<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number:
FOGDOG, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0388602
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Broadway Street, Redwood City,
California 94063
(Address of principal executive offices) (Zip Code)
</TABLE>
(650) 980-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant has filed all reports
required to be filed 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of Common Stock on March 24,
2000 as reported on the Nasdaq National market, was approximately $74.0
million. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of outstanding shares of the registrant's Common Stock, par
value $.001 per share, was 36,162,000 on March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 2000 Annual
Meeting of Stockholders to be held May 25, 2000 are incorporated by reference
in Part III of this Form 10-K.
<PAGE>
PART 1
Item 1. Business
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended regarding Fogdog, Inc
(also referred in this Form 10-K as Fogdog Sports) 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. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed herein. 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 Fogdog Sports
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.
Fogdog Sports is a leading online retailer of sporting goods. We have
designed fogdog.com, our online store, to offer an extensive product
selection, detailed product information and other value-added services. We
believe that we offer the largest selection of sporting goods online, with up
to 60,000 distinct stock keeping units representing more than 600 brands in
all major sports categories. According to Media Metrix, Inc., our web site
received more visits during the fourth quarter of 1999 than any other online
retailer focusing exclusively on sporting goods. Fogdog.com features a
collection of specialty shops, including soccer, baseball, golf, outdoors,
fan/memorabilia and other popular categories, organized to appeal to a broad
base of customers from the avid enthusiast to the occasional participant. We
provide information and analysis authored by our own experts, helpful shopping
services, innovative merchandising and an emphasis on customer service to help
customers make more educated purchasing decisions. We offer customers the
convenience and flexibility of shopping 24 hours a day, seven days a week,
which makes fogdog.com the "anytime, anywhere, sports store." We intend to
establish Fogdog as the first global brand for retail sporting goods, and in
the process build consumer trust, confidence and loyalty.
Industry Overview
Electronic Commerce. The Internet is an increasingly significant medium for
communication, information exchange and commerce. Forrester Research estimates
that online purchases by U.S. consumers will grow from approximately $20
billion in 1999 to $184 billion by 2004, representing a compound annual growth
rate of 56%. International Data Corporation estimates that the number of total
online purchasers will grow from approximately 31 million in 1998 to 183
million in 2003, representing a compound annual growth rate of 43%. Forrester
Research projects that U.S. consumers will purchase $4.2 billion of sporting
goods online in 2004. We believe that growth in Internet usage is being fueled
primarily by easier and cheaper access to the Internet and improvements in
network security, infrastructure and bandwidth. We believe that these trends
are also helping to fuel the growth and consumer acceptance of online
commerce.
The Internet provides a number of advantages for online retailers. Because
online retailers are not constrained by shelf space or catalog page
limitations, they are able to "display" a larger number of products at a lower
cost than traditional store-based or catalog retailers. In addition, online
retailers can more easily and frequently adjust their featured selections,
editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the ability to reach a large
group of customers from a central location, and the potential for low-cost
customer interaction. Unlike traditional retail channels, online retailers do
not have the burdensome costs of managing and maintaining a retail store
infrastructure or the significant printing and mailing costs of catalogs.
Online retailers also can more easily obtain demographic and behavioral data
about customers, increasing their opportunities for targeted marketing and
personalized services.
2
<PAGE>
Traditional Sporting Goods Industry. We believe that the sporting goods
industry, which includes apparel, equipment and athletic footwear, is large
and growing. According to the Sports Business Research Network, total U.S.
retail sales of sporting goods were approximately $77 billion in 1998 and have
grown at a 6.8% compound annual rate since 1994. Additionally, according to
Sports Trend, a trade publication, in 1998 the top five U.S.-based sporting
goods specialty retailers, excluding mass merchandisers, accounted for only
$6.6 billion of total industry sales, demonstrating the highly fragmented
nature of the sporting goods retail market. According to the Sporting Goods
Manufacturers Association, the number of people who actively participate in
sports, fitness and outdoor activities grew 19% from 68.5 million in 1987 to
81.6 million in 1996. We believe that the sporting goods industry will
continue to benefit from the continued growth in participation and interest in
sports, recreation, health, fitness and outdoor activities.
Limitations of the Traditional Sporting Goods Retail Channel. The
traditional sporting goods retail channel is fragmented, including mass
merchant retailers and discount stores, regional or national chain stores,
local specialty shops and mail order catalogers. Mass merchant retailers and
discount stores often offer attractive pricing. However, they typically offer
only a limited selection of each brand's products and lack trained,
knowledgeable sales people. Local and regional chain stores often have a
broader line of branded products, but lack extensive product knowledge at the
individual store level. Specialty stores such as golf and ski shops may offer
better customer service, but with higher prices and a narrower selection. Mail
order catalogers typically focus on one sport category, and are limited by
catalog space constraints in offering either extensive selection or in-depth
product information. As a result of these factors, we believe that the
traditional retail channel for sporting goods fails to satisfy fully
consumers' desire for selection, product information, expert advice,
personalized service and convenience.
We believe that, in addition to failing to fully satisfy the needs of the
customer, the traditional sporting goods retail channel presents significant
limitations for manufacturers. Traditional sporting goods retailers often do
not provide manufacturers global distribution or proper and consistent brand
merchandising. In addition, traditional sporting goods retailers cannot offer
manufacturers unlimited shelf space, full product line presentation with high-
quality product information, and extensive customer service with knowledgeable
salespersons. Similarly, traditional retailers offer manufacturers limited
flexibility in how a product is sold and presented directly to the consumer.
Taken together, we believe that these factors serve to make the traditional
retail sporting goods experience inefficient and inconvenient for both
customers and manufacturers.
The Fogdog Sports Solution
We have designed our online store to offer an extensive product selection,
detailed product information and other value-added services to address the
limitations of the traditional sporting goods retail channel for customers and
manufacturers. With up to 60,000 distinct stock keeping units representing
more than 600 brands, we believe we offer a broader product selection and more
sporting goods categories than many of the largest, brick and mortar
retailers. Our online store is designed to provide customers with a convenient
and enjoyable shopping experience through a collection of specialty shops for
popular sporting goods categories. Our exclusive focus on sporting goods and
commitment to excellent customer service enable us to effectively address the
needs and desires of our customers. In order to further deploy our solution,
we have entered into a strategic relationship with Nike which will allow us to
offer Nike's generally available product lines, present product information
and give us advance availability of mutually agreed upon, newly released Nike
products.
The key components of our solution include:
Specialty Shops Featuring Extensive Product Selection. We offer a broad
range of product lines in a wide variety of sports in order to make Fogdog
Sports a "one-stop-shop." Most of our products, representing 30 different
sports, are featured in seventeen specialty shops and nine brand concept
shops. This presentation gives manufacturers an opportunity to merchandise
their entire product lines and maintain brand identity and pricing.
3
<PAGE>
Our specialty shops feature soccer, outdoor, baseball, golf, tennis and
racquet sports, football, hockey, fan/memorabilia and other categories and
provide useful information and expert advice to help customers make product
selections. Each shop offers equipment, apparel and accessories designed to
appeal to avid enthusiasts and occasional participants. For example, our
soccer shop features soccer cleats, protective equipment, balls, uniforms,
shorts, tops, cross training shoes, pants, tights, warm-ups, athletic tape,
socks, equipment bags and other goods. Because we believe that our customers
tend to participate in several sports, a positive shopping experience in one
specialty shop may encourage shopping in our other specialty shops.
Value-Added Shopping Services. We offer helpful services to assist our
customers with their purchasing decisions, including:
. Detailed Product Information, Guides and Comparison Charts. Fogdog.com
features extensive information on products, including product
descriptions, high-quality product pictures, technical specifications
and the intended product use descriptions. Our web site's technology
allows the user to zoom in on selected products to view construction,
materials and other product details. We recently added our "360 Info
Spin" feature to our web site, allowing consumers to zoom in on and spin
a product image to better understand its features and benefits. To
further aid consumers in finding the right product for their specific
needs, our staff of experts writes product guides which incorporate
manufacturers' data and are intended to help consumers learn about
various product features, sizing and fit information and other relevant
information to know before purchasing. Our experts research the products
and summarize the information in easy-to-read comparison charts.
. Brand Concept Shops. In addition to our specialty shops, we offer brand
shops devoted exclusively to selected high-end brands for customers
loyal to a particular brand. Created in conjunction with top brand
manufacturers, such as Oakley, Pebble Beach, K-Swiss, Callaway and
Moving Comfort, these shops surround the customer with in-depth
information, broad selection and the "look and feel" consistent with the
manufacturers' product merchandising. These shops are accessible from
our home page and from our specialty shops.
. Advice and Product Recommendations by Recognized Sports Experts. We
offer information to help customers select the right product for their
sports needs. We have a staff of world-class athletes, notable equipment
experts and recognized sports journalists who write product articles for
the site, respond to customer emails, answer customer service questions
and recommend products as "Fogdog Picks," chosen for their features and
value. We also host bulletin board sessions in which our expert staff
shares ideas with visitors to our web site.
. Consumer Reviews. To further enhance the site experience and to increase
involvement in our online sporting community, we encourage customers to
offer their personal reviews of any product available on the site. Our
customers review products on a five-star rating scale. We moderate the
reviews for appropriate language and user authenticity. To encourage
reviews, recent shoppers at fogdog.com receive a follow-up email
generally within three weeks after their purchase, which inquires about
the overall shopping experience and asks the customer to submit a review
of the purchased products. This email also serves as an opportunity for
cross selling of additional related products.
. My Fogdog. To provide a more personalized shopping experience, we have
developed an environment for registered users of the site known as "My
Fogdog." Every registered user of fogdog.com is greeted by name on the
home page and is offered a link into a customized area focusing on the
individual's product interests and buying history. This area includes
merchandised items that are specific to that individual's interests,
targeted promotions and links to our online order history and tracking
system which enables customers to check order status and reorder more
easily. Registered My Fogdog users are able to receive product offers
that are relevant to their sports preferences, check-out faster with
"Express Shopper" which stores shipping and credit card information,
gain access to special items and promotions and, reorder items easily.
4
<PAGE>
Convenient Shopping Experience. Our online store provides customers with an
easy-to-use web site. Fogdog.com is available 24 hours a day, seven days a
week and may be reached from the shopper's home or office. Our online store
enables us to deliver a broad selection of products to customers who do not
have convenient access to physical stores. Our "Power Search" technology
allows customers to locate products more efficiently based on user-defined
criteria such as shoe size, gender, product category and manufacturer.
Commitment to Excellent Customer Service. We emphasize customer service
during all phases of the customer's online shopping experience. Our staff
includes sports consultants who are hired for their broad knowledge of
athletics, sports products and training to assist customers in their
purchasing decisions. To ensure that our staff receives ongoing information on
product features and functionality, we offer training sessions sponsored by
key manufacturers. Our consultants, together with our in-house staff, provide
free pre and post-sales support via both email and toll-free telephone service
during extended business hours. Once a customer places an order, that customer
can view order-tracking information on our web site or contact our customer
service department to obtain the status of the order and, when necessary,
resolve order and product questions. Furthermore, our web site contains
extensive information for first-time and repeat visitors, including helpful
hints in searching for, selecting, ordering and returning our products. If the
purchased product does not satisfy the customer, we offer an unconditional,
45-day money-back return policy. If customers are unable to find a product,
they can submit a form asking the "Fogdog Search Squad" to find it for them.
The Fogdog Search Squad are members of our customer service staff who locate
and ship hard-to-find products for customers. This service addresses our
customers' desire for a single trusted source for sporting goods.
Network of Fulfillment Partners. We believe the Fogdog Sports solution
simplifies the order fulfillment process in the complex and highly fragmented
sporting goods industry. We have developed proprietary technologies and
implemented a fulfillment system that utilizes two third-party warehouses,
distributors, converted catalogers and direct shipping from select
manufacturers to support and secure reliable online retailing. We believe that
our distribution network provides us with competitive advantages in offering
our customers and partners an efficient and cost-effective order fulfillment
solution. The use of this network is transparent to the customer and allows us
to effectively manage the distribution process and deliver products to the
customer in Fogdog Sports packaging.
Growth Strategy
The Fogdog Sports vision is to reinvent the sporting goods industry by
providing customers with a new value proposition of selection, information and
service. Our goal is to be the world's leading sporting goods retailer. Key
elements of our growth strategy are to:
Build Brand Recognition. We intend to establish the Fogdog brand as the
first global brand for retail sporting goods and in the process build consumer
trust, confidence and loyalty. We believe that through a compelling shopping
experience and aggressive advertising and promotional activities, we can
continue to build awareness for Fogdog. We are targeting a broad base of
customers who are passionate about their sports, from the avid enthusiast to
the occasional participant. A compelling site experience reinforces the brand
promise that fogdog.com is the "ultimate sports store" and "your anytime,
anywhere sports store." We use a combination of traditional and online
marketing strategies to maximize our brand recognition:
. Television, Radio, Print and Outdoor Advertising. We intend to continue
to use a mix of traditional media to build awareness for the Fogdog
brand, relying primarily on cable and broadcast TV. We plan to focus our
TV advertising on high-profile, national cable and broadcast television
networks to associate Fogdog Sports with the active sporting lifestyle.
In addition, we intend to continue to use radio, print and outdoor
advertising to reach potential customers, particularly in markets with
high Internet use.
. Online Advertising. We intend to continue to establish relationships
with major online services and Internet shopping portals to target
active online sporting goods shoppers. For example, we have entered into
a marketing agreement with America Online, and we also have agreements
with WebTV
5
<PAGE>
Networks, Inc., GO Network, mySimon Inc., GoTo.com and Women.com for
prominent positioning in their online shopping areas. We advertise on
these sites as well as sites of other major online portals, including
Excite and Yahoo! with over 10,000 Fogdog products available through the
Yahoo! shopping area. We intend to continue to maintain high visibility
on major web sites and portals.
. Affiliate Network. We have agreements with numerous web sites which we
refer to as "affiliates." Our goal is to make our affiliates program one
of the largest among major online retail web sites. Affiliates direct
traffic to our web site, and we offer affiliates a commission on
resulting sales. We intend to expand our affiliates program to continue
to draw customers to our web site.
. Promotions, Events and Sponsorships. In addition to promotions designed
to increase awareness and trial of Fogdog, drive traffic to the site and
increase names for Fogdog's database, Fogdog sponsorship of key sports
events is an important marketing strategy we are utilizing to increase
awareness and trial of Fogdog. In 2000, Fogdog will sponsor such high
profile, national sporting events such as the Hi-Tec Adventure Racing
Series, Let-It-Fly Flag Football, and The Fogdog 24 Hour Adventure Race.
We intend to continue to expand our sponsorship programs in order to
build credibility with and recognition by athletes.
. Promote Repeat Purchases. We are focused on promoting customer loyalty
and building relationships with our customers to drive repeat sales. To
accomplish this strategy, we strive to provide quality customer service
seven days per week, ship products promptly and for a low cost and
provide an easy-to-shop online retail environment. We also employ
technology which targets returning customers and makes specific offers
to them based on the customers' purchase history, sports preferences and
shopping behavior. We intend to continue to build features that will
enhance loyalty, provide offerings unique to each individual customer
and continually strive to enhance our customer service. In addition, we
intend to expand our direct, online marketing by delivering meaningful
information and special offers to our customers.
Expand Specialty Shops. We have created a collection of specialty shops
within our online store, and we intend to provide additional shops organized
by sport or brand. We have opened 2 specialty shops of the 5 to 10 we
anticipate opening during this twelve month period. We design these shops to
be destination sites for sports enthusiasts by including top branded products,
extensive product information and superior customer service. We intend to
further enhance our specialty shops by offering the best of a traditional
offline specialty shop in service and information along with the best product
selection for all sports across top brands.
Maximize Product Selection and Fulfillment Capabilities. We intend to
employ a three-part strategy so that we can sell and deliver the broadest
possible array of top branded products to our customers. We believe that our
focus on product availability and use of multiple fulfillment partners and
channels will enable us to increase our margins while serving a rapidly
expanding customer base. Our strategy is to:
. Expand Fulfillment Network. We plan to augment our network of partners
that manage inventory, shipping, warehousing and general purchasing, as
well as our relationships with manufacturers that ship directly to
customers. We believe the strength of our fulfillment network provides a
competitive advantage by increasing product availability without
exposing us to all of the inventory risk of a traditional retailer.
. Extend Brand Relationships. We currently buy products directly from
numerous sporting goods manufacturers with well-known consumer brands.
