and other current liabilities....... 426 3,476
Other assets......................................... 259 (1,084)
Accounts receivable.................................. (2,271) (210)
Merchandise inventory................................ (2,199) (722)
Prepaid expenses and other current assets............ (1,081) (601)
---------------------
Net cash used in operating activities............. (33,111) (11,754)
---------------------
Cash flows from investing activities:
Sale or maturity of short-term investments.............. 115,036 423
Purchase of short-term investments...................... (69,573) -
Purchase of property and equipment...................... (1,890) (1,393)
---------------------
Net cash provided by (used in) investing
activities....................................... 43,573 (970)
---------------------
Cash flows from financing activities:
Proceeds sale of Common Stock........................... 5,074 298
Proceeds from the sale of Preferred Stock............... - 32,523
Proceeds from (payments under) term loan................ (355) 599
Proceeds from (payments under) line of credit.......... - (423)
Payments under capital leases........................... - (3)
Repurchase of Common Stock.............................. (45) -
Payments under sofware loan............................. - (84)
---------------------
Net cash provided by financing activities......... 4,674 32,910
---------------------
Net increase in cash and cash equivalents.................... 15,136 20,186
Cash and cash equivalents at the beginning of the period..... 26,451 1,694
---------------------
Cash and cash equivalents at the end of the period........... $ 41,587 $ 21,880
=====================
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 64 $ 67
======================
Supplemental disclosure of noncash transactions:
Issuance of stock in exchange for notes................. $ 12 $ 94
======================
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 -- The company and basis of presentation
The Company
Fogdog, Inc. ("the Company") is an online retailer of sporting goods. The
Company's online retail store "fogdog.com" offers products, detailed product
information and personalized shopping services. 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.
Presentation
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.
6
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FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(unaudited)
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 Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Numerator:
Net loss $ (13,121) $ (21,406) $ (45,454) $ (28,054)
=============== =============== =============== ===============
Denominator:
Weighted average shares 36,667 5,322 36,390 5,117
Weighted average Common Stock subject
to repurchase agreements (156) (505) (236) (472)
--------------- --------------- --------------- ---------------
Demoninator for basic and diluted calculation 36,511 4,817 36,154 4,645
=============== =============== =============== ===============
Basic and diluted net loss per share $ (0.36) $ (4.44) $ (1.26) $ (6.04)
=============== =============== =============== ===============
</TABLE>
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 Nine Months Ended
September 30, September 30,
------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 2000 1999
------- -------- -------- --------
Weighted average effect of dilutive
securities:
Preferred stock - 20,164 - 16,413
Warrants to purchase Preferred Stock - 671 - 285
Warrants to purchase Common Stock 4,114 71 4,137 54
Employee stock options 4,598 3,986 4,828 1,601
Common Stock subject to repurchase 156 505 236 472
------- -------- -------- --------
8,868 25,397 9,201 18,825
======= ======== ======== ========
</TABLE>
7
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FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
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 September 30, 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 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 - Development Costs
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 nine
months ended September 30, 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 nine months ended September 30,
2000, the Company capitalized approximately $682,000 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 of three months or less. For the nine months
ended September 30, 2000 the Company expensed approximately $3.9 million, to
technology and content expense associated with the operational stage.
Note 7 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
summarizes certain interpretations and practices followed by the SEC in applying
generally acceptable accounting principles to revenue recognition. SAB 101 is
effective for all periods beginning with the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company has evaluated its current
revenue recognition policies and believes that they are compliance with guidance
provided under SAB 101.
In June 1998, the Financial Accounting Standards Board ("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 and
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 FIN 44 did not have a material effect on the financial
statements of the Company.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-02,
"Accounting for Web Site Development Costs". EITF 00-02 establishes guidance
for how companies should account for costs incurred to develop a web site
including costs incurred in the web site application and infrastructure
development stage, costs incurred to develop graphics, costs incurred to
develop, content and costs incurred in the operating stage. EITF 00-02 is
effective for web site development costs incurred for fiscal quarters beginning
after June 30, 2000. The adoption of EITF 00-02 did not have a material effect
on the financial statements of the Company.
