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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 June 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 August 5, 2000
Common Stock, $0.001 par value 36,636,429
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<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999................................................ 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999 (unaudited).................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 (unaudited)............................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)..... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 30
Item 2. Changes in Securities and Use of Proceeds............................ 31
Item 3. Defaults Upon Senior Securities...................................... 31
Item 4. Submission of Matters to a Vote of Security Holders.................. 31
Item 5. Other Information.................................................... 31
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 31
Signatures........................................................................ 32
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
FOGDOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands; unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,313 $ 26,451
Short-term investments 24,815 46,450
Accounts receivable, net of allowances of
$216 and $213, respectively 182 216
Merchandise inventory 3,501 2,765
Prepaid expenses and other current assets 4,695 1,963
--------------- ----------------
Total current assets 60,506 77,845
Property and equipment, net 3,572 2,427
Other assets and intangibles, net 20,599 27,920
---------------- ----------------
Total assets $ 84,677 $ 108,192
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,332 $ 5,638
Current portion of long-term debt 436 473
Other current liabilities 2,958 3,283
---------------- -----------------
Total current liabilities 10,726 9,394
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Long-term debt, less current portion 100 300
---------------- -----------------
Stockholders' equity 73,851 98,498
---------------- -----------------
Total liabilities and stockholders' equity $ 84,677 $ 108,192
================ =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C>
Net revenue $ 5,844 $ 731 $ 10,550 $ 1,084
Cost of revenue 5,223 718 9,782 1,041
-------- -------- -------- --------
Gross profit 621 13 768 43
Operating expenses:
Marketing and sales 13,689 2,680 24,921 4,125
Technology and content 1,257 726 2,578 1,208
General and administrative 1,660 448 3,341 752
Amortization of intangible assets 332 12 664 24
Amortization of stock-based compensation 2,156 409 3,484 740
-------- -------- -------- --------
Total operating expenses 19,094 4,275 34,988 6,849
-------- -------- -------- --------
Operating loss (18,473) (4,262) (34,220) (6,806)
Interest income, net 887 136 1,887 158
-------- -------- -------- --------
Net loss $(17,586) $ (4,126) $(32,333) $ (6,648)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.49) $ (0.92) $ (0.90) $ (1.50)
======== ======== ======== ========
Basic and diluted weighted average shares used in
the computation of net loss per share 35,823 4,494 36,039 4,420
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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FOGDOG, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------ ------
<S> <C> <C>
Cash flow from operating activities:
Net loss $(32,333) $ (6,648)
Adjustments to reconcile net loss to net cash used in operating activities
Allowances for bad debt and sales returns 1,187 48
Depreciation and amortization 583 134
Amortization of intangible assets 664 --
Amortization of stock-based compensation 2,708 740
Non-employee stock based expense 6,493 12
Changes in assets and liabilities
Accounts payable and other current liabilities 1,369 810
Other assets 164 --
Accounts receivable (1,153) (53)
Merchandise inventory (736) (273)
Prepaid expenses and other current assets (2,732) (152)
----------------------
Net cash used in operating activities (23,786) (5,382)
----------------------
Cash flows from investing activities:
Sale or maturity of short-term investments 90,220 --
Purchase of short-term investments (68,586) --
Purchase of property and equipment (1,728) (318)
----------------------
Net cash provided by (used in) investing activities 19,906 (318)
----------------------
Cash flows from financing activities:
Proceeds from the sale of Common Stock 5,010 112
Proceeds from the sale of Preferred Stock 17,937
Proceeds from (payments under) term loan (237) 245
Payments under capital leases (3)
Repurchase of Common Stock (31) --
Payments under sofware loan (108)
-----------------------
Net cash provided by financing activities
4,742 18,183
-----------------------
Net increase in cash and cash
equivalents 862 12,483
Cash and cash equivalents at the beginning of the period 26,451 1,694
-----------------------
Cash and cash equivalents at the end of the period $ 27,313 $ 14,177
=========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FOGDOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 -- The company and basis of presentation
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 Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (17,586) $ (4,126) $ (32,333) $ (6,648)
============= ============= ============= =============
Denominator:
Weighted average shares 36,031 4,983 36,246 4,909
Weighted average Common Stock subject
to repurchase agreements (208) (489) (208) (489)
------------- ------------- ------------- -------------
Denominator for basic and diluted calculation 35,823 4,494 36,038 4,420
============= ============= ============= =============
Basic and diluted net loss per share $ (0.49) $ (0.92) $ (0.90) $ (1.50)
============= ============= ============= =============
</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 Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average effect of dilutive securities:
Preferred stock -- 18,956 -- 14,555
Warrants to purchase Preferred Stock -- 89 -- 89
Warrants to purchase Common Stock 4,207 67 4,235 51
Employee stock options 4,382 3,780 4,708 3,126
Common Stock subject to repurchase 208 489 208 489
------------- ------------- ------------- -------------
8,797 23,381 9,151 18,310
============= ============= ============= =============
</TABLE>
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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 June 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, as a
part of the Company's initial public offering.