We intend to continue to develop relationships with top brand
manufacturers to secure the highest level of premium product inventory
available. We also plan to continuously improve our relationships and
the efficiency of our interactions with these key vendors by
incorporating brand and product information into our site, and by
featuring certain brands within brand concept shops. Our strategic
relationship with Nike will give us access to all Nike brands including
Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports.
6
<PAGE>
. Augment Distribution Technology and Expertise. We have developed a broad
range of technologies to integrate our web site and other systems
directly with the systems of our fulfillment partners. We plan to
leverage and expand our technical expertise to increase this
integration. We also have built and will continue to enhance a team
devoted to executing our warehousing, inventory management, buying and
merchandising activities to ensure superior product selection.
Enhance and Form Strategic Relationships. We have agreements with Nike,
America Online and Keystone Fulfillment. We intend to leverage our agreements
in order to provide us with competitive advantages in merchandising, marketing
and distributing our products. For example, we believe our agreement with Nike
will allow us to offer the broadest possible product selection of the leading
sporting goods brand. Under the agreement, we have access to Nike's generally
available product lines and advance product availability for mutually agreed
upon, newly released products. In addition, we intend to leverage our
agreements with major online services and Internet shopping portals such as
AOL to provide us with key positioning in online sporting goods shopping
areas. We intend to augment our distribution capabilities through agreements
with third parties, such as our agreement with Keystone Fulfillment, which
provides outsourced inventory management, warehousing and shipping services.
We intend to continue to pursue similar arrangements, which may include
written agreements, partnerships or other arrangements that allow us to
further develop our business.
Expand Internationally. Although to date we have focused on the United
States, we believe that growth in sales of sporting goods outside of the
United States will represent additional market opportunities for us. To take
advantage of these opportunities, we intend to replicate our business model
and build our brand name in selected international markets with appropriate
demographics and market characteristics. For example, we have opened an office
in London to serve as a launching point for our European operations.
The Fogdog Sports Store
We designed our online retail store to be a destination site for sports
enthusiasts from the avid enthusiast to the occasional participant. We believe
our online store is well organized, attractive and easy to use, and offers
customers an enjoyable shopping experience. The look and feel of our web site
is action-oriented, and navigation is user-friendly and consistent throughout.
All of our product pages are "three clicks" from our home page, allowing
customers to find and purchase products easily. A consumer shopping on our web
site can, in addition to ordering products, browse the different specialty
shops, conduct targeted searches by product or brand, view recommended
products, participate in promotions and check order status.
Specialty Shops
We categorize many of our products into different specialty shops,
including soccer, baseball, golf, outdoor, and others. Within each shop,
products are organized by brand, such as Nike and Callaway, by department,
such as footwear, apparel and equipment, and by our recommendations, which we
call "bestsellers" and "Fogdog Picks." Each shop has helpful product
information and many feature tips from a site expert with extensive knowledge
about the right gear for specific sports. The following is a summary of our
largest specialty shops:
Soccer. We offer an extensive selection of soccer footwear, apparel, and
equipment, with key brands such as Kappa, Nike, Puma and Umbro. Our soccer
shop includes a Power Search feature, which allows customers to search all
soccer products for available in-stock merchandise in their size. Our on-site
expert provides advice on soccer cleat selection and evaluates equipment. The
soccer shop features a footwear comparison chart as well as a technology
report with information on the way different manufacturers design their
cleats, along with a special section on "What the Pros Wear," where customers
can click directly to purchase products worn by professional athletes.
Outdoor. The outdoor shop features an extensive selection of products for
hiking, backpacking, mountaineering, adventure travel and other outdoor
activities from manufacturers such as Vasque, Merrell, Hi-Tec, Nike ACG,
Marmot, Gregory and Sierra Designs. Our outdoor shop expert provides helpful
information in
7
<PAGE>
areas such as camping and backpacking to make sure the customer experience is
the best possible, as well as providing detailed product descriptions. We also
feature a bulletin board service where customers can post questions about
products and sports activities. We offer an extensive product information
resource online, with comparison charts for items such as backpacks, tents and
sleeping bags.
Baseball. We believe that we offer the largest selection of baseball
equipment available on the Internet. We also provide a comprehensive selection
of apparel and footwear, including such key brands as Easton, Louisville
Slugger, Mizuno, Nike, Rawlings and Wilson. In our baseball shop, customers
can use a bat configurator that takes input on the individual's height, weight
and league type and chooses an appropriate selection of product. This shop
will have regular equipment reviews by our staff journalists.
Golf. The golf shop offers golf equipment, apparel and footwear including
brands such as Adams, Callaway, Nike Golf, Orlimar, Spalding and Maxfli. This
shop features a Callaway brand golf shop, with information on how to select
Callaway clubs, what they are made of and how they are designed. We worked
closely with Callaway to develop the content of this area and the shop offers
the entire line of Callaway products. The golf shop also includes an area
called "What's in the Bag," which shows what professional golfers carry on the
course.
Hockey. Our hockey shop features equipment to outfit players of all skill
levels from the novice to the expert in ice and roller hockey. We offer
products from leading brands such as CCM, Bauer, Jofa and Koho.
Snowboard. We believe that our snowboard shop is one of the most complete
snowboard stores online today with manufacturers including Santa Cruz, Ride,
Switch, Flow and Westbeach. The shop also features expert advice on carving
and equipment selection.
Tennis & Racquet Sports. The tennis and racquet shop includes a wide
selection of tennis equipment, footwear and apparel from top manufacturers
such as Head, Penn, Pro Kennex and Wilson. The tennis racquet shop also offers
a racquet configurator which gives customers the ability to customize their
racquets with their desired grip, string and stringing tension, which
generally ship the same day the order is placed.
Football. The football shop serves a range of players from the
recreational, weekend participant to the serious league player. We offer the
merchandise necessary to outfit a player and/or team including pads, helmets,
guards and braces, from leading manufacturers such as Bike, Nike, Pony,
Rawlings and Wilson.
Fan/Memorabilia. Our fan and memorabilia shop is designed to outfit fans
with apparel and souvenirs from their favorite teams and players. We help fans
of a specific team or player find the favorite products that show how they
support their teams. The shop includes products licensed from the National
Football League, Major League Baseball, the National Basketball Association,
the National Hockey League, the National Collegiate Athletic Association and
international soccer teams. The shop also carries vintage era replicas and
other related sports memorabilia such as autographed photos. Our fan shop
offers many brands including Champion, Majestic, Nike Team Sports, Russell,
CCM, Bulova and Riddell.
Fitness & Health. Our fitness and health shop is an extensive collection of
products and content associated with general fitness. Our fitness shop offers
Reebok, Nike, Danskin, Thorlo, Tanita, Horizon Fitness, Linex, Avia, Champion,
Fitness Quest, Harbinger, Hind and Moving Comfort. The shop features advice on
exercise, apparel selection and nutrition tips.
Group Sales. We believe that Fogdog Sports is the first and currently the
only online retailer to offer custom uniforms and volume discounts for teams.
Our group sales shop enables the team buyer to design custom uniforms and
place the entire order online. We feature a large in-stock selection of
uniforms, and we are able to ship most orders the same day, with a five to
seven day turnaround for custom orders as compared to three to four weeks for
most traditional team dealers.
8
<PAGE>
Shopping At Our Store
Customers navigate our online store through our simple, intuitive and easy-
to-use web site. Our goal is to make the shopping process as easy as possible
for customers. Users accessing our online store generally fall into two
categories: individuals who want to purchase a particular product immediately
in a highly convenient manner, and individuals who browse the store, seeking
an entertaining and informative shopping experience. We designed our online
store to satisfy both types of users in a simple, intuitive fashion.
Browsing and Comparing. Our web site offers visitors a variety of
highlighted subject areas and special features arranged in a simple, easy-to-
use format intended to enhance product search, selection and discovery. By
clicking on the permanently displayed specialty shop names, the consumer moves
directly to the home page of the desired shop and can quickly view promotions
and featured products. On our web site customers can find detailed product
information, including expert reviews of a product, how to use the product and
how to care for it. Customers can use a quick keyword search or search by
brand in order to locate a specific product. They can also execute more
sophisticated searches based on pre-selected criteria depending upon the
department. In addition, customers can browse our online store by linking to
specially designed pages dedicated to products from key national and specialty
brands. We provide product information in tabular form across brands and stock
keeping units for easy comparison of features and benefits.
Customization and Personalization. We use configurators which we call the
"Fogdog Fetch" to identify merchandise unique to a customer's sport
requirements and interests. We also cross-sell merchandise to customers based
on what they have identified as their sport preferences in My Fogdog, what
they have added to their shopping basket during the checkout process and what
they have purchased. Our Fogdog Power Search tool also enables customers to
search for products in some of our shops based on size and brand preferences.
Selecting a Product and Checking Out. To purchase products, customers
simply click on the "add to basket" button to add products to their virtual
shopping cart. Customers can add and subtract products from their shopping
cart as they browse around our store prior to making a final purchase
decision, just as in a traditional store. Our web site is updated through the
direct uploading of supply information from distributors to remove products
that are out of stock. To execute orders, customers click on the "checkout"
button and, depending upon whether the customer has previously shopped with
us, are prompted to supply shipping details online. We also offer customers a
variety of shipping options during the checkout process. Prior to finalizing
an order by clicking the "submit order" button, customers are shown their
total charges along with the various options chosen at which point customers
still have the ability to change their order or cancel it entirely.
Paying. To pay for orders, a customer must use a gift certificate or credit
card, which is authorized during the checkout process, but which is charged
when the product is shipped. Our web site uses a security technology that
works with the most common Internet browsers. Our system automatically
confirms receipt of each order via email within minutes and notifies the
customer when the order is shipped, typically within one to two business days
for in-stock items. We also offer our customers an unconditional, 45-day
money-back return policy. Repeat customers can use an "Express Checkout"
feature in which customer data and payment information is automatically
entered into our system.
Getting Help. From every page of our web site, a customer can click on a
"help" button to go to our customer service area. The customer service area of
our web site contains extensive information for first-time and repeat
visitors. In this area, we assist customers in searching for, shopping for,
ordering and returning our products as well as provide information on our low
price guarantee, shipping charges and other policies. In addition, we provide
customers with answers to the most frequently asked questions and encourage
our visitors to send us feedback and suggestions via email. Furthermore,
customer service agents are available to answer questions about products and
the shopping process during extended business hours via our toll-free number,
which is displayed in the customer service area of our web site.
Promotional Area. Through our promotional area, which is located on the
Fogdog Sports home page, we offer products that tie into recent sporting
events or seasonal themes. For example, we offered soccer jerseys and
9
<PAGE>
equipment following the Women's World Cup, golf equipment and apparel to tie
into the U.S. Open, and backpacks in time for back to school. Customers can
also purchase gift certificates from us in any denomination. We keep each
customer's gift certificate balance on record on the site.
Marketing
We have implemented an aggressive advertising and marketing campaign to
increase awareness of the Fogdog brand. We plan to acquire new customers
through multiple channels, including traditional and online advertising,
direct marketing and expansion and strengthening of our strategic
relationships. Our marketing strategy is designed to:
. build global brand recognition;
. differentiate and build a unique positioning for Fogdog Sports in the
marketplace;
. increase consumer traffic to our web site;
. acquire new customers;
. build strong customer loyalty;
. emphasize a one-on-one relationship with our customers;
. maximize repeat purchases; and
. develop additional ways to increase our net sales.
Positioning and Branding Strategy. We aggressively seek to brand the Fogdog
online experience at every customer touch point, including advertising,
promotions, site experience, packaging and delivery. We seek to position
Fogdog Sports as the trusted online sports store built for people who "live to
play sports" with a selection of top brands, information and expertise. We
target a broad range of customers in active lifestyle households. Our primary
demographic focus is on active sports participants, male and female.
Advertising Mix. To build brand awareness, the primary elements of our
marketing mix include cable and network television, broad reach online
services, such as AOL, and Web shopping portals. We also employ targeted
radio, print and outdoor media campaigns in specific markets during key
sporting goods shopping seasons. We believe that through a sustained national
TV campaign, we can drive consistent growth in awareness, and reach a broad
audience of active sports participants with high-impact creative advertising.
Our TV media plan includes advertising during major cable and network sports
programming and events. We have also secured agreements with leading shopping
portals, with positioning in sporting goods shopping areas. For example, under
our agreement with AOL, we are a "Shopping Anchor" in two of the four AOL
sports shopping areas. We also have agreements with WebTV, GO Network, Excite
and mySimon for prominent positioning in their online shopping areas. In
addition, we advertise on Yahoo! with over 10,000 Fogdog products available
through the Yahoo! shopping area.
Under our contracts with Internet portals and online service providers, we
typically pay a fixed dollar amount in exchange for placement of an enlarged
icon in high traffic areas of their sites. These agreements are generally for
a fixed term of one to two years. For example, under our agreement with AOL,
we have an "anchor" position providing prominent placement in the camping and
outdoor fitness and sports sections of AOL Shopping through mid 2001. AOL
guarantees a minimum number of user impressions of our material through AOL's
online service or AOL.com.
Affiliate Network. Our goal is to create and maintain one of the leading
affiliate programs on the Web, extending the reach of our brand and drawing
customers from a variety of sports and general content sites. Our program
provides a low-cost means of acquiring customers by providing a sales
commission of between 10% and 20% to affiliate partners.
10
<PAGE>
Promotions, Events and Sponsorships. We sponsor multiple events to build
credibility with and recognition by athletes and sports enthusiasts, including
the Hi-Tec Adventure Racing Series, an 8-city series that features teams of
three trail running, mountain biking and kayaking; Let it Fly Flag Football,
the largest grassroots flag football tournament in the U.S. traveling to 18
cities and attracted more than 50,000 participants and The Fogdog 24 Hour
Adventure Challenge. We recently sponsored the "Big League Challenge" homerun
hitting contest in conjunction with the Major League Baseball Players'
Association. The contest, to be televised on ESPN in March, featured many of
Major League Baseball's most prolific and well known home run hitters.
Loyalty, Retention and Personalization. We believe that we are building a
loyal base of customers through a total shopping experience which emphasizes
customer service and marketing incentive programs. For example, we communicate
with prospective customers through email campaigns and with customers through
follow-up emails. In addition, through My Fogdog, we collect relevant
information from registered customers that allow us to market more
specifically to each customer's interest. Each registered member of My Fogdog
has access to special product offerings, promotions and targeted offers, which
we believe helps build loyalty.
Distribution Strategy and Operations
Our strategy for delivering our products to our customers is to focus on
obtaining products through authorized distribution channels while maximizing
customer selection and product availability. Inventory available to us is
either reserved for our customers, shared with other partners or purchased for
our account. Our shared and reserved inventory partners include distributors,
manufacturers and catalogers who purchase and inventory products and then make
products available for sale on our web site. These partners ship products
directly to our customers using our packaging and shipping materials, so that
customers only interact with the Fogdog brand throughout the order and
delivery process. Our purchased inventory is held at two third-party
distribution centers for processing, packaging and shipment to customers. The
shipment of products directly from our distributors, manufacturers and
catalogers to our customers reduces the level of inventory we are required to
carry. We handle all merchandise returns ourselves to ensure customer
satisfaction. We are currently evaluating various alternatives to expand the
capacity of our distribution system.
We use technology to optimize the exchange of information between Fogdog,
our third party distribution centers and our distribution partners, so that we
can properly set customer expectations about product availability and delivery
dates. Our distribution, engineering and logistics teams work with our
partners and third-party warehouses to manage and monitor order accuracy,
fulfillment rate, shipment speed, and overall delivery reliability and
timeliness. We measure performance through daily reports, frequent on-site
visits with partners and our warehouses and quarterly reviews.
Merchandising
Merchandising. Our merchandising strategy is to provide a broad assortment
of quality equipment, athletic footwear and apparel at prices that meet those
of leading sporting goods retailers. Our web site, particularly in our
specialty and brand shops, offers a core selection of brand name merchandise
complemented by a selection of accessories and related products designed to
enable enthusiasts to have a quality shopping experience. Our leading product
category is sporting equipment, followed by apparel and athletic footwear. No
single product category accounts for more than 50% of sales.
Brand Name Merchandise. We emphasize quality brand name merchandise. We
believe that the breadth of our brand name merchandise selection generally
exceeds the merchandise selection carried by traditional, store-based
competitors. Many of these branded products are technical and our customers
benefit from extensive product information and sales assistance. We work with
manufacturers to obtain product information and educate the sports consultants
we keep on staff on the latest features and trends.