Note 8 - Subsequent Event
On October 24, 2000 the Company announced that it had entered into a definitive
agreement to merge with Global Sports, Inc. Under the terms of the merger
agreement, Company stockholders will receive 0.135 shares of Global Sports, Inc.
common stock for each share of the Company's common stock. In addition, Global
Sports, Inc. will assume all of the Company's outstanding options. The
transaction is expected to close in the first quarter of 2001, subject to the
satisfaction of certain customary closing conditions, including the approval of
the stockholders of the Company and termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
8
<PAGE>
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 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 approximately 90,000
distinct stock keeping units representing approximately 900 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 45 different
sports, are featured in 58 specialty shops and 16 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 approximately 50% of our revenue is generated by
shipments from our inventory held at third party warehouses. This percentage is
at the upper end of the range established by management, and may increase or
decrease in future periods depending on our merchandising strategy and the
availability of products from third-party fulfillers. In connection with our
planned merger with Global Sports, Inc., in October 2000 we sold a portion of
our inventory to Global Sports, which will increase the amount of product
fulfilled by third parties.
Results of Operations
THIRD QUARTER OF FISCAL YEAR 2000 COMPARED TO THIRD QUARTER OF FISCAL YEAR 1999
The following table presents selected financial data for the periods indicated
as a percentage of total net revenues.
9
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Three Months Ended
September 30,
2000 1999
-------- --------
Net revenue 100% 100%
Cost of revenue 85 101
-------- --------
Gross profit 15 (1)
-------- --------
Operating expenses:
Marketing and sales 183 415
Technology and content 22 67
General and administrative 21 29
Amortization of intangible assets 6 8
Amortization of stock-based compensation 18 56
-------- --------
Total operating expenses 250 575
-------- --------
Operating loss (235) (576)
Interest income, net 12 8
-------- --------
Net loss (223%) (568%)
======== ========
Net Revenue
Net revenue increased by 295% to $5.9 million from $1.5 million for the three
months ended September 30, 2000 and 1999. The increase in our net revenue was
due to increased transactions on our fogdog.com web site. The top selling sports
in the three months ended September 30, 2000 were fitness and health,
representing approximately 12% of revenue, and baseball, golf and tennis, each
representing between 8% and 10% of revenue. Revenue from merchandise shipped
outside the United States was approximately 3.2% and 6.4% of total merchandise
revenue for the three months ended September 30, 2000 and 1999, respectively.
The decline in international merchandise revenues as a percentage of revenue in
the third quarter of 2000 was due to the increased volume of North American
sales.
Cost of Revenue
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 $5.0 million and $1.5 million or 85% and 101% of
merchandise revenues for the three months ended September 30, 2000 and 1999,
respectively. Cost of revenues increased in total dollars in 2000 compared to
1999 as a result of the significantly higher volume of transactions in 2000 and
higher freight costs. Cost of revenues as a percentage of net revenues
decreased in 2000 as compared to 1999 primarily due to growth in net revenues
with a less than proportional increase in promotional and shipping costs. In
addition, product costs as a percentage of revenue decreased because we sold
more product from our owned inventory in the third quarter of 2000 as compared
to the third quarter of 1999.
Marketing and Sales Expenses
10
<PAGE>
Our 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 $10.8 million and $6.2 million for
the three months ended September 30, 2000 and 1999, respectively. As a
percentage of net revenues, marketing and sales expenses were 183% and 415% for
the three months ended September 30, 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 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 merchandise revenue
without a proportionate increase in marketing and sales expenses during the
three months ended September 30, 2000.
In September 1999, we 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 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 September 30, 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 have more recently adopted a strategy that focuses on increasing
profitability by controlling our operating expenses while increasing revenue at
a more moderate pace. However, we may substantially increase our marketing and
promotional efforts and hire additional marketing, merchandising, customer
service, and operations personnel in the future.