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 six
months ended June 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 six months ended June 30, 2000, the Company
capitalized approximately $619,000 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 six months ended June 30, 2000
the Company expensed approximately $2.6 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 certain of the provisions of FIN 44 prior to June 30,
2000 did not have a material effect on the financial statements. The Company
does not expect that the adoption of the remaining provisions will have a
material effect on the financial statements.
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 Company does not expect the adoption of EITF 00-02 to have a material
impact on the financial statements.
8
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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 slightly over 80,000
distinct stock keeping units representing approximately 850 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 thirty different
sports, are featured in twenty nine specialty shops and fifteen 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 40% of our transactions are shipped
from inventory held at third party warehouses. We expect this percentage to
increase in future periods.
Results of Operations
SECOND QUARTER OF FISCAL YEAR 2000 COMPARED TO SECOND 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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<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
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<S> <C> <C>
Net revenue 100% 100%
Cost of revenue 89 98
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Gross profit 11 2
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Operating expenses:
Marketing and sales 234 367
Technology and content 22 99
General and administrative 28 61
Amortization of intangible assets 6 2
Amortization of stock-based compensation 37 56
-------------- -------------
Total operating expenses 327 585
-------------- -------------
Operating loss (316) (583)
Interest income, net 15 19
-------------- -------------
Net loss (301%) (564%)
============== =============
</TABLE>
Net revenue
Net revenue increased by 699% to $5.8 million from $731,000 for the three
months ended June 30, 2000 and 1999. The increase in our net revenue was due to
increased transactions on our fogdog.com web site. The top sports in the three
months ended June 30, 2000 were baseball, representing approximately 19% of
revenue, and golf, fitness and health, and basketball each representing between
7% and 9% of revenue. Revenue from merchandise shipped outside the United States
was approximately 3.3% and 10.0% of total merchandise revenue for the three
months ended June 30, 2000 and 1999, respectively. The decline in international
merchandise revenues as a percentage of revenue in the second quarter of 2000
was due to the increased volume of North American sales.
Cost of revenue
Costs of revenues consists of products costs, shipping costs, credit card
processing fees, out-bound freight costs and certain promotional expenses. Cost
of revenues were $5.2 million and $718,000 or 89% and 98% of merchandise
revenues for the three months ended June 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 a
proportional increase in promotional and shipping costs.
Marketing and sales
10
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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 $13.7 million and $2.7 million for
the three months ended June 30, 2000 and 1999, respectively. As a percentage of
net revenues, marketing and sales expenses were 234% and 367% for the three
months ended June 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 June 30, 2000.
In September 1999, the Company entered into a two year strategic agreement
with Nike USA, Inc. to distribute Nike products on our web site. In exchange
for certain online exclusivity rights, we granted Nike a fully-vested warrant to
purchase 4,114,349 shares of our common stock at an exercise price of $1.54 per
share. Our marketing and sales expenses in each quarter over the two-year term
of the agreement will include a portion of the warrant's estimated fair value of
approximately $28.8 million, amortized on a straight-line basis. For the three
months ended June 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 continue to substantially increase our
marketing and promotional efforts and hire additional marketing, merchandising,
customer service, and operations personnel in the future.
Technology and content
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 $726,000 for the three
months ended June 30, 2000 and 1999, respectively. As a percentage of net
revenues, technology and content expenses were 22% and 99% for the three months
ended June 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 continue to substantially increase our
technology and content efforts and hire additional engineering and design
support in the future.
General and administrative
General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
service expenses and other general corporate expenses. General and
administrative expenses were $1.7 million and $448,000 for the three months
ended June 30, 2000 and 1999, respectively. As a percentage of net revenues,
general and administrative expenses were 28% and 61% for the three months ended
June 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
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Amortization of intangible assets was $332,000 and $12,000 for the three
months ended June 30, 2000 and 1999, respectively. As a percentage of net
revenues, amortization of intangible assets was 6% and 2% for the three months
ended June 30, 2000 and 1999, respectively. The increase in amortization in
dollars and as a percentage of net revenues was due to the acquisition of Sports
Universe, Inc. in September of 1999.
Amortization of stock-based compensation
In connection with the grant of employee stock options, we recorded aggregate
unearned stock-based compensation of $11.5 million through June 30, 2000.
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 $2.2 million and $409,000 for the three months ended June 30, 2000
and 1999, respectively. The increase in stock-based compensation expense in
dollars was due to the increased headcount in 1999. Unearned stock-based
compensation expense will be reduced in future periods to the extent that
options are terminated prior to full vesting.
