-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VBPk75iilgH5vVvTdYvhomUU1uSbGb6F7Otkg/G7RYVYDmSGjyrKuTs4uQwZbvqS S5BdX1y4qH9EWxYChMOJzw== 0001012870-99-004540.txt : 19991208 0001012870-99-004540.hdr.sgml : 19991208 ACCESSION NUMBER: 0001012870-99-004540 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19991207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOGDOG INC CENTRAL INDEX KEY: 0001094323 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 770388602 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87819 FILM NUMBER: 99770342 BUSINESS ADDRESS: STREET 1: 500 BROADWAY CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6508122559 MAIL ADDRESS: STREET 1: 500 BROADWAY CITY: REDWOOD CITY STATE: CA ZIP: 94063 S-1/A 1 AMENDMENT #3 TO FORM S-1 As filed with the Securities and Exchange Commission on December 7, 1999 Registration No. 333-87819 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- Amendment No. 3 to FORM S-1 REGISTRATION STATEMENT UNDER the Securities Act of 1933 --------------- FOGDOG, INC. (Exact name of registrant as specified in its charter) Delaware 7375 77-0388602 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification incorporation or Classification Code Number) organization) Number) 500 Broadway Redwood City, CA 94063 (650) 980-2500 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) --------------- Timothy P. Harrington Chief Executive Officer Fogdog, Inc. 500 Broadway Redwood City, CA 94063 (650) 980-2500 (Address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Warren T. Lazarow, Esq. Stanton D. Wong, Esq. David A. Makarechian, Esq. David R. Lamarre, Esq. Elizabeth H. Lefever, Esq. Colin M. Morris, Esq. Derrick N.D. Hansen, Esq. Paul C. McCoy, Esq. Hooman Shahlavi, Esq. Pillsbury Madison & Sutro LLP Brian E. Covotta, Esq. P.O. Box 7880 Brobeck, Phleger & Harrison LLP San Francisco, California 94120 Two Embarcadero Place (415) 983-1000 2200 Geng Road Palo Alto, California 94303 (650) 424-0160 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. --------------- If the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +The information contained in this prospectus is not complete and may be + +changed. We may not sell these securities until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +prospectus is not an offer to sell and it is not soliciting an offer to buy + +these securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 7, 1999 6,000,000 Shares [LOGO OF FOGDOG SPORTS] Common Stock -------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $8.00 and $10.00 per share. Our common stock has been approved for listing on The Nasdaq Stock Market's National Market under the symbol "FOGD." The underwriters have an option to purchase a maximum of 900,000 additional shares to cover over-allotments of shares. Investing in the common stock involves risks. See "Risk Factors" on page 8.
Underwriting Price to Discounts and Proceeds to Public Commissions Fogdog -------- ------------- ----------- Per Share.................................. $ $ $ Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston J.P. Morgan & Co. Thomas Weisel Partners LLC Warburg Dillon Read LLC The date of this prospectus is , 1999. The inside front cover of the prospectus includes: FOGDOG HOME [PICTURE OF FOGDOG SPORTS HOMEPAGE] The following text is placed to the left of the picture of the Fogdog Sports homepage and lines connect the text to specific items on the picture of the Fogdog Sports homepage: 1. Highlight Top Shops (seasonal) The 6 top graphics are designed to highlight the more popular areas for consumers. These slots are able to change based on seasonality and other important factors. 2. Personalization Registered users are greeted by name and directed to an area that highlights items and promotions specific to their interests. 3. Shop by Sport or Department Departments are horizontal categorization of products such as footwear, apparel, etc. 4. Promotional Area Highlights the most important areas and products on the site. This area is very dynamic and typically changes on a weekly basis. 5. Concept Shops In-depth, brand-specific shops for key brands such as Callaway Golf. ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 4 The Offering............................................................. 6 Summary Financial Information............................................ 7 Risk Factors............................................................. 8 Cautionary Note on Forward-Looking Statements............................ 23 Use of Proceeds.......................................................... 24 Dividend Policy.......................................................... 24 Capitalization........................................................... 25 Dilution................................................................. 26 Selected Financial Data.................................................. 27 Selected Pro Forma Financial Data........................................ 28 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 29