11
<PAGE>
Strategic Relationship with Nike. Our relationship with Nike provides us
with an extensive selection of high quality branded products. Under the terms
of our agreement, Nike will not sell its products to any other retailer that
sells only on the Internet, except for entities affiliated with Nike customers
that derive the majority of their revenue from traditional retail stores or
entities that serve as web sales outsourcing providers for these Nike
customers, through March 2000. After that date, Nike can and may choose to
supply products to other Internet-only retailers in competition with us. In
addition, we have access to all of Nike's generally available product lines,
including Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports. Our
agreement also allows us advance availability on mutually agreed upon products
included in Nike's generally available product line and the right to return a
percentage of some product lines to Nike for a full refund. Under the
agreement, Nike and its affiliates are not legally obligated to sell us any
quantity of product or deliver on any particular schedule.
Purchasing. Our general managers and merchandise buyers analyze current
sporting goods trends by maintaining close relationships with our
manufacturers, monitoring sales at competing stores, studying specialized data
about traffic to our web site and reviewing industry trade publications.
Customer Service
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. First, our web site is designed to
help answer many questions customers might have in selecting products. Our
customer service representatives are available seven days a week to provide
assistance via email or telephone. We strive to answer all customer inquiries
within 24 hours. Sports consultants on our customer service team are hired for
their extensive knowledge and background in athletics and sporting goods.
Their backgrounds include experience as athletes, coaches and working for
sporting goods manufacturers and retailers. The combination of specific sport
and category understanding, knowledge of products and their use, and technical
capabilities enable them to guide our customers in making an informed product
selection. Our sports consultants also handle questions about orders, assist
customers in finding desired products and register customers' credit card
information over the telephone. We generally allow returns for any reason
within 45 days of the sale for a full refund. Further, if a customer cannot
find a product on our site, we provide the Fogdog Search Squad, which helps
locate products primarily through our existing distribution channels. Our web
site also contains a customer service page that outlines store policies and
provides answers to frequently asked questions.
Technology
We have implemented a broad array of web site management, search, customer
interaction, distribution services and systems that we use to process
customers' orders and payments. These services and systems use a combination
of our own technologies and commercially available, licensed technologies and
are designed to be easily expanded to grow with our business. The systems that
we use to process customers' orders and payments are integrated with our
financial systems. We use a set of applications for:
. generating and running our web site;
. managing product data, including product details, inventory and pricing;
. accepting and validating customer orders;
. organizing, placing and managing orders with suppliers and partners; and
. capturing and analyzing customer information and trends.
Our systems are based on commercially available software and industry
standard protocols and have been designed to reduce downtime in the event of
outages or catastrophic occurrences. Our system hardware is hosted at a third-
party data center in Mountain View, California, which provides redundant
communications lines and emergency power backup. We have implemented load
balancing systems and our own redundant servers to
12
<PAGE>
provide for fault tolerance. System security is managed by both internal staff
as well as by security staff at our third-party data center.
Government Regulation
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly
applicable to retailing or electronic commerce. However, as the Internet
becomes increasingly popular, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. These laws may cover
issues such as user privacy, freedom of expression, pricing, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Furthermore, the growth of electronic
commerce may prompt calls for more stringent consumer protection laws. Several
states have proposed legislation to limit the uses of personal user
information gathered online or require online services to establish privacy
policies. The Federal Trade Commission has also initiated action against at
least one online service regarding the manner in which personal information is
collected from users and provided to third parties and has proposed
regulations restricting the collection and use of information from minors
online. We do not currently provide individual personal information regarding
our users to third parties and we currently do not identify registered users
by age. However, the adoption of additional privacy or consumer protection
laws could create uncertainty in Web usage and reduce the demand for our
products and services or require us to redesign our web site.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
qualification to do business and export or import matters. The vast majority
of these laws were adopted prior to the advent of the Internet. As a result,
they do not contemplate or address the unique issues of the Internet and
related technologies. Changes in laws intended to address these issues could
create uncertainty in the Internet marketplace. This uncertainty could reduce
demand for our services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in services and technology. These include
confidentiality, invention assignment and nondisclosure agreements with
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not
be available in every country in which our services are made available online.
Our trademarks and service marks include Fogdog, Fogdog with the accompanying
design and the Fogdog logo.
We rely on technologies that we license from third parties. These licenses
may not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
We do not believe that our technologies infringe the proprietary rights of
third parties. However, third parties have in the past and may in the future
claim that our business or technologies infringe their rights. From time to
time, we have received notices from third parties questioning our right to
present specific images or mention athletes' names on our Web site, or stating
that we have infringed their trademarks or copyrights. For example, in June
1999 we received a letter from a third party stating his belief that our
Internet marketing activities infringe a patent for a home shopping device,
and inviting us to license this technology. Also, in October 1999 we received
a letter from a third party alleging that our use of the trademark "Fogdog"
and the domain name for our web site fogdog.com, infringed a registered
trademark licensed by this third party, and further alleging unfair
competition under state and federal trademark law. Recently, in January 2000,
we received
13
<PAGE>
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 expect that participants in our
markets will be increasingly subject to infringement claims as the number of
services and competitors in our industry segment grows. Any such claim, with
or without merit, could be time-consuming, result in costly litigation, cause
service upgrade delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on
terms acceptable to us or at all. As a result, any such claim of infringement
against us could have a material adverse effect upon our business, results of
operations and financial condition.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Our primary
competitors are currently traditional national chain retailers of sporting
goods, including Venator Group, which operates Footlocker stores and Champs,
national chain retailers of outdoor equipment, such as REI, and national chain
retailers of athletic footwear, such as Footstar Inc. For example, MVP.com
recently launched as a new Internet sporting goods retailer. MVP.com is backed
by celebrity former professional athletes John Elway, Wayne Gretsky and
Michael Jordan, financed by well known venture capital firms and affiliated
with a brick and mortar sporting goods retailer. We also compete against
traditional regional chain retailers of sporting goods, such as The Sports
Authority, Dick's Sporting Goods and Galyan's. Our competitors also include
major discount retailers, such as Wal-Mart, Kmart and Target, catalog
retailers and numerous local sporting goods or outdoor activities stores. In
addition to traditional store-based retailers, we compete with numerous online
retailers. Online retailers that we compete with include the online efforts of
traditional retailers such as Dick's, Copeland's and REI and manufacturers of
sporting goods that currently sell some of their products directly online,
such as K-Swiss and Patagonia. The Sports Authority, The Athlete's Foot, MC
Sports and Sport Chalet have also announced the formation of an online joint
venture which we expect to compete with in the future. In addition, we compete
against Internet portal sites and online service providers that either offer
or feature shopping services, such as AOL, Yahoo!, Excite@Home, GO Network and
Lycos. We also compete against other online retailers that include sporting
goods as part of their product lines, such as Buy.com, Onsale and Value
America. In addition, sports-oriented web sites such as ESPN.com and CBS
Sportsline offer sporting goods and fan memorabilia over the Web, and we
expect greater competition from these web sites in the future. Finally, we
compete with other retailers selling sporting goods exclusively online, such
as MVP.com, many of which sell products in only one or a few sports
categories.
We believe that we compete primarily on the basis of recognition of the
brands we offer on our web site, the breadth of our product offerings, the
amount of product information provided to customers, convenience of the
shopping experience and price. Particularly with online retailers, we compete
on the basis of speed and accessibility of our web site, quality of site
content, customer service and reliability and speed of order shipment.
Although we believe we compete favorably with both traditional, store-based
retailers and our online competitors, our market is relatively new and is
evolving rapidly. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and more traffic to their web sites. In addition,
many of our competitors have well-established relationships with manufacturers
and more extensive knowledge about our industry. It is possible that new
competitors or alliances among competitors will emerge in the future.
Employees
As of December 31, 1999, we had 137 full-time employees. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
14
<PAGE>
Item 2. Properties
Our corporate offices are located in Redwood City, California, where we
lease 32,000 square feet under a lease that expires in July 2004. We believe
our existing facilities are adequate to meet our needs for at least the next
12 months.
We also maintain the lease on our previous corporate offices in San Jose,
California, comprising approximately 8000 square feet through March, 2001.
This property is subleased to another entity for the duration of our existing
lease.
Commercial building vacancy rates are very low in the market where Fogdog
has its principal place of business. Competition for present and future
available commercial space is intense, resulting in upward pressure on lease
rates and less desirable terms to tenants. As a result, we could experience
difficulty in obtaining additional space for expansion, or in obtaining such
space on favorable terms. Failure to obtain space or to obtain it on
reasonably attractive commercial terms may inhibit our ability to grow, or
otherwise adversely effect our operations and financial results.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
By action by written consent of the majority of shareholders of Fogdog on
November 19, 1999, the holders of 25,400,392 shares of outstanding capital
stock approved the following actions: (i) the reincorporation in the State of
Delaware by creating a wholly owned subsidiary under the laws of the State of
Delaware to acquire all of the assets and assume all of the liabilities of
Fogdog pursuant to a statutory merger; (ii) the amendment to the Amended and
Restated Certificate of Incorporation, effecting a two-for-three reverse stock
split; (iii) the adoption of the 1999 Stock Incentive Plan; (iv) the adoption
of the 1999 Employee Stock Purchase Plan; (v) an indemnification agreement for
Fogdog's current and future officers and directors; and (vi) the public
company Certificate of Incorporation and Bylaws to be filed or adopted as
applicable, at the closing of the initial public offering.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded over-the-counter on the Nasdaq National market
under the symbol FOGD. In December 1999, we completed our initial public
offering of 6,000,000 shares of common stock at an initial offering price of
$11.00 per share. In January 2000, the underwriters exercised their over-
allotment and sold 425,000 shares on the public market at a price of $11.00
per share.
The following table lists the high and low sales price for the period from
initial public offering to fourth quarter end (December 31, 1999)
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
December 9 through December 31, 1999............................... $14.63 $8.56
</TABLE>
The trading price of our Common Stock is subject to wide fluctuations in
response to quarterly variations in operating results, announcements of new
brands, concept shops, and other announcements by us or our competitors,
announcements of technological innovations, as well as other events or
factors. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market price of many high technology companies and which often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely effect the market price of our Common Stock.
15
<PAGE>
At March 24, 2000, the approximate number of common stockholders of record
was 306.
We have never paid any cash dividends on our capital stock and do not
expect to pay any such dividends in the foreseeable future. In addition, an
existing bank credit agreement currently restricts our ability to pay cash
dividends without the bank's consent.
Use of Proceeds from Sales of Registered Securities. The managing
underwriters in our initial public offering were Credit Suisse First Boston
Corporation, J.P. Morgan and Co., Thomas Weisel Partners and Warburg Dillon
Read. The shares of common stock sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-
1 that was declared effective by the SEC on December 8, 1999. The offering
commenced on December 9, 1999 after all 6,000,000 shares of common stock
registered under the registration statement were sold at a price of $11.00 per
share. The aggregate price of the offering amount registered was $66,000,000.
The underwriters exercised their over allotment of 425,000 shares at $11.00 in
January 2000. In connection with the offering and exercise of the over-
allotment, we paid an aggregate of $4.9 million in underwriting discounts and
commissions to the underwriters. In addition, the following table sets forth
an estimate of all expenses incurred in connection with the offering, other
than underwriting discounts and commissions. All amounts shown are estimated
except for the registration fees of the SEC and the National Association of
Securities Dealers, Inc.
<TABLE>
<S> <C>
Nasdaq fees....................................................... $ 100,000
Printing and engraving expenses................................... 356,000
Legal fees and expenses........................................... 650,000
Accounting fees and expenses...................................... 450,000
SEC Registration fees............................................. 17,000
Transfer Agent and Registrar fees................................. 7,000
Miscellaneous..................................................... 64,000
----------
Total........................................................... $1,644,000
==========
</TABLE>
After deducting the underwriting discounts and commissions and the
estimated offering expenses described above, the Company received net proceeds
from the offering of approximately $59.7 million. As of December 31, 1999,
Fogdog has used the net proceeds from the offering to invest in short-term and
long-term, interest bearing, investment grade securities and has used its
existing cash balances to fund the general operations. The proceeds will be
used for general corporate purposes, including working capital and product
development. A portion of the net proceeds may also be used to acquire or
invest in complementary business or products or to obtain the right to use
complementary technologies. We have no agreements or commitments with respect
to any such acquisition or investments and we are not currently engaged in any
material negotiations with respect to any such transaction. None of our net
proceeds of the offering were paid directly or indirectly to any of our
directors, officers or general partners or their associates, persons owning
10% or more of any class of equity securities, or affiliates.
16
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues:
Merchandise...................... $ 6,988 $ 195 $ -- $ -- $ --
Commission....................... 35 123 11 -- --
Web development.................. -- 447 1,030 677 213
-------- ------- ------- ------ ------
Total net revenues............. 7,023 765 1,041 677 213
-------- ------- ------- ------ ------
Cost of revenues:
Merchandise...................... 6,374 157 -- -- --
Commission....................... -- 19 -- -- --
Web development.................. -- 99 156 90 84
-------- ------- ------- ------ ------
Total cost of revenues......... 6,374 275 156 90 84
-------- ------- ------- ------ ------
Gross profit....................... 649 490 885 587 129
-------- ------- ------- ------ ------
Operating expenses:
Marketing and sales.............. 21,450 2,399 1,285 686 65
Technology and content........... 3,448 1,318 259 119 15
General and administrative....... 2,052 705 378 248 87
Amortization of intangible
assets.......................... 473 -- -- -- --
Amortization of stock-based
compensation.................... 3,424 243 -- -- --
-------- ------- ------- ------ ------
Total operating expenses....... 30,847 4,665 1,922 1,053 167
-------- ------- ------- ------ ------
Operating loss..................... (30,198) (4,175) (1,037) (466) (38)
Interest income (expense), net..... 585 29 (8) (3) (6)
Other income....................... -- 26 -- -- --
-------- ------- ------- ------ ------
Net loss........................... (29,613) (4,120) (1,045) (469) (44)
Deemed preferred stock dividend.... (12,918) -- -- -- --
-------- ------- ------- ------ ------
Net loss available to common
stockholders...................... $(42,531) $(4,120) $(1,045) $ (469) $ (44)
======== ======= ======= ====== ======
Basic and diluted net loss per
share available to common
stockholders...................... $ (5.95) $ (0.95) $ (0.23) $(0.13) $(0.01)
======== ======= ======= ====== ======
Basic and diluted weighted average
shares used in computation of net
loss per share available to common
stockholders...................... 7,148 4,323 4,544 3,631 3,105
======== ======= ======= ====== ======
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-
term investments.................. $ 72,901 $ 2,117 $ 311 $ 471 $ 36
Working capital (deficit).......... 68,451 590 (172) 375 (71)
Total assets....................... 108,192 2,840 580 763 144
Long-term liabilities.............. 300 189 3 87 8
Total stockholders' equity
(deficit)......................... 98,498 917 (13) 483 (21)
</TABLE>
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a leading online retailer of sporting goods. We have designed
fogdog.com, our online store, to offer extensive product selection, detailed
product information and a personalized shopping experience. We believe that we
offer the largest selection of sporting goods online, with up to 60,000
distinct stock keeping units representing more than 600 brands in all major
sports categories. Fogdog.com features a collection of specialty shops,
including soccer, baseball, golf, outdoors, fan/memorabilia and other popular
categories, organized to appeal to a broad base of customers from the avid
enthusiast to the occasional participant. Our online store is designed to
address the limitations of the traditional sporting goods retail channel for
consumers and manufacturers. Most of our products, representing 30 different
sports, are featured in seventeen specialty shops and nine brand concept
shops. We provide information and analysis authored by experts, helpful
shopping services and innovative merchandising. According to Media Metrix,
Inc., our web site received more visits during the fourth quarter of 1999 than
any other online sporting goods retailer focusing exclusively on
sporting goods.
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
6% and 8% of total revenues, but our future return rates could differ
significantly from our historical averages. Currently, less than 30% of our
transactions are shipped from inventory held at third-party warehouses. We
expect this percentage to increase in future periods.
We were incorporated in October 1994. From our inception through July 1998,
we were engaged in providing web development and design services to sporting
goods manufacturers, trade associations, retailers and other industry members.
In July 1997, we launched a web site, "SportSite.com," and established
partnerships with sporting goods catalog and distribution companies to process
orders, manage inventory and ship goods directly to customers. In the third
quarter of 1998, we phased out the design services portion of our business
to focus exclusively on online retail. We launched our fogdog.com web site in
November 1998; we began to take title to our own merchandise and also to bear
customer credit and return risk on a substantial number of our transactions.