Interest income, net
Interest income, net, consists of interest earned on cash and short-term
investments, offset by interest expense related to bank borrowings and other
financing lines. Interest income, net, was $887,000 and $136,000, for the three
months ended June 30, 2000 and 1999, respectively. The increase in interest
income, net, in 2000 was due to higher average cash balances from the Company's
initial public offering in the fourth quarter of 1999 as well as the proceeds
from the exercise of the underwriters' over-allotment in January 2000 and sales
of preferred stock completed in the second half of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
The following table presents selected financial data for the periods indicated
as a percentage of total net revenues.
12
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<TABLE>
Six Months Ended
June 30,
2000 1999
------ ------
<S> <C> <C>
Net revenue 100% 100%
Cost of revenue 93 96
------ ------
Gross profit 7 4
------ ------
Operating expenses:
Marketing and sales 236 381
Technology and content 24 111
General and administrative 32 69
Amortization of intangible assets 6 2
Amortization of stock-based compensation 33 68
------ ------
Total operating expenses 331 631
------- -------
Operating loss 324 627
Interest income, net 18 15
------- -------
Net loss (306%) (612%)
======== =======
</TABLE>
Net revenue
Net revenue increased by 873% to $10.6 million from $1.1 million for the
six months ended June 30, 2000 and 1999. The increase in our net revenue was due
to increased transactions on our fogdog.com web site. The top sports in the six
months ended June 30, 2000 were baseball, representing approximately 18% of
revenue, fitness and health, golf, and basketball each representing between 7%
and 11% of revenue. Revenue from merchandise shipped outside the United States
was approximately 3% and 12% of total merchandise revenue for the six months
ended June 30, 2000 and 1999, respectively. The decline in international
merchandise revenues as a percentage of revenue in the first six months of 2000
was due to the increased volume of North American sales.
Cost of revenue
Cost of revenues were $9.8 million and $1.0 million or 93% and 96% of
merchandise revenues for the six months ended June 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
higher 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
Marketing and sales expenses were $24.9 million and $4.1 million for the
six months ended June 30, 2000 and 1999, respectively. As a percentage of net
revenues, marketing and sales expenses were 236%
13
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and 381% for the six months ended June 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 continue to
substantially increase our marketing and promotional efforts and hire additional
marketing, merchandising, customer service, and operations personnel in the
future.
Technology and content
Technology and content expenses were $2.6 million and $1.2 million for the six
months ended June 30, 2000 and 1999, respectively. As a percentage of net
revenues, technology and content expenses were 24% and 111% for the six months
ended June 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 continue to substantially increase our
technology and content efforts and hire additional engineering and design
support in the future.
General and administrative
General and administrative expenses were $3.3 million and $752,000 for the six
months ended June 30, 2000 and 1999, respectively. As a percentage of net
revenues, general and administrative expenses were 32% and 69% for the six
months ended June 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 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 $664,000 and $24,000 for the six months
ended June 30, 2000 and 1999, respectively. As a percentage of net revenues,
amortization of intangible assets was 6% and 2% for the six months ended June
30, 2000 and 1999, respectively. The increase in amortization in dollars and as
a percentage of net revenues was due to the acquisition of Sports Universe, Inc.
in September of 1999.
Amortization of stock-based compensation
We recorded employee stock-based compensation expenses of approximately $3.5
million and $740,000 for the six months ended June 30, 2000 and 1999,
respectively. The increase in stock-based compensation expense in dollars was
due to the increased headcount in 1999. Unearned stock-based compensation
expense will be reduced in future periods to the extent that options are
terminated prior to full vesting.
Interest income, net
Interest income, net, was $1.9 million and $158,000, for the six months ended
June 30, 2000 and 1999, respectively. The increase in interest income, net, in
2000 was due to higher average cash balances from the Company's initial public
offering in the fourth quarter of 1999 as well as the proceeds from the exercise
of the underwriters' over-allotment in January 2000, and the additional sales of
preferred stock completed in the last two quarters of 1999.
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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.
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 $23.8 million and $5.4 million for the
six months ended June 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 $19.9
million for the six months ended June 30, 2000 and used cash of $318,000 for the
six months ended June 30,1999.
Our financing activities generated cash of $4.7 million and $18.2 million, for
the six months ended June 30, 2000 and 1999, respectfully. The cash generated
from these financing activities was primarily related to the exercise of the
underwriters' over-allotment of 425,000 shares of Common Stock for $4.3 million,
net of discounts and issuance costs in the first quarter of 2000, and the
issuance and sale of our Series C Preferred Stock in the first six months of
1999.
At June 30, 2000, we had cash and cash equivalents and short-term investments
aggregating $52.1 million. Approximately $150,000 of our short-term investments
secure a letter of credit issued in connection with the lease of our corporate
offices. We have an agreement with a bank, which provides us with the ability to
borrow up to $5.0 million, subject to specified limitations. The agreement
provides for the following:
. a revolving line of credit facility for $3,000,000 expiring in December of
2000;
. an equipment term loan facility for $2,000,000 limited to 75% of the invoice
amount of the equipment;
. an equipment term loan for $88,552 payable in 26 equal installments
commencing December 22, 1998; and
. an equipment term loan for $766,667 payable in 24 equal installments
commencing September 30, 1999.