Technology and Content Expenses
Our 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
$1.0 million for the three months ended September 30, 2000 and 1999,
respectively. As a percentage of net revenues, technology and content expenses
were 22% and 67% for the three months ended September 30, 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 merchandise revenue without a
proportionate increase in technology and content expenses during 2000. We have
more recently adopted a strategy that focuses on increasing profitability by
controlling our operating expenses while increasing revenue at a more moderate
pace. However, we may substantially increase our technology and content
efforts and hire additional engineering and design support personnel 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 $1.3 million and $429,000 for the three months
ended September 30, 2000 and 1999, respectively. As a percentage of net
revenues, general and administrative expenses were 21% and 29% for the three
months ended September 30, 2000 and 1999, respectively. The increase in general
and administrative expenses in dollars was due to increased personnel and
related costs to support the implementation of our business strategy. The
decrease in general and administrative expenses as a percentage of net revenues
was due to the growth in merchandise revenue without a proportionate increase in
general and administrative expenses during 2000.
Amortization of Intangible Assets
11
<PAGE>
Amortization of intangible assets was $332,000 and $120,000 for the three
months ended September 30, 2000 and 1999, respectively. As a percentage of net
revenues, amortization of intangible assets was 6% and 8% for the three months
ended September 30, 2000 and 1999, respectively. The increase in amortization in
dollars was due to the acquisition of Sports Universe, Inc. in September of
1999.
Amortization of Stock-Based Compensation
Employee stock-based compensation expense is amortized over the vesting
period of the options, which is generally four years, using the multiple-option
approach. We recorded employee stock-based compensation expenses of
approximately $1.0 million and $842,000 for the three months ended September 30,
2000 and 1999, respectively. The increase in stock-based compensation expense in
dollars was due to the increased headcount in late 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 $726,000 and $118,000, for the
three months ended September 30, 2000 and 1999, respectively. The increase in
interest income, net, in 2000 was due to higher average cash balances from our
initial public offering in the fourth quarter of 1999 as well as the proceeds
from the exercise of the underwriters' over-allotment option in January 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
The following table presents selected financial data for the periods indicated
as a percentage of total net revenues.
12
<PAGE>
Nine Months Ended
September 30,
2000 1999
--------- --------
Net revenue 100% 100%
Cost of revenue 90 99
--------- --------
Gross profit 10 1
--------- --------
Operating expenses:
Marketing and sales 217 401
Technology and content 24 85
General and administrative 28 46
Amortization of intangible assets 6 6
Amortization of stock-based compensation 27 61
--------- --------
Total operating expenses 302 599
--------- --------
Operating loss (292) (598)
Interest income, net 16 11
--------- --------
Net loss (276%) (587%)
========= ========
Net Revenue
Net revenue increased by 538% to $16.4 million from $2.6 million for the
nine months ended September 30, 2000 and 1999. The increase in our net revenue
was due to increased transactions on our fogdog.com web site. The top selling
sports in the nine months ended September 30, 2000 were baseball, representing
approximately 16% of revenue, fitness and health, golf and tennis each
representing between 6% and 11% of revenue. Revenue from merchandise shipped
outside the United States was approximately 3.3% and 10.3% of total merchandise
revenue for the nine months ended September 30, 2000 and 1999, respectively. The
decline in international merchandise revenues as a percentage of revenue in the
first nine months of 2000 was due to the increased volume of North American
sales.
Cost of Revenue
Cost of revenues were $14.8 million and $2.6 million or 90% and 99% of
merchandise revenues for the nine months ended September 30, 2000 and 1999,
respectively. Cost of revenues increased in total dollars in 2000 compared to
1999 as a result of the significant increase in volume of transactions and a
resulting increase in freight costs. The decrease in the cost of revenue as a
percentage of net revenues was due to growth in revenue with less than a
proportional increase in promotional and shipping costs.
Marketing and Sales Expenses
Marketing and sales expenses were $35.7 million and $10.3 million for the
nine months ended September 30, 2000 and 1999, respectively. As a percentage of
net revenues, marketing and sales expenses were 217% and 401% for the nine
months ended
13
<PAGE>
September 30, 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
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 merchandise revenue without
a proportionate increase in marketing and sales expenses during 2000. We have
more recently adopted a strategy that focuses on increasing profitability by
controlling our operating expenses while increasing revenue at a more moderate
pace. However, we may substantially increase our marketing and promotional
efforts and hire additional marketing, merchandising, customer service, and
operations personnel in the future.