In April 1999, we began to take title to the merchandise on all transactions
processed on our web site.
In September 1999, we purchased Sports Universe, Inc., and Sports Universe
became our wholly owned subsidiary. Sports Universe derives its revenue
primarily from the sales of sporting goods from its web site,
"sportsuniverse.com." Sports Universe is a Delaware corporation that is based
in Austin, Texas and has fewer than 10 full-time employees. In the merger, we
exchanged 266,665 shares of our common stock for all outstanding shares of
Sports Universe capital stock. The transaction was accounted for using the
purchase method. We have recorded goodwill of approximately $2.7 million in
connection with the merger, which is being amortized over a two-year period.
Since we have incurred substantial costs to develop our web site and to
recruit, train and compensate personnel for our creative, engineering, sales,
marketing, merchandising, customer service and administration departments. As
a result, we had an accumulated deficit of $35.4 million. In order to expand
our business, we intend to invest heavily in sales, marketing, merchandising,
operations, content and additional personnel to support these activities. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
We had 137 full-time employees as of December 31, 1999 and intend to hire a
significant number of employees in the future. This expansion will place
significant demands on our management and our operational
18
<PAGE>
resources. To manage this rapid growth, we must invest in and implement
operational systems, procedures and controls that can be expanded easily. We
expect future expansion to continue to challenge our ability to hire, train,
manage and retain employees.
Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total net revenues.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Merchandise.............................................. 100% 25% -- %
Commission............................................... -- 16 1
Web development.......................................... -- 59 99
---- ---- ----
Total net revenues..................................... 100 100 100
---- ---- ----
Cost of revenues:
Merchandise.............................................. 91 21 --
Commission............................................... -- 2 --
Web development.......................................... -- 13 15
---- ---- ----
Total cost of revenues................................. 91 36 15
---- ---- ----
Gross profit............................................... 9 64 85
---- ---- ----
Operating expenses:
Marketing and sales...................................... 305 314 123
Technology and content................................... 49 172 25
General and administrative............................... 29 92 36
Amortization of intangible assets........................ 7 -- --
Amortization of stock-based compensation................. 49 32 --
---- ---- ----
Total operating expenses............................... 439 610 184
---- ---- ----
Operating loss............................................. (430) (546) (99)
Interest income (expense), net............................. 8 4 (1)
Other income............................................... -- 3 --
---- ---- ----
Net loss................................................. (422)% (539)% (100)%
==== ==== ====
</TABLE>
Years Ended December 31, 1999, 1998 and 1997
Net Revenues
Merchandise revenue increased to $7.0 million for the year ended December
31, 1999 from $195,000 for the year ended December 31, 1998, and there was no
merchandise revenue for the year ended December 31, 1997. Our merchandise
revenue resulted from customer transactions on our fogdog.com web site. In
November 1998, we began taking title to our own merchandise and bearing the
credit risk on an increasing number of transactions; as a result moved away
from the commission structure in 1999. Our merchandise revenue also increased
due to an increase in the number of merchandise transactions processed on our
web site. Revenue from merchandise shipped outside the United States was
approximately 6% of total merchandise revenue for the years ended December 31,
1999 and 1998.
Commission revenue was $35,000, $123,000 and $11,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The decrease in commission
revenue in 1999 was due to the elimination of commission
19
<PAGE>
transactions in March 1999. The increase in commission revenue in 1998 was due
to an increased number of commission transactions processed on our web site.
We had no web development revenue for the year ended December 31, 1999
because we terminated our web development services in July 1998. Web
development revenue was $447,000 and $1.0 million for the years ended December
31, 1998 and 1997, respectively. The decrease in web development revenue in
1998 compared to 1997 occurred as we shifted our focus from being a web
development services provider to an online retailer.
Cost of Revenues
Cost of merchandise revenue consists of product costs, shipping and
handling costs, credit card processing fees, and in fiscal 1999 included out-
bound freight costs and certain promotional expenses. Cost of merchandise
revenue was $6.4 million and $157,000 or 91% and 81% of merchandise revenues
for the years ended December 31, 1999 and 1998, respectively. We had no cost
of merchandise revenue for the years ended December 31, 1997. Cost of revenues
increased in total dollars and as a percentage of merchandise revenues in 1999
compared to 1998 as a result of the Company taking title to the merchandise
and bearing the credit risk prior to delivery to the customer for the full
twelve months compared to the last two months of 1998. We have reclassified
out-bound freight and certain promotional expenses totaling $482,000 in cost
of merchandise revenue for the year ended December 31, 1999 that were
previously recorded in Marketing and Sales Expense in the first three quarters
of 1999. These additional costs were not significant in prior years due to the
commission structure of our on-line sporting goods business.
Cost of web development revenue consists of third-party fees and salaries
and related costs for site development and maintenance on behalf of clients.
Cost of web development revenue was $0, $99,000 and $156,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. As a percentage of web
development revenue, cost of web development revenue was 0%, 22% and 15% for
the years ended December 31, 1999, 1998 and 1997, respectively. The decrease
in the cost of web development in dollars in 1999 and 1998 compared to 1997
was due to a reduction of our hosting and maintenance activity as we shifted
our focus from being a web development services provider to an online retailer
in 1998.
Marketing and Sales Expenses
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 $21.5 million, $2.4
million and $1.3 million for the years ended December 31, 1999, 1998 and 1997.
As a percentage of net revenues, marketing and sales expenses were 305%, 314%
and 123% for the years ended December 31, 1999, 1998 and 1997, respectively.
The increase in marketing and sales expenses in dollars was attributable to an
increase in advertising and merchandising, customer service, distribution, and
marketing personnel and related costs as we continued to expand our online
store and establish the Fogdog brand. In September 1999, we entered into an
agreement with Nike USA, Inc. to distribute Nike products on our web site. In
connection with this agreement, we granted Nike a warrant to purchase
4,114,349 shares of our common stock at an exercise price of $1.54 per share.
Our 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, calculated on a straight-line basis. For the year
ended December 31, 1999, the Company recorded $3.7 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 accrued in December 1999. The
payments are being amortized to marketing and sales expense over the life of
the agreement. We expect to continue to substantially increase our marketing
and promotional efforts and hire additional marketing, merchandising, customer
service and operations personnel. The increase in marketing and sales expenses
in dollars and as a percentage of net revenues from 1998 to 1997 was
attributable to an increase in advertising and merchandising, customer
service, distribution, and marketing personnel and related costs.
20
<PAGE>
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 $3.4 million, $1.3 million and
$259,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
As a percentage of net revenues, technology and content expenses were 49%,
172% and 25% for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in technology and content expenses in dollars from
1999 to 1998 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 site development expenses during 1999. The increase in dollars and
as a percentage of net revenues from 1998 compared to 1997 was due to the
development and enhancement of our fogdog.com web site and the development of
technologies for integrating with our suppliers. We expect to continue to make
substantial investments in web content and maintenance and anticipate that
technology and content expenses will continue to increase.
General and Administrative Expenses
General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
service expenses and other general corporate expenses. General and
administrative expenses were $2.1 million, $705,000 and $378,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. As a percentage of net
revenues, general and administrative expenses were 29%, 92% and 36% for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in
general and administrative expenses in dollars and as a percentage of net
revenues was due to increased personnel and related costs to support the
implementation of our business strategy. The decrease in general and
administrative expenses as a percentage of net revenues in fiscal 1999 was due
to the fact that general and administrative expenses were more fixed in nature
and consequently did not grow with the increase net revenues. We expect that
general and administrative expenses will increase substantially as we add
personnel and incur additional costs related to the anticipated growth of our
business and operation as a public company.
Amortization of Intangible Assets
Amortization of intangible assets consists of goodwill amortization. In
September 1999, we acquired Sports Universe, Inc. ("Sports Universe"). The
merger was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their fair values as
of the acquisition date. The purchase price was allocated to net tangible
liabilities assumed of $538,000 and goodwill of $2.7 million. The acquired
goodwill will be amortized over its estimated useful life of two years.
Goodwill amortization for the year ended December 31, 1999 was $432,000
Amortization of Stock-Based Compensation
In connection with the grant of employee stock options, we recorded
aggregate unearned stock-based compensation of $15.0 million through December
31, 1999. Employee stock-based compensation expense is amortized over the
vesting period of the options, which is generally four years, using the
multiple-option approach. We recorded employee stock-based compensation
expenses of approximately $3.4 million for the year ended December 31, 1999
and $243,000 for the year ended December 31, 1998. Unearned stock-based
compensation expense will be reduced in future periods to the extent that
options are terminated prior to full vesting.
Interest Income (Expense), Net
Interest income (expense), net consists of interest earned on cash and
short-term investments, offset by interest expense related to bank borrowings
and other financing lines. Interest income (expense), net was
21
<PAGE>
$585,000, $29,000 and $(8,000) for the years ended December 31, 1999, 1998 and
1997, respectively. The increase in interest income (expense), net in 1999 was
due to higher average cash balances from additional sales of preferred stock
completed in the first three quarters of 1999, and increased merchandise
revenue.
Other Income
Other income consists of the proceeds we received when we transitioned our
remaining web development service obligations to a third-party, which was
completed in the third quarter of 1998.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
December 31, 1999, and therefore have not recorded a provision for income
taxes. Our deferred tax asset primarily consists of net operating loss
carryforwards and nondeductible accruals and allowances. We have recorded a
valuation allowance for the full amount of our net deferred tax assets, as the
future realization of the tax benefit is not currently likely.
As of December 31, 1999, we had net operating loss carryforwards for
federal and state tax purposes of approximately $25.4 million and $12.8
million, respectively. These federal and state tax loss carryforwards are
available to reduce future taxable income and expire at various dates into the
year 2019. We expect that the amount of net operating loss carryforwards that
could be utilized annually in the future to offset taxable income will be
limited by "change in ownership" provisions of the Internal Revenue Code. This
annual limitation may result in the expiration of net operating loss
carryforwards before their utilization.
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. 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 $17.3 million during 1999, $3.0
million during 1998, and $915,000 during 1997. This negative operating cash
flow resulted primarily from our net losses experienced during these periods.
In 1999 and 1998, we invested in the development of our brand and online
store, hired additional personnel and expanded our technology infrastructure
to support our growth.
Our investing activities, consisting of the sale and purchase of short-term
investments and furniture, fixtures and computer equipment to support our
growing number of employees, used cash of $48.4 million during 1999, $692,000
during 1998 and $81,000 during 1997. During 1999 and 1998, $55.6 million and
$423,000 was used to purchase short-term investments and the remainder was
used for furniture, fixtures and computer equipment.
Our financing activities generated cash of $90.5 million during 1999, $5.0
million during 1998 and $836,000 during 1997. Of these financing activities,
the initial public offering generated $59.7 million, net of underwriters
discounts and issuance costs. The issuance of convertible preferred stock
generated net proceeds of $32.6 million for the year ended December 31, 1999,
$4.5 million during 1998, $528,000 during 1997. We also had proceeds from bank
borrowings of $506,000 and $452,000 in 1999 and 1998 offset by payments of
$529,000 and $73,000, respectively.
At December 31, 1999, we had cash and cash equivalents and short-term
investments aggregating $72.9 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;
22
<PAGE>
. 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 December 31, 1999 of
$773,000. Interest on the borrowings range from the prime rate plus one-half
percent to the prime rate plus one percent and is payable monthly. We must
meet financial covenants with respect to the borrowings, which we were in
compliance with at December 31, 1999.
We also had an agreement with a software company to purchase software under
a one-year loan agreement which bears interest at 7.5%. The principal and
interest is payable in 12 equal monthly installments beginning in October
1998. This loan was paid off in the fourth quarter of 1999.
During 1999, we entered into a number of commitments for online and
traditional offline advertising. As of December 31, 1999, our remaining
commitments were approximately $5.7 million. In addition, we have remaining
commitments under the lease for our headquarters of $4.9 million and the Nike
agreement for $250,000 which was accrued at December 31, 1999. The Nike
expense is being amortized over the life of the Nike agreement.
We expect to devote substantial resources to continue development of our
brand and online store, expand our sales, support, marketing and engineering
organizations, establish additional facilities worldwide and build the systems
necessary to support our growth. Although we believe that our current cash and
cash equivalents and our borrowing capacity, will be sufficient to fund our
activities for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that
additional funding, if needed, will be available on terms acceptable to us or
at all. In addition, although there are no present understandings, commitments
or agreements with respect to any acquisition of other businesses, products or
technologies, we may, from time to time, evaluate potential acquisitions of
other businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and these financings may be dilutive to existing investors.
23
<PAGE>
Risks Related to Our Business
We expect significant increases in our operating expenses and continuing
losses.
We incurred a cumulative net loss of $35.4 million for the period from
inception through December 31, 1999. Our operating loss for the year ended
December 31, 1999 was $29.6 million, for the year ended December 31, 1998 was
$4.1 million, and for the year ended December 31, 1997 was $1.0 million. We
have not achieved profitability. We only began selling products under our
current business model in November 1998. We may not obtain enough customer
traffic or a high enough volume of purchases to generate sufficient revenues
and achieve profitability. We believe that we will continue to incur operating
and net losses for the next several years, and that the rate at which we will
incur losses will increase significantly from current levels. We intend to
increase our operating expenses substantially as we:
. increase our sales and marketing activities, particularly advertising
efforts;
. provide our customers with promotional benefits, such as selling
selected products or offering shipping below our actual costs;
. increase our general and administrative functions to support our growing
operations;
. expand our customer support and sports consultant staffs to better serve
customer needs;
. develop enhanced technologies and features to improve our web site;
. enhance our distribution and order fulfillment capabilities; and
. expand third-party distribution facilities or possibly buy or build our
own.
Because we will spend these amounts before we receive any revenues from
these efforts, our losses will be greater than the losses we would incur if we
developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which would further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
Our operating results are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts and investors, the market
price of our common stock may decline significantly.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may decline significantly. Factors that may harm our
business or cause our operating results to fluctuate include the following:
. our inability to obtain new customers at a reasonable cost, retain
existing customers, or encourage repeat purchases;
. decreases in the number of visitors to our web site or our inability to
convert visitors to our web site into customers;
. the mix of sporting goods, apparel, footwear and other products sold by
us;
. our inability to manage inventory levels;
. our inability to adequately maintain, upgrade and develop our web site,
the systems that we use to process customers' orders and payments or our
computer network;
. the ability of our competitors to offer new or enhanced web sites,
services or products;
24
<PAGE>
. price competition;
. fluctuations in the demand for sporting goods associated with sports
events, movies, television and other entertainment events;
. fluctuations in the amount of consumer spending on sporting goods and
related products, which tend to be discretionary spending items;
. the termination of existing marketing relationships with key business
partners or failure to develop new ones;
. increases in the cost of online or offline advertising;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season; and
. technical difficulties, system downtime or Internet slowdowns.
A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of products sold by us, inventory management,
inbound and outbound shipping and handling costs, the level of product returns
and the level of discount pricing and promotional coupon usage. Any change in
one or more of these factors could reduce our gross margins in future periods.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We have experienced and expect to continue to experience seasonal
fluctuations in our revenues. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, the fourth calendar
quarter accounted for a large percentage of our total annual sales for 1999.
We expect that the fourth calendar quarter will account for a large percentage
of our total annual sales in this and future years. In anticipation of
increased sales activity during the fourth calendar quarter, we may hire a
significant number of temporary employees to bolster our permanent staff and
may significantly increase our inventory levels. For this reason, if our
revenues were below seasonal expectations during this quarter, our annual
operating results could be below the expectations of securities analysts and
investors. In the future, our seasonal sales patterns may become more
pronounced, may strain our personnel, product distribution and shipment
activities and may cause a shortfall in revenues as compared to expenses in a
given period.
Our limited operating history makes forecasting difficult. Because most of our
expenses are based on planned operating results, failure to accurately
forecast revenues could cause net losses in a given quarter to be greater than
expected.
As a result of our limited operating history, it is difficult to accurately
forecast our revenues and we have limited meaningful historical financial data
upon which to base planned operating expenses. We were incorporated in October
1994. We started as a web site design company and derived most of our revenues
from the sale of web development services until August 1998, when we stopped
selling those services. We began selling products on our web site only in
November 1998. Our results since that time will not be comparable to our prior
results. We base our current and future expense levels on our operating plans,
expected traffic and purchases from our web site and estimates of future
revenues, and our significant expenses are to a large extent fixed in the
short term. Our sales and operating results are difficult to forecast because
they generally depend on the volume and timing of the orders we receive. As a
result, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause
our net loss in a given quarter to be greater than expected.