We had an outstanding aggregate debt balance at June 30, 2000 of $536,000.
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
June 30, 2000.
During the first six months of 2000, we entered into commitments for online
and traditional offline advertising. As of June 30, 2000, our remaining
commitments were approximately $3.0 million. In addition, we have remaining
commitments under the lease for our headquarters of $4.3 million.
We expect to devote substantial resources to continue development of our brand
and online store, expand our sales, support, marketing and engineering
organizations, establish additional facilities worldwide and build the systems
necessary to support our growth. Although we believe that our current cash and
cash
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equivalents and our borrowing capacity, will be sufficient to fund our
activities for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that additional
funding, if needed, will be available on terms acceptable to us or at all. In
addition, although at present we do not have any legally binding agreements or
commitments with respect to any acquisition of other businesses, products or
technologies, from time to time, we evaluate potential acquisitions of other
businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and these financings may be dilutive to existing investors.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
Prior to December 31, 1999, we completed our Year 2000 compliance program.
The program was directed by our information technology group. We have not
experienced any material Year 2000 related difficulties in either our IT or non-
IT systems, or otherwise.
We may discover Year 2000 compliance problems in our systems in the future.
In addition, third-party software, hardware or services incorporated into our
business or used in our web site may need to be revised or replaced, all of
which could be time-consuming and expensive and could adversely affect our
business.
Risks Related to Our Business
We expect significant increases in our operating expenses and continuing losses.
We incurred a cumulative net loss of $67.7 million for the period from
inception through June 30, 2000. Our net loss for the three months ended June
30, 2000 was $17.6 million and for the three months ended June 30, 1999 was $4.1
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 as we:
. increase our sales and marketing activities, particularly advertising
efforts;
. provide our customers with promotional benefits;
. increase our general and administrative functions to support our growing
operations;
. expand our customer support and sports consultant staffs to better serve
customer needs;
. develop enhanced technologies and features to improve our web site;
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. enhance our distribution and order fulfillment capabilities; and
. expand third-party distribution facilities or possibly buy or build our own.
Because we will spend these amounts before we receive any revenues from these
efforts, our losses will be greater than the losses we would incur if we
developed our business more slowly. In addition, we may find that these efforts
are more expensive than we currently anticipate, which would further increase
our losses. Also, the timing of these expenses may contribute to fluctuations in
our quarterly operating results.
Our operating results are volatile and difficult to predict. If we fail to meet
the expectations of public market analysts and investors, the market price of
our Common Stock may decline significantly.
Our annual and quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. 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
the holiday season; and
. technical difficulties, system downtime or Internet slowdowns.
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A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of products sold by us, inventory management, inbound
and outbound shipping and inbound handling costs, the level of product returns
and the level of discount pricing and promotional coupon usage. Any change in
one or more of these factors could reduce our gross margins in future periods.
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; and
- Stock market price and volume fluctuations of publicly-traded
companies in general and Internet-related companies in particular.
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.
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We have experienced and expect to continue to experience seasonal fluctuations
in our revenues. These seasonal patterns will cause quarterly fluctuations in
our operating results. In particular, the fourth calendar quarter accounted for
a large percentage of our total annual sales for 1999. We expect that the fourth
calendar quarter will account for a large percentage of our total annual sales
in this and future years. In anticipation of increased sales activity during the
fourth calendar quarter, we may hire a significant number of temporary employees
to bolster our permanent staff and may significantly increase our inventory
levels. For this reason, if our revenues were below seasonal expectations during
this quarter, our annual operating results could be below the expectations of
securities analysts and investors. In the future, our seasonal sales patterns
may become more pronounced, may strain our personnel, product distribution and
shipment activities and may cause a shortfall in revenues as compared to
expenses in a given period.
Our limited operating history makes forecasting difficult. Because most of our
expenses are based on planned operating results, failure to accurately forecast
revenues could cause net losses in a given quarter to be greater than expected.
As a result of our limited operating history, it is difficult to accurately
forecast our revenues and we have limited meaningful historical financial data
upon which to base planned operating expenses. We were incorporated in October
1994. We started as a web site design company and derived most of our revenues
from the sale of web development services until August 1998, when we stopped
selling those services. We began selling products on our web site only in
November 1998. Our results since that time will not be comparable to our prior
results. We base our current and future expense levels on our operating plans,
expected traffic and purchases from our web site and estimates of future
revenues, and our significant expenses are to a large extent fixed in the short
term. Our sales and operating results are difficult to forecast because they
generally depend on the volume and timing of the orders we receive. As a result,
we may be
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unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net loss in a given
quarter to be greater than expected.