Technology and Content Expenses
Technology and content expenses were $3.9 million and $2.2 million for the
nine months ended September 30, 2000 and 1999, respectively. As a percentage of
net revenues, technology and content expenses were 24% and 85% for the nine
months ended September 30, 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 merchandise revenue without a proportionate increase in technology and
content expenses during 2000. We have more recently adopted a strategy that
focuses on increasing profitability by controlling our operating expenses while
increasing revenue at a more moderate pace. However, we may substantially
increase our technology and content efforts and hire additional engineering and
design support in the future.
General and Administrative Expenses
General and administrative expenses were $4.6 million and $1.2 million for
the nine months ended September 30, 2000 and 1999, respectively. As a percentage
of net revenues, general and administrative expenses were 28% and 46% for the
nine months ended September 30, 2000 and 1999, respectively. The increase in
general and administrative expenses in dollars was due to increased personnel
and related costs to support the implementation of our business strategy. The
decrease in general and administrative expenses as a percentage of net revenues
was due to the growth in merchandise revenue without a proportionate increase in
general and administrative expenses during 2000.
Amortization of Intangible Assets
Amortization of intangible assets was $996,000 and $144,000 for the nine
months ended September 30, 2000 and 1999, respectively. As a percentage of net
revenues, amortization of intangible assets was 6% for the nine months ended
September 30, 2000 and 1999. The increase in amortization in dollars was due to
the acquisition of Sports Universe, Inc. in September of 1999.
Amortization of Stock-Based Compensation
We recorded employee stock-based compensation expenses of approximately
$4.5 million and $1.6 million for the nine months ended September 30, 2000 and
1999, respectively. The increase in stock-based compensation expense in dollars
was due to the increased headcount in late 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, was $2.6 million and $276,000, for the nine months
ended September 30, 2000 and 1999, respectively. The increase in interest
income, net, in 2000 was due to higher average cash balances from our initial
public offering in the fourth quarter of 1999 as well as the proceeds from the
exercise of the underwriters' over-allotment option in January 2000.
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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 the first
quarter of 2000 from the sale of 425,000 shares from the underwriters' over-
allotment option. 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 $33.1 million and $11.8 million for
the nine months ended September 30, 2000 and 1999, respectively. This negative
operating cash flow resulted primarily from our net losses experienced during
these periods, less significant levels of amortization related to stock-based
compensation and the Nike warrant. Throughout 2000 and 1999, we invested in the
development of our brand and online store, hired additional personnel and
expanded our technology infrastructure to support our growth.
Our investing activities, consisting of the maturity, 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 $43.6
million for the nine months ended September 30, 2000 and used cash of $970,000
for the nine months ended September 30,1999.
Our financing activities generated cash of $4.7 million and $32.9 million,
for the nine months ended September 30, 2000 and 1999, respectively. The cash
generated from these financing activities was primarily related to the exercise
of the underwriters' over-allotment option of 425,000 shares of Common Stock for
$4.3 million, net of discounts and issuance costs in the first quarter of 2000,
and the issuance and sale of our Series C and D Preferred Stock in the first
nine months of 1999.
At September 30, 2000, we had cash and cash equivalents and short-term
investments aggregating $42.6 million. Approximately $150,000 of our cash
eqivalents 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.
We had an outstanding aggregate debt balance at September 30, 2000 of
$418,000. 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, with which we were in
compliance at September 30, 2000.
We have entered into an agreement and Plan of Merger and Reorganization
with Global Sports, Inc. and its wholly owned subsidiary which substantially
limits our ability to incur indebtedness without the consent of Global Sports.
The Global Sports merger has required us to obtain certain waivers with respect
to the covenants in the loan documentation, which the Company is in the process
of receiving.
During the first nine months of 2000, we entered into commitments for
online and traditional offline advertising. As of September 30, 2000, our
remaining commitments were approximately $2.5 million. In addition, we have
remaining commitments under the lease for our headquarters of $4.1 million.
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We may in the future devote substantial resources to continue the
development of our on line store, expand our sales, support, marketing and
engineering organizations, and build the systems necessary to support our
growth. We may also continue the development of our brand and establish
additional facilities worldwide. Although we believe that our current cash and
cash equivalents 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
have evaluated 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; however, our merger agreement
with Global Sports, Inc. precludes the issuance of debt or equity securities
except under certain limited circumstances with the prior consent of Global
Sports.
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.
Risks Related to Our Business
We expect significant increases in our operating expenses and continuing losses.