25
<PAGE>
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
To date, we have funded our operations from the sale of equity securities
and have not generated sufficient cash from operations. Cash from revenues
must increase significantly for us to fund anticipated operating expenses
internally. If our cash flows are insufficient to fund these expenses, we may
need to fund our growth through additional debt or equity financings or reduce
costs. Further, we may not be able to obtain financing on satisfactory terms.
Our inability to finance our growth, either internally or externally, may
limit our growth potential and our ability to execute our business strategy.
If we issue securities to raise capital, our existing stockholders may
experience additional dilution or the new securities may have rights senior to
those of our common stock.
We must maintain relationships with our distributors and manufacturers to
obtain sufficient quantities of quality merchandise on acceptable commercial
terms. If we fail to maintain our relationships with those parties on
acceptable terms, our sales and profitability could suffer.
Because we rely primarily on product manufacturers and third-party
distributors to stock the products we offer, our business would be seriously
harmed if we were unable to develop and maintain relationships with suppliers
that allow us to obtain sufficient quantities of quality merchandise on
acceptable terms. Our product orders are fulfilled by more than 35
distributors and manufacturers. However, our contracts or arrangements with
these parties do not guarantee the availability of merchandise, establish
guaranteed prices or provide for the continuation of particular pricing
practices. In addition, we do not have a written contract with most of our
major suppliers. Although we have alternative sources of supply for a small
percentage of the products we offer, we may have difficulty establishing
alternative sources for many of our products. Our current suppliers may not
continue to sell products to us on current terms or at all, and we may not be
able to establish new supply relationships to ensure delivery of merchandise
in a timely and efficient manner or on terms acceptable to us. Some sporting
goods manufacturers may be slow to adopt the use of the Internet as a
distribution channel. In addition, our supply contracts typically do not
restrict a supplier from selling products to other retailers, which could
limit our ability to supply the quantity of merchandise requested by our
customers. If we cannot supply our products to consumers at acceptable prices,
we may lose sales and market share as consumers make purchases elsewhere.
Further, an increase in supply costs could cause our operating losses to
increase beyond current expectations.
If we are unable to establish and maintain relationships with key brand
manufacturers, our sales will decrease.
If we are unable to establish and maintain relationships with important
brand manufacturers, we may be unable to obtain sufficient quantities of
popular products and in-depth product information. This could result in lower
sales. We have never derived more than 40% of our revenues in any quarter from
products purchased directly from manufacturers, although we cannot predict
whether we will exceed this percentage in future periods. For the year ended
December 31, 1999, we derived approximately 10% of our net revenues from sales
of Nike. We entered into an agreement with Nike in September 1999 that will
give us access to Nike's generally available product lines and product
information, as well as advance availability of mutually agreed upon, newly
released Nike products. However, this agreement has a term of only two years
and is subject to earlier termination if we breach the agreement. Moreover,
Nike is not legally obligated to sell us any quantity of product or deliver on
any particular schedule. Also, our purchases from Nike's online affiliate are
subject to similar limitations. If our relationship with Nike deteriorates,
our business and reputation could be seriously harmed. In addition, we believe
our relationship with Nike has caused other existing suppliers or could cause
future suppliers to modify their existing relationships with us or prevent new
relationships from being formed. We believe that some of Nike's competitors
have been and may in the future be reluctant to enter into an agreement with
us or to provide products for sale on our online store because of our
agreement with Nike. For example, we believe that some competitors may not
want to be featured on our web site because of Nike's involvement with us.
Also,
26
<PAGE>
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 79% of our customer shipments by units in the year ended
December 31, 1999. We are therefore subject to the risk that labor shortages,
strikes, inclement weather or other factors may limit the ability of UPS and
other carriers to meet our shipping needs. Our shippers' failure to deliver
products to our customers in a timely manner would damage our brand and
adversely affect our operating results. If UPS or our other existing shippers
are unable or unwilling to deliver our products to our customers, we would
need to arrange for alternative carriers. We may be unable to engage an
alternative carrier on a timely basis or upon terms favorable to us. Changing
carriers would likely disrupt our business.
If we fail to expand our fulfillment operations successfully, sales could fall
below expectations and we could incur unexpected costs.
We must be able to fill customer orders quickly and efficiently. If we do
not expand our fulfillment operations and systems to accommodate increases in
demand, particularly during the peak holiday selling season, we will not be
able to increase our net sales in accordance with the expectations of
securities analysts and investors. We intend to add to the capacity of our
distribution network by entering into agreements with additional fulfillment
partners. We can not assure you that we will be able to enter into any such
agreements on terms acceptable to us or at all. It may be difficult for us to
assimilate new partners into our distribution system. We may be unable to
secure these additional partners or integrate their systems and technologies
into ours. If we fail to do so, we may lose sales and our reputation for
prompt delivery and customer service would suffer. Even if we are successful
in expanding our distribution network, our planned expansion may cause
disruptions in our business and our fulfillment operations may be inadequate
to accommodate increases in customer demand.
High merchandise returns could adversely affect our financial condition and
results of operations.
We allow our customers to return products within 45 days for a full refund.
We make allowances in our financial statements for anticipated merchandise
returns based on historical return rates. However, actual returns may exceed
our allowances. If merchandise returns increase significantly or exceed our
allowances, our financial condition and results of operations could be
adversely affected.
27
<PAGE>
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 America Online and other
online services, search engines and directories to drive traffic to our web
site. If these relationships do not continue, it will be difficult for us to
increase market share and achieve profitability.
We have relationships with America Online, Inc. and other online services,
search engines and directories to provide content and advertising banners that
link to our web site. We rely on these relationships as significant sources of
traffic to our web site and, therefore, new customers. However, these
relationships are generally terminable on short notice, and they may not be
available to us in the future on acceptable terms. If we are unable to
maintain satisfactory relationships with high-traffic web sites on acceptable
terms, our ability to attract new customers and enhance our brand could be
harmed. Further, many of the web sites with which we have existing or
potential online advertising arrangements may also provide advertising
services for other marketers of sporting goods. As a result, these sites may
be reluctant to enter into or maintain relationships with us. Our online
advertising efforts may require costly, long-term commitments. We may not
achieve sufficient online traffic or product purchases to realize sufficient
sales to compensate for our significant obligations to these sites. Failure to
achieve sufficient traffic or generate sufficient revenue from purchases
originating from third-party web sites would likely reduce our profit margins
and may result in termination of these types of relationships. Without these
relationships, it is unlikely that we can sufficiently increase market share
and achieve profitability.
Because a key element of our strategy is to generate a high volume of traffic
on our web site, our business could be harmed by capacity constraints.
A key element of our strategy is to generate a high volume of traffic on,
and use of, our web site, www.fogdog.com. Accordingly, the satisfactory
performance, reliability and availability of our web site, transaction-
processing systems and network infrastructure are critical to our reputation
and our ability to attract and retain customers and maintain adequate customer
service levels. Our revenue depends upon the number of visitors who shop on
our web site and the volume of orders that we can fulfill. Any system
interruptions that result in the unavailability of our web site or reduced
order fulfillment would reduce the volume of goods that we sell and the
attractiveness of our product offerings. We have experienced periodic system
interruptions in the past, and we believe that system interruptions may
continue to occur in the future. Any substantial increase in the volume of
traffic on our web site or the number of orders placed by customers will
require that we expand and upgrade our technology, transaction-processing
systems and network infrastructure. We may not be able to accurately project
the rate or timing of increases, if any, in the use of our web site or timely
expand and upgrade our technology, transaction-processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our web site or timely expand and upgrade our
systems and infrastructure to accommodate these increases.
28
<PAGE>
Our vital computer and communications hardware and software systems are
vulnerable to damage and interruption which could harm our business.
Our success, in particular our ability to successfully receive and fulfill
orders and provide high-quality customer service, largely depends upon the
efficient and uninterrupted operation of our computer and communications
hardware and software systems. We use internally developed systems for our web
site and some aspects of transaction processing, including customer profiling
and order verifications. Our systems and operations are vulnerable to damage
or interruption from:
. earthquake, fire, flood and other natural disasters;
. power loss, computer systems failures, Internet and telecommunications
or data network failure, operator negligence, improper operation by or
supervision of employees, physical and electronic loss of data or
security breaches, misappropriation and similar events; and
. computer viruses.
Recently, a number of online retailers have been the target of "denial of
service" attacks by outside third parties. These attacks seek to overburden
the online companies' capacity so that others trying to access the Website
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. See "Business--Technology."
Establishing the Fogdog brand quickly and cost-effectively is central to our
success. If we do not establish the Fogdog brand quickly, we may not capture
sufficient market share or increase revenues enough to achieve profitability.
We believe that we must establish, maintain and enhance the Fogdog brand to
attract more customers to our web site and to generate revenues from product
sales. Brand recognition and customer loyalty will become increasingly
important as more companies with well-established brands in online services or
the sporting goods industry offer competing services on the Internet. For
example, existing sporting goods retailers with established brand names may
establish an online presence that competes with our web site and existing
online providers with better name recognition than Fogdog Sports may begin
selling sporting goods. Establishing the Fogdog brand as a widely recognized
and trusted source of sporting goods will depend largely on our success in
providing a high-quality online experience supported by a high level of
customer service, which cannot be assured. We expect that we will need to
increase substantially our spending on programs designed to create and
maintain strong brand loyalty among customers and we cannot be certain that
our efforts will be successful.
Our inability to secure and protect our Internet domain name may adversely
affect our business operation.
The www.fogdog.com Internet domain name is our brand on the Internet. In
October 1999, a third party challenged the use of the domain name as a
violation of a registered trademark. If we are unable to adequately protect
our Internet domain name, our trademarks and other intellectual property
rights, or must incur costs in doing so, it could harm our business. The
acquisition and maintenance of Internet domain names generally is regulated by
governmental agencies and their designees. Until recently, Network Solutions,
Inc. was the exclusive registrar for the ".com," ".net" and ".org" generic
top-level Internet domains in the U.S. In April
29
<PAGE>
1999, however, the Internet Corporation for Assigned Names and Numbers, or
ICANN, a new global non-profit corporation formed to oversee a set of the
Internet's core technical management functions, opened the market for
registering Internet domain names to an initial group of five companies.
Network Solutions, Inc. still maintains the registry containing all the
registrations in the generic top-level Internet domains. The market for
registering these Internet domain names in the U.S. and in foreign countries
is expected to undergo further changes in the near future. We expect the
requirements for registering Internet domain names also to be affected. The
relationship between regulations governing Internet domain names and laws
protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring Internet domain names that are
similar to, infringe upon or otherwise decrease the value of our Internet
domain name, our trademarks and other intellectual property rights used by us
and we may need to protect our rights through litigation.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to
intensify in the future because current and new competitors can enter our
market with little difficulty and can launch new web sites at a relatively
low cost.
In addition, the development of new technologies and the expansion of
existing technologies, such as price comparison programs that select specific
products from a variety of web sites, may increase competitive pressures on
us. We currently or potentially compete with a variety of other companies,
including:
. retailers selling sporting goods exclusively online such as MVP.com who
has partner relationships with Sportsline.com and Galyans;
. traditional, store-based, national chain sporting goods retailers such
as the Venator Group (Footlocker brands and Champs);
. traditional, store-based, national chain outdoor equipment retailers,
such as REI;
. traditional, store-based, national chain athletic footwear retailers,
such as Footstar, Inc.;
. traditional, store-based, regional chain sporting goods retailers such
as The Sports Authority, Dick's Sporting Goods and Galyan's;
. major discount retailers, such as Wal-Mart, Kmart and Target;
. catalog sporting goods retailers, such as Eastbay, TSI and Edwin Watts;
. numerous traditional local sporting goods and outdoor activity stores;
. online efforts of these traditional retailers, including the online
stores operated by Dick's Sporting Goods, Copeland's and REI;
. vendors of sporting goods that currently sell some of their products
directly online, such as K-Swiss and Patagonia;
. Global Sports Interactive, a newly formed online joint venture
established by The Sports Authority, The Athlete's Foot, MC Sports and
Sport Chalet and which may include in the future other store-based
retailers;
. Internet portals and online service providers that feature shopping
services, such as AOL, Excite@Home, GO Network and Lycos;
. other online retailers that include sporting goods as part of their
product offerings, such as Onsale and Buy.com;
30
<PAGE>
. physical and online stores of entertainment entities that sell sporting
goods and fan memorabilia, such as ESPN.com and CBS Sportsline; and
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. See
"Business--Competition."
We may be unable to hire and retain the skilled personnel necessary to develop
our business.
We intend to hire a significant number of additional marketing,
engineering, merchandising and retailing personnel in 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. See
"Business--Employees."
We are dependent upon our chief executive officer for our future success and
our managers are not obligated to stay with us.
Our future success depends to a significant degree on the skills,
experience and efforts of Timothy Harrington, our Chief Executive Officer, and
other key personnel. The loss of the services of any of these individuals
could harm our business and operations. In addition, we have not obtained key
person life insurance on any of our key employees. If any of our key employees
left or was seriously injured and unable to work and we were unable to find a
qualified replacement, our business could be harmed.
We have experienced significant growth in our business in recent periods and
any inability to manage this growth and any future growth could harm our
business.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our management, administrative
resources, software and systems. Any failure to manage growth effectively
could seriously harm our business. We have grown from 47 employees on December
31, 1998 to 137 employees on December 31, 1999. We also moved into a new
headquarters building in August 1999 and significantly expanded our
operations. To be successful, we will need to continue to implement management
information systems and improve our operating, administrative, financial and
accounting systems and controls. We will also need to train new employees and
maintain close coordination among our executive, accounting, finance,
marketing, sales and operations organizations. These processes are time
consuming and expensive, will increase management responsibilities and will
divert management attention.
31
<PAGE>
If the protection of our trademarks and proprietary rights is inadequate, our
brand and reputation could be damaged and we could lose customers.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets
and similar intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights. Despite these precautions, it may be possible
for a third-party to copy or otherwise obtain and use our intellectual
property without our authorization. We have applied to register the trademark
Fogdog in the United States and internationally. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which we will sell our products and services online. If we become
involved in litigation to defend our intellectual property rights, we may have
to spend significant amounts of money, and the litigation could divert our
management's time and efforts.
We may be subject to intellectual property claims that could be costly and
could disrupt our business.
Third parties have in the past and may in the future assert that our
business or technologies infringe their intellectual property rights. From
time to time, we have received notices from third parties questioning our
right to present specific images or mention athletes' names on our Web site,
or stating that we have infringed their trademarks or copyrights. In addition,
in June 1999 we received a letter from a third party stating his belief that
our Internet marketing activities infringe a patent for a home shopping device
and inviting us to license this technology. Also, in October 1999 we received
a letter from a third party alleging that our use of the trademark "Fogdog"
and the domain name for our web site fogdog.com infringed a registered
trademark licensed by this third party, and further alleging unfair
competition under state and federal trademark law. Recently, in January 2000,
we received a letter from a third party stating his belief that our Web site
induces infringement by others of a patent for a remote query communication
system, and inviting us to license this technology. We may in the future
receive additional claims that we are engaging in unfair competition or other
illegal trade practices. These claims may increase in the future. We may be
unsuccessful in defending against any such claim, which could result in
substantial damages, fines or other penalties. The resolution of a claim could
also require us to change how we do business, redesign our web site and other
systems, or enter into burdensome royalty or licensing agreements. In
particular, we may have to enter into a license to use our domain name, or we
could even be forced to change our name, either of which would severely harm
our business. These license or royalty agreements, if required, may not be
available on acceptable terms, if at all, in the event of a successful claim
of infringement. Our insurance coverage may not be adequate to cover every
claim that could be asserted against us. Even unsuccessful claims could result
in significant legal fees and other expenses, diversion of management's time
and disruptions in our business. Any such claim could also harm our reputation
and brand.
We intend to expand our business internationally, causing our business to
become increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires
businesses to pursue or consider pursuing international expansion. We have
expanded into international markets by opening an office in London. Revenue
from merchandise shipped outside the United States was approximately 6% of
total merchandise revenue for the year ended December 31, 1999, and we expect
to increase our international sales efforts. International sales are subject
to inherent risks and challenges that could affect our profitability,
including:
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting goods manufacturers may require that
our international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
32
<PAGE>
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
effects on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into U.S. dollars may contribute
to fluctuations in our results of operations and fluctuating exchange rates
could cause reduced gross revenues and/or gross margins from dollar-
denominated international sales.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations.