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
To date, we have funded our operations from the sale of equity securities and
have not generated sufficient cash from operations. Cash from revenues must
increase significantly for us to fund anticipated operating expenses internally.
If our cash flows are insufficient to fund these expenses, we may need to fund
our growth through additional debt or equity financing or reduce costs. Further,
we may not be able to obtain financing on satisfactory terms. Our inability to
finance our growth, either internally or externally, may limit our growth
potential and our ability to execute our business strategy. If we issue
securities to raise capital, our existing stockholders may experience additional
dilution or the new securities may have rights senior to those of our common
stock.
We must maintain relationships with our distributors and manufacturers to obtain
sufficient quantities of quality merchandise on acceptable commercial terms. If
we fail to maintain our relationships with those parties on acceptable terms,
our sales and profitability could suffer.
Because we rely primarily on product manufacturers and third-party
distributors to stock the products we offer, our business would be seriously
harmed if we were unable to develop and maintain relationships with suppliers
that allow us to obtain sufficient quantities of quality merchandise on
acceptable terms. Our product orders are fulfilled by more than 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. Some sporting goods manufacturers may be slow to
adopt the use of the Internet as a distribution channel. In addition, our supply
contracts typically do not restrict a supplier from selling products to other
retailers, which could limit our ability to supply the quantity of merchandise
requested by our customers. If we cannot supply our products to consumers at
acceptable prices, we may lose sales and market share as consumers make
purchases elsewhere. Further, an increase in supply costs could cause our
operating losses to increase beyond current expectations.
If we are unable to establish and maintain relationships with key brand
manufacturers, our sales will decrease.
If we are unable to establish and maintain relationships with important brand
manufacturers, we may be unable to obtain sufficient quantities of popular
products and in-depth product information. This could result in lower sales. We
have never derived more than 40% of our revenues in any quarter from products
purchased directly from manufacturers, although we cannot predict whether we
will exceed this percentage in future periods. For the three months ended June
30, 2000, we derived approximately 18% of our net revenues from sales of Nike.
We entered into an agreement with Nike in September 1999 that will give us
access to Nike's generally available product lines and product information, as
well as advance availability of mutually agreed upon, newly released Nike
products. However, this agreement has a term of only two years and is subject to
earlier termination if we breach the agreement. Moreover, Nike is not legally
obligated to sell us any quantity of product or deliver on any particular
schedule. Also, our purchases from Nike's online affiliate are subject to
similar limitations. If our relationship with Nike deteriorates, our business
and reputation could be seriously harmed. In addition, we believe our
relationship with Nike has caused other existing suppliers or could cause future
suppliers to modify their existing relationships with us or prevent new
relationships from being formed. We believe that some of Nike's competitors
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have been and may in the future be reluctant to enter into an agreement with us
or to provide products for sale on our online store because of our agreement
with Nike. For example, we believe that some competitors may not want to be
featured on our web site because of Nike's involvement with us.
Also, we believe that Nike's competitors may fear that Nike may use its
relationship with us to attempt to gain access to competitive information
concerning those competitors.
We have experienced difficulty in obtaining sufficient product allocations
from some of our key vendors. If we have to rely exclusively on distributors and
not manufacturers, we may not be able to obtain the types and quantities of the
products we desire because of varying demand from their other customers or
temporal limitations on the availability of products from their suppliers. In
addition, Nike and some of our other key vendors have established, and may
continue to expand, their own online retailing efforts, which may impair our
ability to acquire sufficient product allocations from these vendors. In
connection with this expansion, or a decision by manufacturers not to offer
products online or through our web site, manufacturers have asked us and may
again ask us to remove their products from our web site.
We depend on third parties to fulfill all of our customer orders, and any
problems with these parties could impair our operating results and harm our
reputation.
Currently, we rely primarily on third-party distributors and product
manufacturers to fulfill our customers' orders. These fulfillment partners are
responsible for packaging products and arranging for them to be shipped to our
customers. We may be unable to ensure that our fulfillment partners fill our
customers' orders accurately and that orders are shipped promptly and in
appropriate packaging. In addition, we have no written contracts with some of
these fulfillment partners, and our contracts with the others are generally
terminable upon short notice. If any of our existing fulfillment arrangements
were to be terminated, our business could be disrupted and we could incur
significant costs in attempting to make alternative arrangements. Our
distribution network is also heavily dependent upon third-party carriers,
primarily United Parcel Service, for product shipments. UPS accounted for
approximately 90% of our customer shipments by units for the three months ended
June 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.
If we fail to expand our fulfillment operations successfully, sales could fall
below expectations and we could incur unexpected costs.