We incurred a cumulative net loss of $80.8 million for the period from
inception through September 30, 2000. Our net loss for the three months ended
September 30, 2000 was $13.1 million and for the three months ended September
30, 1999 was $8.5 million. Our net 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 while we have adopted a strategy of
controlling operating expenses while increasing revenues at a more moderate
pace, the rate at which we will incur losses may increase significantly from
current levels. While we are focused on controlling operating expenses, we may
again in the future increase our operating expenses substantially if we:
. increase our sales and marketing activities, particularly advertising
efforts;
. provide our customers with promotional benefits;
. increase our general and administrative functions to support growing
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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 would spend these amounts before we received any revenues from
these efforts, our losses would 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 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. We have
in the past and it is likely that we may in some future quarter have operating
results which fall below the expectations of securities analysts and investors.
In this event, the trading price of our Common Stock may decline significantly.
Factors that may harm our business or cause our operating results to fluctuate
include the following:
. our inability to obtain new customers at a reasonable cost, retain existing
customers or encourage repeat purchases;
. decreases in the number of visitors to our web site or our inability to
convert visitors to our web site into customers;
. the mix of sporting goods, apparel, footwear and other products sold by us;
. our inability to manage inventory levels;
. our inability to adequately maintain, upgrade and develop our web site, the
systems that we use to process customers' orders and payments or our computer
network;
. the ability of our competitors to offer new or enhanced web sites, services
or products;
. price competition;
. fluctuations in the demand for sporting goods associated with sports
events, movies, television and other entertainment events;
. fluctuations in the amount of consumer spending on sporting goods and
related products, which tend to be discretionary spending items;
. the termination of existing marketing relationships with key business
partners or failure to develop new ones;
. increases in the cost of online or offline advertising;
. the amount and timing of operating costs and capital expenditures relating
to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during
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the holiday season; and
. technical difficulties, system downtime or Internet slowdowns.
A number of factors may 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.
In addition, pursuant to an agreement with Global Sports, Inc., we agreed to the
sale of a portion of our inventory to Global. Under the terms of the
agreement, Global will bear the risk of owning this inventory and will provide
fulfillment services to us under an interim operating agreement, which will
likely cause our gross margin to decline.
Our stock price is subject to fluctuation, which could result in substantial
losses for investors.
The market price for our Common Stock has and will continue to vary. This
could result in substantial losses for investors. The market price of our
Common Stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control. These factors include:
- Changes in financial estimates by securities analysts;
- Publicity about us, our products and services, our competitors, or
e-commerce in general;
- Any future sales of our Common Stock or other securities;
- Stock market price and volume fluctuations of publicly-traded
companies in general and Internet-related companies in particular;
- Fluctuations in the price of the common stock of Global Sports, Inc.
which, based on the fixed exchange ratio provided for in our merger
agreement with Global and investors' belief that the merger will be
consummated at such stock price, may affect the market price of our
common stock; and
- Possible de-listing of our common stock from the Nasdaq National
Market System due to the consistently low trading price of our common
stock.
The trading prices of Internet-related companies and e-commerce companies
have been especially volatile and many have fallen since reaching near
historical highs in prior months. In the past, securities class action
litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may be the target of
similar litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
seriously harm our business and operating results.
If we are unable to comply with the Nasdaq National Market's rules, our common
stock may be delisted.
On November 6, 2000, we received a letter from the Nasdaq Stock Market,
Inc. stating that we had failed to maintain a minimum bid price of $1.00 over
the last 30 consecutive trading days, which is required for continued listing on
the Nasdaq National Market. We have until February 5, 2001 to regain compliance
with this rule. If we are not able to demonstrate compliance with this rule on
or before February 5, 2001, then our common stock will be delisted at the
opening of business on February 7, 2001. If our common stock is delisted, it
would seriously harm our business.
We may not achieve the benefits we expect from the merger with Global Sports,
Inc.
We entered into the merger agreement with Global Sports, Inc. with the
expectation that the merger will result in significant benefits to both parties.
Achieving the benefits of the merger depends on the timely, efficient and
successful execution of a number of post-merger events. Key events include:
. Integrating the operations and the personnel of the two companies; and
. Developing new services that utilize the assets of both companies.