We may make acquisitions or investments in other companies or technologies.
We may not realize the anticipated benefits of any acquisition or investment.
If we make any acquisitions, we will be required to assimilate the operations,
products and personnel of the acquired businesses and train, retain and
motivate key personnel from the acquired businesses. We may be unable to
maintain uniform standards, controls, procedures and policies if we fail in
these efforts. Similarly, acquisitions may cause disruptions in our operations
and divert management's attention from day-to-day operations, which could
impair our relationships with our current employees, customers and strategic
partners. In addition, our profitability may suffer because of acquisition-
related costs or amortization costs for acquired goodwill and other intangible
assets.
We may be subject to product liability claims or other claims that could be
costly and time consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. In addition, we contract for the delivery and
assembly of some of the products we sell. We may be subject to claims if any
such product were to cause physical injury or injury to property due to faulty
assembly by our contractors. Our insurance coverage may not be adequate to
cover every claim that could be asserted against us. Similarly, we could be
subject to claims that users of the site were harmed due to their reliance on
our product information, product selection guides and configurators, advice or
instruction. If a successful claim were brought against us in excess of our
insurance coverage, it could harm our business. Even unsuccessful claims could
result in the expenditure of funds and management time and could have a
negative impact on our business.
Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction.
As of December 31, 1999, our executive officers and directors, their
affiliates and other substantial stockholders together controlled
approximately 72% 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
33
<PAGE>
the price, rights, preferences, privileges and restrictions of the preferred
stock. If we issue preferred stock, it might have preference over and harm the
rights of the holders of common stock. Although the availability of this
preferred stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, the issuance of preferred stock may
make it more difficult for a third-party to acquire a majority of our
outstanding voting stock. We currently have no plans to issue preferred stock.
Our certificate of incorporation and bylaws include provisions that may
deter an unsolicited offer to purchase us. These provisions, coupled with the
provisions of the Delaware General Corporation Law, may delay or impede a
merger, tender offer or proxy contest. Further, our board of directors is
divided into three classes, only one of which is elected each year. Our
directors are only removable by the affirmative vote of at least 66 2/3% of
all classes of voting stock. These factors may further delay or prevent a
change of control.
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 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;
34
<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, our computer network to
customer requirements, new technologies or emerging industry standards.
Governmental regulation may slow the Internet's growth and increase our costs
of doing business.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. These laws and regulations could
expose us to compliance costs and substantial liability, which could
materially harm our business, operating results and financial condition. In
addition, the growth of the Internet, coupled with publicity regarding
Internet fraud, may lead to the enactment of more stringent consumer
35
<PAGE>
protection laws. These laws would be likely to impose additional burdens on
our business. The adoption of any additional laws or regulations may also
inhibit the expansion of the Internet, which could reduce visits to our online
store or otherwise harm our business. Moreover, the applicability to the
Internet of existing laws in various jurisdictions governing issues such as
qualifications to do business, property ownership, sales tax, obscenity,
employment, libel, intellectual property and personal privacy is uncertain and
may take years to resolve. In order to comply with new or existing laws
regulating online commerce, we may need to modify the manner in which we do
business, which may result in additional expenses and could slow our growth.
For instance, we may need to spend time and money revising the process by
which we fulfill customer orders to ensure that each shipment complies with
applicable laws. We may also need to revise our customer acquisition and
registration processes to comply with increasingly stringent laws relating to
dealing with minors online. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of our Internet business or our marketing efforts.
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from
individuals when accessing web sites, with particular emphasis on access by
minors. These regulations may include requirements that we establish
procedures to disclose and notify users of privacy and security policies,
obtain consent from users for collection and use of information and provide
users with the ability to access, correct and delete personal information
stored by us. These regulations may also include enforcement and remedial
provisions. Even in the absence of those regulations, the Federal Trade
Commission has begun investigations into the privacy practices of other
companies that collect information on the Internet. One investigation resulted
in a consent decree under which an Internet company agreed to establish
programs to implement the principles noted above. We may become a party to a
similar investigation or enforcement proceeding, or the Federal Trade
Commission's regulatory and enforcement efforts may harm our ability to
collect demographic and personal information from users, which could be costly
or adversely affect our marketing efforts.
Our inability to securely transmit confidential information over public
networks may harm our business and cause our stock price to decline.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. We rely upon
encryption and authentication technology licensed from third parties to effect
the secure transmission of confidential information, such as customer credit
card numbers. Advances in computer capabilities, new discoveries in the field
of cryptography or other events may result in a compromise or breach of the
systems that we use to protect customer transaction data. A party who is able
to circumvent our security measures may misappropriate proprietary information
or customers' personal data such as credit card numbers, and could interrupt
our operations. We may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by these breaches. In addition, security breaches may damage our
reputation and cause our stock price to decline.
Credit card fraud could adversely affect our business.
A failure to adequately control fraudulent credit card transactions could
reduce our net revenues and our gross margin because we do not carry insurance
against this risk. We have put in place technology to help us detect the
fraudulent use of credit card information and have not suffered material
losses to date. However, we may in the future suffer losses as a result of
orders placed with fraudulent credit card data even though the associated
financial institution approved payment of the orders. Under current credit
card practices, we are liable for fraudulent credit card transactions because
we do not obtain a cardholder's signature.
36
<PAGE>
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 did not
experience 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 result in the following, any
of which could adversely affect our business.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for other hedging activities.
SFAS 133 is effective for all fiscal quarters beginning with the quarter
ending June 30, 1999. In July 1999, the Financial Accounting Standards Board
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
deferred the effective date until the first fiscal quarter ending June 30,
2000. We will adopt SFAS 133 in our quarter ending June 30, 2000. We do not
currently engage in hedging activities or invest in derivative instruments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirements to capitalize specified costs and
amortization of such costs. The adoption of the provisions of SOP 98-1 during
our fiscal year beginning January 1, 1999 did not have a material effect on
our financial statements.
37
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We currently market our merchandise in the United States and anticipate
expanding our marketing efforts in Europe in 2000. As a result, our financial
results could be affected by factors including changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all sales
are currently made in U.S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets. Our interest income is
sensitive to changes in the general level of U.S. interest rates, particularly
since the majority of our investments are in short-term instruments. Due to
the short-term nature of our investments, we believe that there is no material
risk exposure. Therefore, no quantitative tabular disclosures are required.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by this Item is included in Part IV Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Pursuant to General Instruction G to Form 10-K, the information required by
Items 10, 11, 12 and 13 of Part III is omitted from this Report and will be
included in the Registrant's definitive Proxy Statement which will be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered
by this Report, and certain information included therein is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
1.Consolidated Financial Statements
Report of Independent Accountants................................... 40
Consolidated Balance Sheet as of December 31, 1999 and 1998......... 41
Consolidated Statement of Operations for the three years ended
December 31, 1999.................................................. 42
Consolidated Statement of Stockholders' Equity for the three years
ended December 31, 1999............................................ 43
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999.................................................. 44
Notes to Consolidated Financial Statements.......................... 45
2.Financial Statement Schedules for the three years ended December 31,
1999
All schedules not listed above have been omitted because they are
either not applicable or the required information is shown in the
financial statements or the notes thereto.
3.Exhibits: See accompanying Index to Exhibits. The Exhibits listed in
the accompanying Index to Exhibits are filed or incorporated by
reference as part of this Form.
</TABLE>
(b) Reports on Form 8-K--None.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 29th day of March, 2000.
Date March 29, 2000 Fogdog, Inc.
/s/ Timothy P. Harrington
By: _________________________________
Timothy P. Harrington
Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Timothy
P. Harrington, acting individual, as his attorney-in-fact, each with full
power of substitution and resubstitution, for him or her in any way and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of March, 2000.
Signature Title
/s/ Timothy P. Harrington Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Timothy P. Harrington
/s/ Brett M. Allsop President, International Division,
- ------------------------------------- and Chairman of the Board.
Brett M. Allsop
/s/ Frederick M. Gibbons Director
- -------------------------------------
Frederick M. Gibbons
/s/ Warren J. Packard Director
- -------------------------------------
Warren J. Packard
/s/ Ralph T. Parks Director
- -------------------------------------
Ralph T. Parks
/s/ Ray A. Rothrock Director
- -------------------------------------
Ray A. Rothrock
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Fogdog, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
Fogdog, Inc. at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
January 31, 2000
40
<PAGE>
FOGDOG, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,451 $ 1,694
Short-term investments.................................... 46,450 423
Accounts receivable, net of allowances of $213 and $35,
respectively............................................. 216 75
Merchandise inventory..................................... 2,765 --
Prepaid expenses and other current assets................. 1,963 132
-------- -------
Total current assets.................................... 77,845 2,324
Property and equipment, net................................. 2,427 470
Intangible assets, net...................................... 2,212 46
Other assets, net........................................... 25,708 --
-------- -------
Total assets................................................ $108,192 $ 2,840
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,638 $ 705
Current portion of long-term debt......................... 473 606
Other current liabilities................................. 3,283 423
-------- -------
Total current liabilities............................... 9,394 1,734
-------- -------
Long-term debt, less current portion........................ 300 189
-------- -------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible Preferred Stock, issuable in series, $0.001
par value, 5,000 and 14,200 shares authorized at December
31, 1999 and 1998, respectively; 0 and 8,239 shares
issued and outstanding at December 31, 1999 and 1998,
respectively............................................. -- 8
Common Stock, $0.001 par value, 100,000 and 50,000 shares
authorized at December 31, 1999 and 1998, respectively;
35,792 and 4,886 issued and outstanding at December 31,
1999 and 1998, respectively.............................. 36 5
Additional paid-in capital................................ 145,441 7,664
Notes receivable.......................................... (50) --
Unearned stock-based compensation......................... (11,534) (978)
Accumulated deficit....................................... (35,395) (5,782)
-------- -------
Total stockholders' equity.............................. 98,498 917
-------- -------
Total liabilities and stockholders' equity.................. $108,192 $ 2,840
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net revenues:
Merchandise..................................... $ 6,988 $ 195 $ --
Commission...................................... 35 123 11
Web development................................. -- 447 1,030
-------- ------- -------
Total net revenues............................ 7,023 765 1,041
-------- ------- -------
Cost of revenues:
Merchandise..................................... 6,374 157 --
Commission...................................... -- 19 --
Web development................................. -- 99 156
-------- ------- -------
Total cost of revenues........................ 6,374 275 156
-------- ------- -------
Gross profit...................................... 649 490 885
-------- ------- -------
Operating expenses:
Marketing and sales............................. 21,450 2,399 1,285
Technology and content.......................... 3,448 1,318 259
General and administrative...................... 2,052 705 378
Amortization of intangible assets............... 473 -- --
Amortization of stock-based compensation........ 3,424 243 --
-------- ------- -------
Total operating expenses...................... 30,847 4,665 1,922
-------- ------- -------
Operating loss.................................... (30,198) (4,175) (1,037)
Interest income (expense), net.................... 585 29 (8)
Other income...................................... -- 26 --
-------- ------- -------
Net loss.......................................... (29,613) (4,120) (1,045)
Deemed preferred stock dividend................... (12,918) -- --
-------- ------- -------
Net loss available to common stockholders......... $(42,531) $(4,120) $(1,045)
======== ======= =======
Basic and diluted net loss per share available to
common stockholders.............................. $ (5.95) $ (0.95) $ (0.23)
======== ======= =======
Basic and diluted weighted average shares used in
computation of net loss per share available to
common stockholders.............................. 7,148 4,323 4,544
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible Total
Preferred Stock Common Stock Additional Unearned Stockholders'
------------------ ------------- Paid-In Notes Stock-Based Accumulated Equity
Shares Amount Shares Amount Capital Receivable Compensation Deficit (Deficit)
--------- ------- ------ ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,155 $ 1 4,542 $ 5 $ 1,093 $-- $ -- $ (617) $ 482
Issuance of Series A
Preferred Stock, net... 631 1 -- -- 527 -- -- -- 528
Issuance of warrants to
purchase Series A
Preferred Stock........ -- -- -- -- 21 -- -- -- 21
Issuance of Common
Stock.................. -- -- 5 -- 1 -- -- -- 1
Net loss................ -- -- -- -- -- -- -- (1,045) (1,045)
--------- ------ ------ --- -------- ---- -------- -------- --------
Balance at December 31,
1997................... 1,786 2 4,547 5 1,642 -- -- (1,662) (13)
Issuance of Series B
Preferred Stock, net... 6,453 6 -- -- 4,774 -- -- -- 4,780
Issuance of Common
Stock.................. -- -- 292 -- 23 -- -- -- 23
Unearned stock-based
compensation........... -- -- -- -- 1,221 -- (1,221) -- --
Amortization of stock-
based compensation..... -- -- -- -- -- -- 243 -- 243
Issuance of Common Stock
for services........... -- -- 47 -- 4 -- -- -- 4
Net loss................ -- -- -- -- -- -- -- (4,120) (4,120)
--------- ------ ------ --- -------- ---- -------- -------- --------
Balance at December 31,
1998................... 8,239 8 4,886 5 7,664 -- (978) (5,782) 917
Issuance of Series C
Preferred Stock, net... 11,657 12 -- -- 17,911 -- -- -- 17,923
Issuance of Series D
Preferred Stock, net... 3,529 4 -- -- 14,646 -- -- 14,650
Issuance of Common
Stock.................. -- -- 1,067 1 243 (50) -- -- 194
Common Stock issued for
acquired business...... -- -- 267 -- 2,132 -- -- -- 2,132
Unearned stock-based
compensation........... -- -- -- -- 13,882 -- (13,802) -- 80
Amortization of stock-
based compensation..... -- -- -- -- -- -- 3,246 -- 3,246
Issuance of warrants to
purchase Series C
Preferred Stock........ -- -- -- -- 28,840 -- -- -- 28,840
Issuance of warrants to
purchase shares of
Common Stock........... -- -- -- -- 184 -- -- -- 184
Issuance of Common Stock
upon exercise of
warrants............... -- -- 147 -- 110 -- -- -- 110
Issuance of stock
options for services... -- -- -- -- 99 -- -- -- 99
Conversion of Series A,
B, C and D Preferred
Stock to Common Stock
in conjunction with the
initial public
offering............... (23,425) (24) 23,425 24 -- -- -- -- --
Issuance of Common Stock
in conjunction with the
initial public
offering, net of
offering costs totaling
$6,264................. -- -- 6,000 6 59,730 -- -- -- 59,736
Allocation of discount
on Preferred Stock..... -- -- -- -- 12,918 -- -- -- 12,918
Deemed Preferred Stock
dividend............... -- -- -- -- (12,918) -- -- -- (12,918)
Net loss................ -- -- -- -- -- -- -- (29,613) (29,613)
--------- ------ ------ --- -------- ---- -------- -------- --------
Balance at December 31,
1999................... -- $ -- 35,792 $36 $145,441 $(50) $(11,534) $(35,395) $ 98,498
========= ====== ====== === ======== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
FOGDOG, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(29,613) $(4,120) $(1,045)
Adjustments to reconcile net loss to net cash
used in operating activities:
Allowances for bad debt and sales returns...... 215 30 --
Depreciation and amortization.................. 428 122 105
Amortization of intangible assets.............. 473 -- --
Amortization of stock-based compensation....... 3,424 243 --
Non-employee stock-based expense............... 3,737 4 --
Changes in assets and liabilities:
Accounts payable and other current
liabilities................................. 7,311 945 27
Other assets................................. 1,738 -- 8
Accounts receivable.......................... (356) (12) (17)
Merchandise inventory........................ (2,765) -- --
Prepaid expenses and other current assets.... (1,881) (164) 7
-------- ------- -------
Net cash used in operating activities...... (17,289) (2,952) (915)
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment............... (2,385) (269) (81)
Sale of short-term investments................... 9,600 -- --
Purchase of short-term investments............... (55,627) (423) --
-------- ------- -------
Net cash used in investing activities...... (48,412) (692) (81)
-------- ------- -------
Cash flows from financing activities:
Proceeds from the sale of Common Stock........... 57,908 23 --
Proceeds from the sale of Preferred Stock........ 32,573 4,455 528
Proceeds from (payments under) term loan......... 506 266 (70)
Payments under capital leases.................... (3) (15) (21)
Proceeds from (payments under) line of credit.... (423) 186 237
Payments under software loan..................... (103) (58) --
Proceeds from (payments under) notes payable to
Stockholders.................................... -- 170 162
-------- ------- -------
Net cash provided by financing activities.. 90,458 5,027 836
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 24,757 1,383 (160)
Cash and cash equivalents at the beginning of the
period............................................ 1,694 311 471
-------- ------- -------
Cash and cash equivalents at the end of the period. $ 26,451 $ 1,694 $ 311
======== ======= =======
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 89 $ 57 $ 14
======== ======= =======
Supplemental disclosure of noncash transactions:
Conversion of note to Series B Preferred Stock... $ -- $ 325 $ --
======== ======= =======
Conversion of Preferred Stock to Common Stock.... $ 24 $ -- $ --
======== ======= =======
Issuance of warrants............................. $ 29,024 $ -- $ 21
======== ======= =======
Software purchased under loan agreement.......... $ -- $ 161 $ --
======== ======= =======
Issuance of stock in exchange for notes.......... $ 50 $ -- $ --
======== ======= =======
Issuance of common stock in acquisition.......... $ 2,132 $ -- $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Fogdog, Inc. (the "Company") is an online retailer of sporting goods. The
Company's online retail store, "fogdog.com," offers products, detailed product
information and personalized shopping services. During 1998 and 1997, the
Company also provided web development services to sporting goods
manufacturers, trade associations and retailers. The Company was incorporated
in California in October 1994 as Cedro Group, Inc. and in November 1998,
changed its name to Fogdog, Inc. The Company was reincorporated in the state
of Delaware as Fogdog, Inc in September 1999.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Sports Universe, Inc. All intercompany
accounts have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
classifies all short-term investments as available-for-sale. At December 31,
1999, the fair value of these short-term investments approximated amortized
cost and primarily mature within the next 12 months. Unrealized and realized
gains and losses have been insignificant for all periods presented. Short-term
investments at December 31, 1999 consist primarily of municipal bonds.