We must be able to fill customer orders quickly and efficiently. If we do not
expand our fulfillment operations and systems to accommodate increases in
demand, particularly during the peak holiday selling season, we will not be able
to increase our net sales in accordance with the expectations of securities
analysts and investors. We intend to add to the capacity of our distribution
network by entering into agreements with additional fulfillment partners. We
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.
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We plan to expand our inventory levels, and we may have to write down the value
of our inventory if consumer demand changes after we order products.
Although we currently rely primarily on our distributors and brand name
suppliers to carry the inventory available for purchase on our site, we have
increased the amount of inventory we carry and the percentage of sales made from
our own inventory has increased. We anticipate that we will continue to increase
our inventory levels, and that the percentage of sales made from our own
inventory will continue to rise. As a result, it will be 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
advertising services for other marketers of sporting goods. As a result, these
sites may be reluctant to enter into or maintain relationships with us. Our
online advertising efforts may require costly, long-term commitments. We may not
achieve sufficient online traffic or product purchases to realize sufficient
sales to compensate for our significant obligations to these sites. Failure to
achieve sufficient traffic or generate sufficient revenue from purchases
originating from third-party web sites would likely reduce our profit margins
and may result in termination of these types of relationships. Without these
relationships, it is unlikely that we can sufficiently increase market share and
achieve profitability.
Because a key element of our strategy is to generate a high volume of traffic on
our web site, our business could be harmed by capacity constraints.
A key element of our strategy is to generate a high volume of traffic on, and
use of, our web site, www.fogdog.com. Accordingly, the satisfactory performance,
reliability and availability of our web site, transaction-processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers and maintain adequate customer service levels. Our revenue
depends upon the number of visitors who shop on our web site and the volume of
orders that we can fulfill. Any system interruptions that result in the
unavailability of our web site or reduced order fulfillment would reduce the
volume of goods that we sell and the attractiveness of our product offerings. We
have experienced periodic system interruptions in the past, and we believe that
system interruptions may continue to occur in the future. Any substantial
increase in the volume of traffic on our web site or the number of orders placed
by customers will require that we expand and upgrade our technology,
transaction-processing systems and network infrastructure. We may not be able to
accurately project the rate or timing of increases, if any, in the use of our
web site or timely expand and upgrade our technology, transaction-processing
systems and network infrastructure 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
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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 Mountain View, California. We cannot control the
maintenance and operation of this site, which is also susceptible to similar
disasters and problems. We have no formal disaster recovery plan, and our
insurance policies may not adequately compensate us for any losses that we may
incur. Any system failure that causes an interruption in our service or a
decrease in responsiveness could harm our relationships with our customers and
result in reduced revenues.
Establishing the Fogdog brand quickly and cost-effectively is central to our
success. If we do not establish the Fogdog brand quickly, we may not capture
sufficient market share or increase revenues enough to achieve profitability.
We believe that we must establish, maintain and enhance the Fogdog brand to
attract more customers to our web site and to generate revenues from product
sales. Brand recognition and customer loyalty will become increasingly important
as more companies with well-established brands in online services or the
sporting goods industry offer competing services on the Internet. For example,
existing sporting goods retailers with established brand names may establish a
competing online presence and existing online providers with better name
recognition than Fogdog may begin selling sporting goods. Establishing the
Fogdog brand as a widely recognized and trusted source of sporting goods will
depend largely on our success in providing a high-quality online experience
supported by a high level of customer service, which cannot be assured. We
expect that we will need to increase substantially our spending on programs
designed to create and maintain strong brand loyalty among customers and we
cannot be certain that our efforts will be successful.
Our inability to secure and protect our Internet domain name may adversely
affect our business operation.
The www.fogdog.com Internet domain name is our brand on the Internet. In
October 1999, a third party challenged the use of the domain name as a violation
of a registered trademark. If we are unable to adequately protect our Internet
domain name, our trademarks and other intellectual property rights, or must
incur costs in doing so, it could harm our business. The acquisition and
maintenance of Internet domain names generally is regulated by governmental
agencies and their designees. Until recently, Network Solutions, Inc. was the
exclusive registrar for the ".com," ".net" and ".org" generic top-level Internet
domains in the U.S. In April 1999, however, the Internet Corporation for
Assigned Names and Numbers, or ICANN, a new global non-profit corporation formed
to oversee a set of the Internet's core technical management functions, opened
the market for registering Internet domain names to an initial group of five
companies. Network Solutions, Inc. still maintains the registry containing all
the registrations in the generic top-level Internet domains. The market for
registering these Internet domain names in the U.S. and
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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
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
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. 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.
While we have adopted a strategy of controlling operating expenses while
increasing revenues at a more moderate pace, we may continue to hire a
significant number of additional marketing, engineering, merchandising and
retailing personnel in 2000 and beyond. Competition for these individuals is
intense, and we may not be able to attract, assimilate or retain highly
qualified personnel in the future. Our business cannot continue to grow if we
cannot attract qualified personnel. Our failure to attract and retain the highly
trained personnel that are integral to our business may limit our growth rate,
which would harm our business. We expect to face greater difficulty attracting
these personnel with equity incentives as a public company than we did as a
privately held company.