We will need to overcome significant issues, however, in order to realize
any benefits or synergies from the merger. In general, we cannot offer any
assurances that we can successfully integrate or realize the anticipated
benefits of the merger. Our failure to do so could have a material adverse
effect on the combined company's business, financial
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condition and operating results or could result in the loss of key personnel,
customers or suppliers. In addition, the attention and effort devoted to the
integration of the two companies will significantly divert management's
attention from other important issues, and could seriously harm the combined
company.
Failure to complete the merger could negatively impact our stock price and
future business and operations
If the merger is not completed for any reason, we may be subject to a
number of material risks, including the following:
. We may be required under certain circumstances to pay Global a termination
fee of $1,900,000 and reimburse Global for expenses;
. The price of our common stock may decline to the extent that the current
market price of our common stock reflects a market assumption that the
merger will be completed;
. Costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed; and
. During the period prior to consummating the merger we may reduce the amount
of inventory that is ordered for future periods due to our interim
distribution agreement with Global Sports, Inc. In the event that the
merger is not consummated, we may be unable to obtain sufficient inventory
to allow us to achieve revenue growth consistent with projections of
investors and securities analysts.
In addition, our customers and suppliers, in response to the announcement
of the merger, may delay or defer decisions concerning us or decide to terminate
their relationship with us. Any delay or deferral in those decisions or any
decision to terminate such relationships by our customers or suppliers could
have a material adverse effect on our business, regardless of whether the merger
is ultimately completed. Similarly, this may adversely affect our ability to
attract and retain key management, sales, marketing and technical personnel to
the extent we intend to keep such personnel.
Further, if the merger is terminated and our board of directors determines
to seek another merger or business combination, there can be no assurance that
it will be able to find a partner willing to pay an equivalent or more
attractive price than the price to be paid in the merger. In addition, while the
merger agreement is in effect and subject to very narrowly defined exceptions,
we are prohibited from soliciting, initiating or encouraging or entering into
certain extraordinary transactions, such as a merger, sale of assets or other
business combination, with any party other than Global.
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. The
fourth calendar quarter may account for a large percentage of our total annual
sales in this and future years. Our agreement with Global Sports, Inc. prevents
us from hiring additional staff and increasing our inventory levels except under
certain limited circumstances and with the prior consent of Global. To the
extent that we are unable to accommodate increased demand for our products,
revenues in the fourth quarter of 2000 may be adversely effected. If our
revenues are 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
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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. Our recent focus on controlling operating
expenses includes reducing dramatically our on-line and off-line advertising.
Given our limited operating history, it is difficult to predict the effects of
lower advertising on demand for our products and services. To the extent
decreases in advertising result in a substantial decrease in visitors to our
website, revenues in future periods may fall below expectations of securities
analysts.
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
To date, we have funded our operations from the sale of equity securities
and have not generated sufficient cash from operations. Cash from revenues must
increase significantly for us to fund anticipated operating expenses internally.
If our cash flows are insufficient to fund these expenses, we may need to fund
our growth through additional debt or equity financing or reduce costs. Our
merger agreement with Global Sports, Inc. precludes the issuance of debt or
equity securities, except in certain limited circumstances with the prior
consent of Global. 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 90 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. Our relationship with Global Sports, Inc. prior to
the consummation of the proposed merger may jeopardize our relationships with
certain of our current suppliers. 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 50% of our revenues in any quarter from products
purchased directly from manufacturers, although we cannot predict whether we
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will exceed this percentage in future periods. For the nine months ended
September 30, 2000, we derived approximately 19% of our net revenues from sales
of Nike products. 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. It is unclear what effect the
proposed merger with Global Sports, Inc. may have on our relationship with Nike.
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. In addition, we believe our relationship with Global Sports, Inc.
prior to the consummation of the proposed merger may cause other existing
suppliers or could cause future suppliers to modify their existing relationships
with us or prevent new relationships from being formed.
We have experienced difficulty in obtaining sufficient product allocations
from some of our key vendors. If we have to rely exclusively on distributors and
not manufacturers, we may not be able to obtain the types and quantities of the
products we desire because of varying demand from their other customers or
temporal limitations on the availability of products from their suppliers. In
addition, Nike and some of our other key vendors have established, and may
continue to expand, their own online retailing efforts, which may impair our
ability to acquire sufficient product allocations from these vendors. In
connection with this expansion, or a decision by manufacturers not to offer
products online or through our web site, manufacturers have asked us and may
again ask us to remove their products from our web site.