Merchandise inventory
Inventory is stated at the lower of cost or market, determined on a
weighted average basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets, generally three years, or the remaining lease term.
Web development costs
Web development costs primarily consist of costs to develop software which
enables users to access information on the customer's web site. Web
development costs incurred prior to technological feasibility are expensed as
incurred and are included in technology and content expense. The Company
defines establishment of the technological feasibility as the completion of a
working model. Software development costs incurred subsequent to the
establishment of technological feasibility throughout the period of market
availability of the web site are capitalized. Costs eligible for
capitalization have been insignificant for all periods presented.
45
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Purchased intangible assets are presented at cost, net of accumulated
amortization, and are amortized using the straight line method over the
estimated useful life of the assets. At each balance sheet date, the Company
assesses the value of recorded intangible assets for possible impairment in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," ("SFAS 121"), based upon a number of factors including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows. Since inception, the Company has not recorded any
provisions for possible impairment of intangible assets. In September 1999,
the Company acquired Sports Universe, Inc. in a purchase transaction which
included recording goodwill of $2.7 million which is being amortized over its
two year life. In October 1998, the Company purchased the mailing list,
Internet domain name and client database from Sportscape.com for $55,000. The
Company amortized the balance over a twelve month period.
Revenue recognition
Merchandise revenue is earned by the Company from the sale of sporting
goods through its online retail store. Merchandise revenue is recognized upon
the shipment of the merchandise, which occurs only after credit card
authorization is obtained. For sales of merchandise, the Company is
responsible for establishing prices, processing the orders, and forwarding the
information to the manufacturer, distributor or third-party warehouse for
shipment. For these transactions, the Company assumes credit risk and is
responsible for processing returns. The Company provides for estimated returns
at the time of shipment based on historical data.
Commission revenue was earned by the Company from catalog partners for
transactions processed through the Company's online retail store. Revenue was
recognized when the order was transmitted to the catalog partner. In
commission sales, the Company processed orders in exchange for a commission on
the sale of the vendor's merchandise. At the conclusion of the sale, the
Company forwarded the order information to the vendor, which then charged the
customer's credit card and shipped the merchandise directly to the customer.
In a commission sale transaction, the Company did not take title or possession
of the merchandise, and the vendor assumed all the risk of credit card
chargebacks. The Company also earned commission revenue from transactions
processed on several client sites. Commission revenue from these transactions
has been immaterial to date.
Revenue from web development services was recognized when the client's site
had either been placed on-line or completed to the client's satisfaction, the
Company had the right to invoice the customer, collection of the receivable
was probable and there were no significant obligations remaining.
Advertising costs
Advertising costs are expensed as in accordance with Statement of Position
93-7, "Reporting on Advertising Costs." Advertising expenses for the years
ended December 31, 1999, 1998, 1997 were $9.2 million, $541,000, and $64,000,
respectively.
Technology and Content
Technology and content costs include costs to develop and maintain the
Company's website and related content. 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 has capitalized approximately $411,000 of software for
internal use purchased from outside vendors. During 1999, internal technology
and content costs incurred primarily related to costs associated with
displaying new products and related information. Such costs are expensed as
incurred because the contents
46
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are subject to continued and substantial change. Other internal costs incurred
which were eligible for capitalization under SOP 98-1 were insignificant.
Net loss per share
Basic net loss per share available to common stockholders is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of shares of Common Stock outstanding during the
period. Diluted net loss per share available to common stockholders is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common and potential common
equivalent shares outstanding during the period. The calculation of diluted
net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of Common Stock subject to
repurchase rights, incremental shares of Common Stock issuable upon the
exercise of stock options and warrants and incremental shares of Common Stock
issuable upon conversion of Preferred Stock. For the year ended December 31,
1999, net loss per share available to common stockholders includes a charge of
$12.9 million to reflect the deemed preferred stock dividend recorded in
connection with the Series D Preferred Stock financing.
The following table sets forth the computation of basic and diluted net
loss per share available to common stockholders for the periods indicated (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Numerator:
Net loss...................................... $(29,613) $(4,120) $(1,045)
Deemed preferred stock dividend............... (12,918) -- --
-------- ------- -------
Net loss available to common stockholders..... $(42,531) $(4,120) $(1,045)
======== ======= =======
Denominator:
Weighted average shares....................... 7,291 4,728 4,544
Weighted average Common Stock subject to
repurchase Agreements........................ (143) (405) --
-------- ------- -------
Denominator for basic and diluted calculation. 7,148 4,323 4,544
======== ======= =======
Basic and diluted net loss per share available
to common Stockholders....................... $ (5.95) $ (0.95) $ (0.23)
======== ======= =======
</TABLE>
47
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the weighted average potential shares of
Common Stock that are not included in the diluted net loss per share available
to common stockholders calculation above because to do so would be
antidilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Weighted average effect of dilutive securities:
Preferred Stock................................... 18,208 5,299 777
Warrants to purchase Series A Preferred Stock..... 89 78 1
Warrants to purchase Series C Preferred Stock..... 1,200 -- --
Warrants to purchase Common Stock................. 71 -- --
Employee stock options............................ 3,714 810 524
Common Stock subject to repurchase agreements..... 143 405 --
-------- ------- -------
23,425 6,592 1,302
======== ======= =======
</TABLE>
Income taxes
A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year. A deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any benefits
that, based on available evidence, are not expected to be realized.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. During each of the three years ended
December 31, 1999, the Company has not had any significant adjustments to net
loss that are required to be reported in comprehensive income (loss).
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of Enterprise and Related Information."
During each of the three years ended December 31, 1999, the Company's
management focused its business activities on the marketing and sale of
sporting goods over the Internet. Since management's primary form of internal
reporting is aligned with the marketing and sale of sporting goods, the
Company believes it operates in one segment. Revenue from shipments to
customers outside of the United States was 6%, 6%, and 0% for the years ended
December 31, 1999, 1998 and 1997, respectively.
Stock-based compensation
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB 25, unearned compensation is based
on the difference, if any, on the date of the grant, between the fair value of
the Company's stock and the exercise price. Unearned compensation is amortized
and expensed in accordance with Financial Accounting Standards Board
Interpretation No. 28 using the multiple-option approach. The Company accounts
for stock-based compensation issued to non-employees in accordance
48
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Concentration of risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, short-term
investments and accounts receivable. Cash equivalents are primarily composed
of investments in money market funds and certificates of deposits and are
maintained with two institutions and the composition and maturities are
regularly monitored by management. The Company's short-term investments are
managed by a single financial institution.
The Company maintains an allowance for uncollectible accounts based upon
the expected collectibility of all accounts receivable. At December 31, 1999,
no customer represented more than 10% of outstanding accounts receivable. At
December 31, 1998, two customers accounted for 21% and 15% of commission-
related accounts receivable. At December 31, 1997, approximately 47% of web
development accounts receivable represented amounts due from three different
customers. Sales to these web development customers accounted for
approximately 25% of the related revenues in 1997.
Due to their short-term nature, the carrying value of all financial
instruments approximate their respective fair value.
Approximately 10% of the Company's revenue is derived from purchases from
one manufacturer for the year ended December 31, 1999. The Company relies on a
limited number of product manufacturers and third-party distributors to
fulfill a large percentage of products offered on the online retail store.
While management believes that alternate suppliers could provide product at
comparable terms, the loss of any one manufacturer or distributor could delay
shipments and have a material adverse effect on the Company's business,
financial position and results of operations.
Reclassifications
Freight, coupons and promotional discounts totaling $482,000 were
reclassified in the first three quarters of 1999 from operating expense to
cost of revenues, to conform to the fiscal 1999 presentation in accordance
with applicable accounting requirements.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting with Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter ending June 30, 2000. The Company will adopt SFAS 133 in its quarter
ending June 30, 2000. The Company has not engaged in hedging activities or
invested in derivative instruments.
49
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------- ----
<S> <C> <C>
Prepaid expenses and other current assets:
Prepaid advertising......................................... $ 1,024 $--
Strategic agreements........................................ 268 --
Insurance................................................... 414 --
Other....................................................... 257 132
------- ----
$ 1,963 $132
======= ====
Property and equipment:
Computer equipment and software............................. $ 2,201 $627
Office furniture and fixtures............................... 945 134
------- ----
3,146 761
Less: accumulated depreciation................................ (719) (291)
------- ----
$ 2,427 $470
======= ====
Other assets:
Deferred alliance costs, net (Note 7)....................... $25,288 $--
Deposits.................................................... 244 --
Other....................................................... 176 --
------- ----
$25,708 $--
======= ====
Other current liabilties:
Accrued professional fees................................... $ 410 $--
Strategic agreements........................................ 1,274 --
Deferred revenue............................................ 386 --
Accrued compensation........................................ 1,028 375
Other....................................................... 185 48
------- ----
$ 3,283 $423
======= ====
</TABLE>
Note 3--Long-Term Debt (in thousands):
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Equipment term loan (a)...................................... $ 700 $ 134
Line of credit (b)........................................... -- 423
Equipment term loan (b)...................................... 73 132
Software loan (c)............................................ -- 103
Capital leases............................................... -- 3
------ ------
773 795
Current portion of long-term debt............................ (473) (606)
------ ------
$ 300 $ 189
====== ======
</TABLE>
(a) In September 1998, the Company entered into a loan agreement with a bank
which provided borrowings up to $800,000. Borrowings under the agreement
bear interest at the prime rate plus one-half percent (9.0% and 8.25% at
December 31, 1999 and 1998, respectively) and are payable in equal
monthly installments
50
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
over a twenty-four month period beginning in October 1999. Borrowings for
software, furniture, fixtures or telephone equipment are limited to 75% of
the invoice amount. The Company must meet certain financial covenants in
connection with the loan agreement with which it was in compliance at
December 31, 1999.
(b) In December 1997, the Company entered into a loan agreement with a bank
which provided for a line of credit and an equipment term loan. Under the
line of credit, the Company was permitted to borrow up to $500,000 and
was required to keep cash on hand to cover the balance outstanding. At
December 31, 1998, the Company had short-term investments of $423,000
collateralized under the agreement. The line of credit bore interest at
8.75% at December 31, 1998. Interest on the line was payable monthly. The
line was paid off and terminated by the Company in September 1999. The
company entered into a new line of credit in December 1999. Under the new
credit line, the Company is permitted to borrow up to $3,000,000. The
line of credit bears interest at the prime rate plus one half percent (9%
at December 31, 1999) and there was no outstanding balance at December
31, 1999.
As of December 31, 1999 the Company had $73,000 outstanding under an
existing term loan used to purchase capital equipment, furniture,
software or other equipment. The term loan bears interest at the prime
rate plus one percent (9.5% and 8.75% at December 31, 1999 and 1998) and
is payable in twenty-four equal installments, including interest,
commencing on January 28, 1999. In December of 1999 the Company entered
into a new equipment term loan. Under the equipment term loan, the
Company can borrow up to $2,000,000 to be used to purchase capital
equipment, furniture, software or other equipment. The term loan bears
interest at the prime rate plus one percent (9.5% at December 31, 1999),
and interest on the unpaid principal is due monthly. The term loan is
subject to two semi-annual term out and principal payments. Balances
outstanding on June 30, 2000 will be paid back in 33 monthly payments of
interest and principal beginning on July 15, 2000. Borrowings made after
on July 1, 2000 through December 2000 will be paid back in 33 monthly
payments of interest and principal beginning on January 15, 2001. The
Company must meet certain financial covenants in connection with the loan
agreement with which it was in compliance at December 31,1999.
(c) In October 1998, the Company entered into a loan agreement with a
software company to purchase software. Borrowings under the agreement
bear interest at 7.5% and were repaid in 1999.
Under the terms of the loan agreements, the Company is prohibited from
paying dividends without approval from the bank.
Note 4--Acquisition
Effective September 3, 1999, the Company merged with Sports Universe, Inc.
("Sports Universe"). Sports Universe sells equipment and apparel for
wakeboarding, waterskiing, inline skating, surfing and skateboarding on the
Internet. The merger was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
values as of the acquisition date. The total purchase price of approximately
$2.1 million consisted of 266,665 shares of Company Common Stock with an
estimated fair value of approximately $8.00 per share and other acquisition
related expenses of approximately $30,000 primarily of payments for
professional fees. The purchase price was allocated to net tangible
liabilities assumed of $538,000 and goodwill of $2.7 million. The acquired
goodwill will be amortized over its estimated useful life of two years. The
results of operations for Sports Universe have been included in the Company's
operations as of September 3, 1999.
51
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes unaudited consolidated information for the
Company and Sports Universe (in thousands except per share amounts), giving
effect to this merger as if it had occurred on February 9, 1998 ("inception")
by consolidating the results of operations of Sports Universe from inception
through the year ended December 31, 1999.
<TABLE>
<CAPTION>
Pro Forma
-------------------------
Year ended Year ended
December 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net revenues...................................... $ 7,508 $ 944
Net loss available to common stockholders......... (43,569) (5,790)
Basic and diluted net loss per share available to
common stockholders.............................. $ (6.10) $ (1.27)
</TABLE>
Note 5--Commitments and contingencies:
Operating leases
The Company leases office space under noncancelable operating leases at two
locations, expiring in April 2001 and July 2004. Rent expense totaled
$556,000, $157,000 and $51,000 for the years ended December 31, 1999, 1998 and
1997, respectively. The Company sublets one of the spaces for a total of
$385,000 through April 2001.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000................................................................ $1,113
2001................................................................ 1,042
2002................................................................ 1,024
2003................................................................ 1,062
2004................................................................ 633
------
$4,874
======
</TABLE>
Distributor and Strategic Agreements
The Company maintains agreements with independent distributors to provide
merchandise. The terms of these agreements are generally one to three years
with optional extension periods. Annual minimum payments under these
agreements are $344,000. The Company is also obligated under the strategic
agreement signed with Nike USA, Inc. ("Nike") (Note 7) to make two installment
payments of $250,000, one of which was paid upon entering the agreement and
the second of which was due upon the earlier of seven days after the closing
of the Company's initial public offering or January 15, 2000. The second
payment was accrued at December 31, 1999 and the related expense is being
amortized over the life of the strategic agreement.
Advertising
As of December 31, 1999 the Company had commitments for online and
traditional offline advertising of approximately $5.7 million for fiscal 2000.
52
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
Note 6--Income Taxes:
The Company incurred net operating losses for each of the three years ended
December 31, 1999 and accordingly, no provision for income taxes has been
recorded. The tax benefit is reconciled to the amount computed using the
federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Federal statutory benefit...................... $ (10,023) $ (1,400) $ (355)
State taxes, net of federal benefit............ (905) (247) (63)
Future benefits not currently recognized....... 8,238 1,550 418
Nondeductible compensation..................... 1,164 97 --
Other.......................................... 1,526 -- --
--------- -------- ------
$ -- $ -- $ --
========= ======== ======
</TABLE>
At December 31, 1999, the Company had approximately $25.4 million of
federal and $12.8 million of state net operating loss carryforwards available
to offset future taxable income which expire at various dates through 2019.