We are dependent upon our chief executive officer for our future success and our
managers are not obligated to stay with us.
Our future success depends to a significant degree on the skills, experience
and efforts of Timothy Harrington, our Chief Executive Officer, and other key
personnel. The loss of the services of any of these individuals could harm our
business and operations. In addition, we have not obtained key person life
insurance on any of our key employees. If any of our key employees left or was
seriously injured and unable to work and we were unable to find a qualified
replacement, our business could be harmed.
We have experienced significant growth in our business in recent periods and any
inability to manage this growth and any future growth could harm our business.
Our historical growth has placed, and any further growth is likely to continue
to place, a significant strain on our management, administrative resources,
software and systems. Any failure to manage growth effectively could seriously
harm our business. We have grown from 55 employees on March 31, 1999 to 165
employees on June 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.
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<PAGE>
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
third party, and further alleging unfair competition under state and federal
trademark law. In January 2000, we received a letter from a third party stating
his belief that our Web site induces infringement by others of a patent for a
remote query communication system, and inviting us to license this technology.
We may in the future receive additional claims that we are engaging in unfair
competition or other illegal trade practices. These claims may increase in the
future. We may be unsuccessful in defending against any such claim, which could
result in substantial damages, fines or other penalties. The resolution of a
claim could also require us to change how we do business, redesign our web site
and other systems, or enter into burdensome royalty or licensing agreements. In
particular, we may have to enter into a license to use our domain name, or we
could even be forced to change our name, either of which would severely harm our
business. These license or royalty agreements, if required, may not be available
on acceptable terms, if at all, in the event of a successful claim of
infringement. Our insurance coverage may not be adequate to cover every claim
that could be asserted against us. Even unsuccessful claims could result in
significant legal fees and other expenses, diversion of management's time and
disruptions in our business. Any such claim could also harm our reputation and
brand.
We have recently curtailed our current 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 recently curtailed our
current efforts to expand business internationally due to market conditions,
although we intend to re-evaluate our international expansion plans and may
consider international expansion in the future. Revenue from merchandise shipped
outside the United States was approximately 3% of total merchandise revenue for
the three months ended June 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;
25
<PAGE>
. 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.
We may make acquisitions or investments in other companies or technologies.
We may not realize the anticipated benefits of any acquisition or investment.
If we make any acquisitions, we will be required to assimilate the operations,
products and personnel of the acquired businesses and train, retain and motivate
key personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners.
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 June 30, 2000, our executive officers and directors, their affiliates
and other substantial stockholders together controlled approximately 65% of our
outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring our stockholders'
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may delay, prevent or
deter a change in control, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of the company or its
assets and might adversely affect the market price of our common stock.
Provisions of our certificate of incorporation and bylaws may make changes of
control difficult, even if they would be beneficial to stockholders.
The board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Also, without any further vote or action on the part of the
stockholders, the board of directors has the authority to determine the price,
rights, preferences, privileges and restrictions of the preferred stock. If we
issue
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<PAGE>
preferred stock, it might have preference over and harm the rights of the
holders of common stock. Although the availability of this preferred stock will
provide us with flexibility in connection with possible acquisitions and other
corporate purposes, the issuance of preferred stock may make it more difficult
for a third-party to acquire a majority of our outstanding voting stock. We
currently have no plans to issue preferred stock.
Our certificate of incorporation and bylaws include provisions that may deter
an unsolicited offer to purchase us. These provisions, coupled with the
provisions of the Delaware General Corporation Law, may delay or impede a
merger, tender offer or proxy contest. Further, our board of directors is
divided into three classes, only one of which is elected each year. Our
directors are only removable by the affirmative vote of at least 66 2/3% of all
classes of voting stock. These factors may further delay or prevent a change of
control.
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 June 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. If measures we take to address inventory theft do not
reduce or prevent inventory theft, our gross margin and results of operations
could be significantly below expectations in future periods.
Risks Specific to the Internet and Our Industry
Sporting goods consumers may not accept our online business model. This may
result in slower revenue growth, loss of revenue and increased operating losses.
To be successful, we must attract and retain a significant number of consumers
to our web site at a reasonable cost. Any significant shortfall in the number of
transactions occurring over our web site will negatively affect our financial
results by increasing or prolonging operating losses. Conversion of customers
from traditional shopping methods to electronic shopping may not occur as
rapidly as we expect, or at all. Therefore, we may not achieve the critical mass
of customer traffic we believe is necessary to become successful. Specific
factors that could prevent widespread customer acceptance of our online business
model, and our ability to grow our revenue, include:
. customer concerns about the security of online transactions;
. customer concerns about buying sporting goods, footwear and other products
without first seeing them;
. delivery time before customers receive Internet orders, unlike the immediate
receipt of products at traditional retail outlets;
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<PAGE>
. pricing that may not meet customer expectations;
. customer resistance to shipping charges, which generally do not apply to
purchases from traditional retail outlets;
. shipment of damaged goods or wrong products from our suppliers; and
. difficulties in returning or exchanging orders.