We depend on third parties to fulfill all of our customer orders, and any
problems with these parties could impair our operating results and harm our
reputation.
Currently, we rely primarily on third-party distributors and product
manufacturers to fulfill our customers' orders. These fulfillment partners are
responsible for packaging products and arranging for them to be shipped to our
customers. We may be unable to ensure that our fulfillment partners fill our
customers' orders accurately and that orders are shipped promptly and in
appropriate packaging. In addition, we have no written contracts with some of
these fulfillment partners, and our contracts with the others are generally
terminable upon short notice. We are working on transitioning our inventory
management and distribution logistics to Global Sports, Inc. under an interim
operating agreement. If this transition is not successful, disruptions in our
distribution services may result. 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 75% of our customer shipments by units for the three months ended
September 30, 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.
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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 are working on transitioning our inventory management
and distribution logistics to Global Sports, Inc. under an interim operating
agreement during this period. We cannot guarantee that this transition will not
affect our ability to accommodate increases in demand during the peak holiday
season. We may add to the capacity of our distribution network by entering into
agreements with additional fulfillment partners. We cannot guarantee 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 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. In October 2000, we sold a portion of our
inventory to Global Sports, Inc. However, if the proposed merger with Global
Sports, Inc. is not consummated, we may continue to increase our inventory
levels, and the percentage of sales made from our own inventory may continue to
rise. As a result, it will be critical to our success that we accurately predict
the rapidly changing trends in consumer preferences for sporting goods, and do
not overstock unpopular products. Predicting these trends is difficult. If
demand for one or more of our products falls short of our expectations, we may
be required to take significant inventory markdowns, which could reduce our net
sales and gross margins. 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 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 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
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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. We are currently
reevaluating our on-line marketing agreements and seeking to renegotiate or
terminate poorly performing deals. If we are unable to implement cost effective
customer acquisition programs, it may be difficult or impossible to increase
revenues to a level that will allow us to achieve profitability.
Because a key element of our strategy is to generate a high volume of traffic on
our web site, our business could be harmed by capacity constraints.
A key element of our strategy is to generate a high volume of traffic on, and
use of, our web site, www.fogdog.com. Accordingly, the satisfactory performance,
reliability and availability of our web site, transaction-processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers and maintain adequate customer service levels. Our revenue
depends upon the number of visitors who shop on our web site and the volume of
orders that we can fulfill. Any system interruptions that result in the
unavailability of our web site or reduced order fulfillment would reduce the
volume of goods that we sell and the attractiveness of our product offerings. We
have experienced periodic system interruptions in the past, and we believe that
system interruptions may continue to occur in the future. Any substantial
increase in the volume of traffic on our web site or the number of orders placed
by customers will require that we expand and upgrade our technology,
transaction-processing systems and network infrastructure. We may not be able to
accurately project the rate or timing of increases, if any, in the use of our
web site or timely expand and upgrade our technology, transaction-processing
systems and network infrastructure 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;
. 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
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 Santa Clara, 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
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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, to the extent our new marketing strategy permits,
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 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 have reduced the amount of spending on programs
designed to create and maintain strong brand loyalty among customers. The Fogdog
brand may not be able to grow with reduced marketing spending.
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.
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, which
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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 developer and operator of e-commerce sporting
goods businesses for store-based retailers, general merchandisers, internet
companies, and media companies;
. 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; and
. 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.
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 have adopted a strategy of controlling operating expenses while increasing
revenues at a more moderate pace, and we intend to limit hiring to selected key
positions. Competition for these individuals is, however,
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intense, and we may not be able to attract, assimilate or retain highly
qualified personnel in the future. In the event that the proposed merger with
Global Sports, Inc. is not consummated and we adopt a strategy to grow our
business, we may again increase our staff and 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 are dependent upon our chief executive officer for our future success.
Our future success depends to a significant degree on the skills, experience
and efforts of Timothy Harrington, our President and Chief Executive Officer.