Under the Tax Reform Act of 1986, the amount of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a
three year period.
Deferred tax assets and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 9,383 $ 1,843
Accruals and allowances................................. 714 354
-------- -------
Net deferred tax assets............................... 10,097 2,197
Valuation allowance....................................... (10,097) (2,197)
-------- -------
$ -- $ --
======== =======
</TABLE>
The Company has incurred losses for the three years ended December 31,
1999. Management believes that based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely
than not that the Company will not be able to realize its deferred tax assets
and thus a full valuation allowance has been recorded at December 31, 1999 and
1998.
53
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Common Stock:
In December 1999, the Company completed an initial public offering of
6,000,000 shares of Common Stock at $11.00 per share, proceeds were
approximately $59.7 million, net of issuance costs. The Company's Certificate
of Incorporation, as amended in the State of Delaware in September 1999,
authorizes the Company to issue 100,000,000 shares of Common Stock with a par
value of $0.001. In January 2000, the Company sold an additional 425,000
shares at $11.00 per share which generated proceeds of approximately $4.2
million, net of issuance costs in connection with the exercise of the
underwriters over-allotment.
In November 1999, the Company's Board of Directors approved a two for three
reverse stock split of the outstanding shares of common, convertible
redeemable preferred stock and stock options. In September 1997, the Board of
Directors approved a two-for-one stock split of the Company's Common Stock and
Preferred Stock with a corresponding adjustment to outstanding stock options.
All common and preferred share and per share data in the accompanying
financial statements have been adjusted retroactively to give effect to both
of the stock splits.
A portion of the shares owned by the employees prior to the initial public
offering are subject to a right of repurchase by the Company subject to
vesting. At December 31, 1999 and 1998, there were approximately 351,000 and
870,000 shares, respectively, subject to repurchase.
During the years ended December 31, 1998, the Company issued 47,413 shares
of Common Stock to consultants in exchange for services. In connection with
these issuances, the Company recorded expenses of $4,000, respectively, based
on the fair value of the Common Stock on the date of grant as determined by
the Board of Directors. The Board in determining the fair value of the common
stock considered, among other things, the relative level of revenues and other
operating results, the absence of a public trading market for the Company's
securities and the competitive nature of the Company's market.
Warrants for Common Stock
In connection with the loan agreement entered into in December 1997, the
Company issued to the bank a warrant to purchase 29,630 shares of Series A
Preferred Stock. The warrant may be exercised at any time between May 1, 1998
and December 24, 2002 at an exercise price of $0.84 per share. The warrant was
recorded as a debt discount at its estimated fair value of $8,000.
Amortization of the discount was recognized as interest expense over the term
of the loan agreement. The warrant automatically converted to a warrant to
purchase Common Stock upon the effective date of the initial public offering,
December 9, 1999.
In connection with the issuance of convertible promissory notes to certain
holders of the Series A Preferred Stock in May 1998 and December 1997, the
Company issued warrants to purchase 35,556 shares of Series A Preferred Stock.
The warrants may be exercised at any time prior to December 26, 2002 at an
exercise price of $0.84 per share. The warrants were recorded as a debt
discount at its estimated fair value of $13,000. Amortization of the discount
is being recognized as interest expense over the term of the promissory notes.
The warrants automatically converted to warrants to purchase Common Stock upon
the effective date of the initial public offering, December 9, 1999.
In May 1998 and December 1997, the Company issued warrants to purchase
24,000 shares of Series A Preferred Stock to certain members of the Board of
Directors for services. The warrants may be exercised at any time prior to May
22, 2003 and December 26, 2002 at an exercise price of $0.84 per share. The
warrants automatically converted to warrants to purchase Common Stock upon the
effective date of the initial public offering, December 9, 1999. The estimated
fair value of the warrants was $8,000. The Company has not recorded any
expense for the estimated fair value of the warrants because such amounts were
insignificant.
54
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company issued fully-vested warrants to purchase
146,667 shares of Common Stock to certain investors for services provided. The
warrants were exercisable at the option of the holder at any time prior to
March 7, 1999 at an exercise price of $0.75 per share. The estimated fair
value of the warrants was $2,000. The Company has not recorded any expense for
the estimated fair value of the warrants because such amount was
insignificant. The warrants were fully exercised in May 1999.
In March 1999, the Company issued a fully-vested warrant to purchase 64,762
shares of Common Stock to a distributor in exchange for exclusivity rights.
The warrant is exercisable at the option of the holder at any time prior to
March 31, 2000 at an exercise price of $1.54 per share. The warrant is
recorded as a marketing and sales expense at its estimated fair value of
$26,000 over the term of the distribution agreement.
In May 1999, the Company issued a fully-vested warrant to purchase 4,166
shares of Common Stock to a distributor in exchange for exclusivity rights.
The warrant is exercisable at the option of the holder at any time prior to
May 31, 2000, at an exercise price of $4.50 per share. The estimated fair
value of the warrant was $3,000. The Company has not recorded any expense for
the estimated fair value of the warrants because such amount was
insignificant.
In September 1999, the Company entered into a two-year strategic agreement
with Nike to distribute Nike products over the Company's web site. In exchange
for certain online exclusivity rights, the Company granted Nike a fully-vested
warrant to purchase 4,114,349 shares of Series C Preferred Stock at $1.54 per
share. The warrant automatically converted to a warrant to purchase Common
Stock upon the closing of the initial public offering on December 9, 1999. The
Company will expense the estimated fair value of the warrant of approximately
$28.8 million over the term of the distribution agreement as marketing and
sales expense. The Company estimated the fair value using the Black-Scholes
option model with a per share value of $8.00 for the Series C Preferred Stock.
The unamortized balance at December 31, 1999 is included in other assets, net
as deferred alliance costs.
In September 1999, the Company issued fully-vested warrants to purchase
46,667 shares of Common Stock to distributors in exchange for exclusivity
rights. The warrants are exercisable at the option of the holders at any time
prior to March 31, 2000 at an exercise price of $4.50 per share. The warrants
are recorded as marketing and sales expenses at their estimated fair values of
$184,000 over the term of their respective distribution agreements.
The Company estimated the fair value of each warrant using the Black-
Scholes option pricing model using the following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1999 1998
---------- ----
<S> <C> <C>
Risk-free interest rate.................................... 4.88%-5.11% 5.46%
Expected life (in years)................................... Term Term
Dividend yield............................................. 0% 0%
Expected volatility........................................ 90% 50%
</TABLE>
Note 8--Preferred Stock:
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series,
to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. At December 31, 1999, there were
5,000,000 shares of Preferred Stock authorized for issuance, and no shares
issued or outstanding.
55
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Preferred Stock ("Preferred Stock") prior to the initial public
offering on December 9, 1999 consisted of the following (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Proceeds
Net of
Shares Per Share Liquidation Issuance
Series Authorized Outstanding Amount Amount Costs
------ ---------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
A..................... 2,813 1,786 $0.84 $ 1,502 $ 1,473
B..................... 9,679 6,453 0.75 4,839 4,780
C..................... 23,804 11,657 1.54 18,000 17,923
D..................... 5,500 3,529 4.34 15,300 14,650
------ ------ ------- -------
41,796 23,425 $39,641 $38,826
====== ====== ======= =======
</TABLE>
The Company recorded a deemed preferred stock dividend of $12.9 million to
reflect the difference between the issuance price of $4.34 and estimated fair
value of the Series D Preferred Stock of $8.00.
Note 9--Employee Benefits:
Stock Option Plans
In November 1996, the Board of Directors adopted the 1996 Stock Option Plan
providing for the issuance of incentive and nonstatutory stock options to
employees, consultants and outside directors of the Company. In September
1999, the Company's Board of Directors approved the 1999 Stock Incentive Plan
(the "Plan"), which will serve as the successor plan to the 1996 Plan. The
Plan provides for the issuance of incentive and nonstatutory stock options to
employees, consultants and outside directors of the Company. The Plan became
effective immediately prior to the completion of the initial public offering.
The common stock reserved under the plan is 6,296,631. The share reserve will
automatically increase on the first trading day in January each year,
beginning with calendar year 2001 through 2005, equal to 3% of the total
number of shares of common stock outstanding on the last trading day in
December in the immediately preceding year, but in no event will any such
annual increase exceed 2,000,000 shares.
Options may be granted at an exercise price at the date of grant of not
less than the fair market value per share for incentive stock options and not
less than 85% of the fair market value per share for nonstatutory stock
options, except for options granted to a person owning greater than 10% of the
total combined voting power of all classes of stock of the Company, for which
the exercise price of the option must be not less than 110% of the fair market
value. Prior to the initial public offering, the fair market value of the
Company's Common Stock was determined by the Board of Directors or a committee
thereof.
Options granted under the Plan generally become exercisable at a rate of
25% after the first year and ratable each month over the next three years and
expire no later than ten years after the grant date.
56
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock option activity
under the Plan (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... 2,404 $0.083 1,199 $0.083 -- $ --
Granted below fair value...... 4,176 2.08 1,931 0.083 -- --
Granted at fair value......... -- -- 13 0.083 1,231 0.083
Exercised..................... (1,067) 0.23 (292) 0.083 (5) 0.083
Canceled...................... (514) 0.87 (447) 0.083 (27) 0.083
------ ----- -----
Outstanding at end of period.. 4,999 1.64 2,404 0.083 1,199 0.083
====== ===== =====
Options vested................ 2,762 504 --
====== ===== =====
Weighted average fair value of
options granted during the
period....................... $ 4.16 $ 0.72 $0.083
====== ====== ======
</TABLE>
At December 31, 1999, the Company had 385,000 shares available for future
grant under the Plan.
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Exercise Price Outstanding (in years) Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.083.................... 1,479 3.14 $0.083 448 $0.083
$0.33..................... 1,226 4.34 0.33 123 0.33
$1.32..................... 998 4.45 1.32 645 1.32
$4.50..................... 1,075 4.50 4.50 428 4.50
$6.75..................... 221 5.10 6.50 -- --
----- ---- ------ ----- ------
Total................... 4,999 4.10 1.65 1,644 $ 1.74
===== ==== ====== ===== ======
</TABLE>
1999 Employee Stock Purchase Plan
In September 1999, the Company's Board of Directors approved the 1999
Employee Stock Purchase Plan (the "1999 ESPP"). Under the plan, eligible
employees can have up to 15% of their earnings withheld to be used to purchase
shares of Common Stock on specified dates determined by the Board of
Directors. The price of Common Stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the specified purchase date. The
Board of Directors may specify a look-back period of up to 24 months. The
Common Stock reserved for future issuances under the plan is 500,000 shares of
Common Stock. Additionally, the shares reserved in the plan will automatically
increase on the first trading day in January each year, beginning with
calendar year 2000 through 2005, equal to 1% of the total number of shares of
common stock outstanding on the last trading day in December in the
immediately preceeding year, but in no event will exceed 1,000,000 shares.
57
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its stock option plan. Had compensation expense for options granted for
the years ended December 31, 1999, 1998 and 1997 been determined based on the
fair value at the grant date as prescribed by SFAS No. 123, the Company's net
loss and net loss per share would have decreased to the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported.................................. $(42,531) $(4,120) $(1,045)
======== ======= =======
Pro forma.................................... $(40,669) $(4,018) $(1,048)
======== ======= =======
Basic and diluted net loss per share available
to common Stockholders:
As reported.................................. $ (5.95) $ (0.95) $ (0.23)
======== ======= =======
Pro forma.................................... $ (5.69) $ (0.93) $ (0.23)
======== ======= =======
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Risk-free interest rates............................... 4.34-5.50% 4.06-5.15%
Expected lives (in years).............................. 5 5
Dividend yield......................................... 0% 0%
Expected volatility.................................... 90% 0%
</TABLE>
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected
volatility factor in addition to the factors described in preceding paragraph,
the above results may not be representative of future periods.
58
<PAGE>
FOGDOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned stock-based compensation
In connection with certain stock option grants, during the year ended
December 31, 1999 and 1998, the Company recognized unearned stock-based
compensation totaling $13.8 million and $1.2 million, respectively, which is
being amortized over the vesting periods of the related options, which is
generally four years, using the multiple option approach. Amortization expense
recognized for the year ended December 31, 1999 and 1998 was approximately
$3.4 million and $243,000, respectively. During the year ended December 31,
1999, the Company issued 57,500 options to consultants in exchange for
services. In determining the fair market value on each grant date the Company,
prior to the completion of the initial public offering, considered among other
things, the relative level of revenues and other operating results, the
absence of a public trading market for the Company's securities and the
competitive nature of the Company's market.
<TABLE>
<CAPTION>
Year Ended
December
31,
-----------
1999 1998
------ ----
<S> <C> <C>
Marketing and sales............................................. $1,236 $ 60
Technology and content.......................................... 321 38
General and administrative...................................... 1,867 145
------ ----
Total stock-based compensation............................... $3,424 $243
====== ====
</TABLE>
401(k) Plan
During the year ended December 31, 1998, the Board of Directors adopted an
employee savings and retirement plan (the "401(k) Plan") offering
substantially all of the Company's employees the opportunity to participate.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. To date, the
Company has not made any contributions to the 401(k) Plan.
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1** Agreement and Plan of Reorganization, dated August 13, 1999, by and
among the registrant, Fogdog Acquisition Corp., Sports Universe, Inc.
and certain principal stockholders of Sports Universe, Inc.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
4.1** Form of registrant's Specimen Common Stock Certificate.
4.2** Third Amended and Restated Registration Rights Agreement, dated March
3, 1999, April 16, 1999, and September 23, 1999, by and among the
registrant and the parties who are signatories thereto.
4.3** Warrant to Purchase Series A Preferred Stock, dated December 24,
1997, by and between the registrant and Imperial Bank.
4.4** Warrant to Purchase Series C Preferred Stock, dated September 23,
1999, by and between the registrant and Nike USA, Inc.
10.1** Registrant's 1999 Stock Incentive Plan.
10.2** Registrant's 1999 Employee Stock Purchase Plan.
10.3** Form of registrant's Directors and Officers' Indemnification
Agreement.
10.4+** Agreement, dated June 30, 1999, by and between the registrant and
America Online Inc.
10.5** Amended and Restated Loan Agreement, dated September 16, 1998, by and
between the registrant and Imperial Bank.
10.6** Sublease, dated July 14, 1999, by and between the registrant and
Ampex Corporation.
10.7** Letter Agreement, dated December 9, 1997, by and between the
registrant and Robin Smith.
10.8** Amended and Restated Employment Agreement, effective September 17,
1999, by and between the registrant and Timothy Harrington.
10.9** Employment Agreement, dated June 12, 1998, by and between the
registrant and Robert Chea.
10.10** Amended and Restated Employment Agreement, dated April 5, 1999, by
and between the registrant and Brett Allsop.
10.11** Letter Agreement, dated August 23, 1999, by and between the
registrant and Timothy Joyce.
10.12+** Order Fulfillment Services Agreement, dated September 17, 1999, by
and between the registrant and Keystone Fulfillment, Inc.
10.13+** Letter Agreement dated September 17, 1999, by and between the
registrant and Nike USA, Inc.
10.14** Letter Agreement, dated November 1, 1999, by and between, the
registrant and Mark Garrett.
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (included on page 39).
27.1** Financial Data Schedule for Sports Universe, Inc. (In EDGAR format
only)
27.2 Financial Data Schedule for Fogdog, Inc. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed
+ Confidential Treatment Requested
60
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-32672) of Fogdog, Inc., of our report dated
January 31, 2000 relating to the consolidated financial statements, which
appear in this Form 10-K
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,451
<SECURITIES> 46,450
<RECEIVABLES> 429
<ALLOWANCES> 213
<INVENTORY> 2,765
<CURRENT-ASSETS> 77,845
<PP&E> 3,146
<DEPRECIATION> 719
<TOTAL-ASSETS> 108,192
<CURRENT-LIABILITIES> 9,394
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 98,462
<TOTAL-LIABILITY-AND-EQUITY> 108,192
<SALES> 7,023
<TOTAL-REVENUES> 7,023
<CGS> 6,374
<TOTAL-COSTS> 37,221
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (29,613)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,613)
<EPS-BASIC> (5.95)
<EPS-DILUTED> 0
</TABLE>