The success of our business model is dependent upon the continued growth of the
online commerce infrastructure.
Our future revenue and any future profits are also dependent upon the
continued development of the online commerce infrastructure. The Internet and
other online services may not be accepted as a viable commercial marketplace for
a number of reasons, including potentially inadequate development of enabling
technologies and performance improvements. To the extent that the Internet and
other online services continue to experience significant growth in the number of
users, their frequency of use or an increase in their bandwidth requirements,
there can be no assurance that the infrastructure for the Internet and other
online services will be able to support the demands placed upon them. In
addition, the Internet or other online services could lose their viability due
to delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet or other online service activity. Changes
in or insufficient availability of telecommunications services to support the
Internet or other online services could result in slower response times and
adversely affect usage of the Internet and other online services, including
fogdog.com. These problems would adversely affect our business and cause our
stock price to decline.
Sporting goods and apparel are subject to changing consumer preferences. If we
fail to anticipate these changes, we will experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our ability to anticipate and respond to trends in
sporting goods merchandise and consumers' participation in sports. Consumers'
tastes in apparel and sporting goods equipment are subject to frequent and
significant changes, due in part to manufacturers' efforts to incorporate
advanced technologies into some types of sporting goods. In addition, the level
of consumer interest in a given sport can fluctuate dramatically. If we fail to
identify and respond to changes in sporting goods merchandising and recreational
sports participation, our sales could suffer and we could be required to mark
down unsold inventory. This would depress our profit margins. In addition, any
failure to keep pace with changes in consumers' recreational sports habits could
allow our competitors to gain market share and could hurt our reputation.
If we do not respond to rapid technological changes, our services could become
obsolete and we could lose customers.
To be competitive, we must continue to enhance and improve the functionality
and features of our online store. The Internet and the online commerce industry
are rapidly changing. If competitors introduce new products and services
featuring new technologies, or if new industry standards and practices emerge,
our existing web site and proprietary technology and systems may become
obsolete. We may use new technologies ineffectively, or we may be unable to
license or otherwise obtain new technologies from third parties. We may also
experience difficulties in adapting our web site, the systems that we use to
process customers' orders and payments, 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,
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<PAGE>
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
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.
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If one or more states successfully assert that we should collect sales or other
taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California and Pennsylvania. However,
one or more local, state or foreign jurisdictions may seek to impose sales tax
collection obligations on us and other out-of-state companies that engage in
online commerce. If one or more states or any foreign country successfully
asserts that we should collect sales or other taxes on the sale of our
merchandise, it could adversely affect our business.
We may be subject to liability for content on our web site.
As a publisher of online content, we face potential liability for defamation,
negligence, copyright, right of publicity or privacy, patent or trademark
infringement, or other claims based on the nature and content of materials that
we publish or distribute. We have, in the past, received notices of such claims,
and we expect to continue to receive such claims in the future. We may also be
subject to claims based on the content on our bulletin boards. If we face
liability, then our reputation and our business may suffer. In the past,
plaintiffs have brought these types of claims and sometimes successfully
litigated them against online services. Although we carry general liability
insurance, our insurance currently does not cover claims of these types.
Year 2000 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.
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
None
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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
The 2000 Annual Meeting of Stockholders of the Company was held on May 25,
2000. The two persons named below were elected as proposed in the proxy
statement pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, to serve as directors until the 2003 Annual Meeting and until their
successors are elected and qualified, or until a director's earlier death,
resignation or removal. There were 23,984,913 votes cast in the election of
directors. The voting regarding each nominee was as follows: Ralph Parks (for:
23,865,431/withheld: 119,482) and Donna de Varona (for: 23,863,001 /withheld:
121,912). The following directors' terms of office continued after the meeting:
Lloyd D. Ruth, Warren J. Packard, Timothy P. Harrington and Ray A. Rothrock.
Also at the 2000 Annual Meeting of Stockholders of the Company, the stockholders
ratified the selection of PricewaterhouseCoopers LLP as independent accountants
of the Company for its fiscal year ending December 31, 2000, with 23,586,808
votes for; 396,670 votes against; and 1,435 votes abstained. Finally, the
stockholders approved an amendment to the 1999 Stock Incentive Plan that
increased the number of shares of Common Stock reserved for issuance under the
1999 Plan by an additional One Million Five Hundred Thousand (1,500,000) shares,
with 23,754,566 votes for; 227,334 votes against; and 3,013 votes abstained.
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
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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
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
August 11, 2000
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<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