The loss of the services of Mr. Harrington could harm our business and
operations. In addition, we have not obtained key person life insurance on Mr.
Harrington. If Mr. Harrington 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 the past and any
inability to manage this growth and any future growth could harm our business.
Our historical growth has placed, and further growth, if any, 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 146 employees on September 30, 2000. 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.
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
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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. In August, 2000, we were named as a defendant in a lawsuit
claiming the misappropriation and sale of confidential and trade secret
football playbooks by one of our "affiliate" web sites. In October, 2000,
we were named as a defendant in a lawsuit alleging violation of the Lanham
Act, common law trademark and service mark infringement, unfair competition,
fraudulent representation and unjust enrichment in connection with search
engine keywords and metatags. 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 have curtailed our efforts to expand business internationally due to market
conditions.
We believe that the current globalization of the economy requires businesses
to consider pursuing international expansion. We have curtailed our efforts to
expand business internationally due to market conditions, although we may in the
future re-evaluate our international expansion plans and may consider
international expansion at such time. Revenue from merchandise shipped outside
the United States was approximately 3% of total merchandise revenue for the
three months ended September 30, 2000. 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.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations.
Although the merger agreement with Global Sports, Inc. limits our ability to
acquire other entities without Global's consent, in the future (or if the
proposed merger is not consummated) we may make acquisitions or investments in
other companies or technologies. We may not realize the anticipated benefits of
any acquisition or investment.
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If we make any such 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.
Integration may require significant cash expenditures. 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 October 23, 2000, our executive officers and directors, their affiliates
and other substantial stockholders together controlled approximately 55% 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
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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 and the merger agreement with
Global Sports, Inc. substantially limits our ability to issue equity securities
without the prior consent of Global.
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.
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 September 30, 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. We are undertaking the movement of our
inventory from Pennsylvania to Global Sports' distribution center in Kentucky.
Any losses resulting from such movement may not be covered by insurance. 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.
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Our future depends upon the widespread adoption of the web as a primary
medium for commerce. Sporting goods consumers may not accept our online business
model. To be successful, we must attract and retain a significant number of
consumers to our web site at a reasonable cost. Conversion of customers from
traditional shopping methods to electronic shopping may not occur as rapidly as
we expect, or at all. The failure of this market to develop, or a delay in the
development of this market would have a material adverse effect on our business,
financial condition and operating results. 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 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.
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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, or 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.
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
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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.
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 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 internationally.
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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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
1. Fogdog, Inc. is a co-defendant in an action brought by Zampese et
al. in the District Court of Harris County, Texas, in which plaintiffs
allege that defendants misappropriated and offered for sale without
consent certain football playbooks on the Sportsplaybooks.com Website.
Plaintiffs contend these playbooks are trade secrets, confidential and
proprietary. Fogdog, Inc. is alleged to have participated, aided and
abetted in the alleged misconduct by virtue of Sportsplaybooks.com's
"affiliate" agreement with Fogdog, Inc. Plaintiffs seek damages and
injunctive relief.
2. Fogdog, Inc. is a defendant in an action brought by Michael DiPirro
in the Superior Court of Alameda, California, in which plaintiff alleges
that Fogdog, Inc. violated California Health and Safety Code Section
25249 (Proposition 65) and Business and Professions Code Section 17200 by
offering for sale on its Website certain products containing lead or lead
compounds. Plaintiff seeks civil penalties, restitution and injunctive
relief.
3. Fogdog, Inc. is a defendant in an action brought by Eastbay, Inc.
and Venator Group Retail, Inc. in the U.S. District Court of the Western
District of Wisconsin, in which plaintiffs allege violation of the Lanham
Act, common law trademark and service mark infringement, unfair
competition, fraudulent representation and unjust enrichment in
connection with search engine keywords and metatags. Plaintiffs seek
declaratory relief, injunctive relief, damages and corrective
advertisements.
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
33
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Exhibits
(a)
Exhibit Number Description
-------------- -----------
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)
--------
** 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
34
<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)
By: /s/ Bryan LeBlanc
--------------------------------
Bryan LeBlanc
Vice President, Chief Financial Officer
November 14, 2000
35
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
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)
--------
** Previously filed
+ Confidential Treatment Requested
36