Page ---- Business................................................................. 41 Management............................................................... 54 Transactions and Relationships with Related Parties...................... 68 Principal Stockholders................................................... 71 Description of Capital Stock............................................. 73 Shares Available for Future Sale......................................... 76 Underwriting............................................................. 78 Notice to Canadian Residents............................................. 80 Legal Matters............................................................ 81 Experts.................................................................. 81 Additional Information................................................... 81 Index to Financial Statements............................................ F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this prospectus is accurate only on the date of this document. Dealer Prospectus Delivery Obligation Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. 3 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes to those statements appearing elsewhere in this prospectus. Fogdog Sports We are a leading online retailer of sporting goods. We have designed fogdog.com, our online store, to offer extensive product selection, detailed product information and a personalized shopping experience. We believe that we offer the largest selection of sporting goods online, with up to 60,000 distinct stock keeping units representing more than 500 brands in all major sports categories. Fogdog.com features a collection of specialty shops, including soccer, baseball, golf, outdoors, fan/memorabilia and other popular categories, organized to appeal to a broad base of customers from the avid enthusiast to the occasional participant. We provide information and analysis authored by experts, helpful shopping services and innovative merchandising. According to Media Metrix, Inc., our web site received more visits during September 1999 than any other online sporting goods retailer focusing exclusively on sporting goods. We believe that the sporting goods industry is large and growing and that sporting goods are increasingly being purchased online. According to the Sports Business Research Network, total U.S. retail sales of sporting goods were approximately $77 billion in 1998 and have grown at a 6.8% compound annual rate since 1994. Forrester Research projects that U.S. consumers will purchase $4.2 billion of sporting goods online in 2004. We believe that the sporting goods industry will continue to benefit from the growth in participation and interest in sports, recreation, health, fitness and outdoor activities. We believe the sporting goods industry is fragmented and fails to satisfy fully the needs of consumers and manufacturers. Our online store is designed to address the limitations of the traditional sporting goods retail channel for consumers and manufacturers. Most of our products, representing 30 different sports, are featured in fourteen specialty shops and five brand concept shops. In addition to offering a wide selection of products, our web site provides a superior online shopping experience by emphasizing the following: . Specialty Shops Featuring Extensive Product Selection. We offer a broad range of product lines in a wide variety of sports in order to make fogdog.com a "one-stop-shop." Our specialty shops also feature useful, compelling information and expert advice to help customers make the right product selection to meet their sports performance objectives. . Value-Added Shopping Services. We offer helpful services to assist our customers with their purchasing decisions, including: - Detailed product information, guides, configurators and comparison charts; - Brand concept shops; - Advice and product recommendations by recognized sports experts; - Consumer reviews; and - Personalized shopping. . Convenient Shopping Experience. Our online store provides customers with an easy-to-use web site that is available 24 hours a day, seven days a week. . Commitment to Excellent Customer Service. We emphasize customer service during all phases of the customer's online shopping experience and hire sports consultants with a broad knowledge of athletics, sports products and training to assist customers in their purchasing decisions. 4 . Network of Fulfillment Partners. We have developed and implemented a fulfillment system that utilizes third-party warehouses, distributors and direct shipping from select manufacturers to support secure and reliable online retailing. The Fogdog Sports vision is to reinvent the sporting goods retail industry by providing customers with a new value proposition of selection, information and service. Our goal is to be the world's leading sporting goods retailer. We intend to achieve this goal by: . Building Brand Recognition. We intend to establish the Fogdog brand as the first global brand for retail sporting goods and in the process build consumer trust, confidence and loyalty. . Promoting Repeat Purchases. We are focused on promoting customer loyalty and building relationships with our customers to drive repeat sales. . Expanding Specialty Shops. We intend to add five to ten specialty shops organized by sport or brand within the next 12 months. . Maximizing Product Selection and Fulfillment Capabilities. We intend to expand our fulfillment network, extend our brand relationships and augment our technology and expertise so that we can sell and deliver the broadest possible array of top branded products to our customers. . Enhancing and Forming Strategic Relationships. We have entered into agreements with manufacturers, such as Nike USA, Internet shopping portals, such as America Online, and distribution partners, such as Keystone Fulfillment, that we believe provide us with competitive advantages in merchandising, marketing and distributing our products. We intend to pursue similar arrangements which may include written agreements, partnerships or other arrangements to further develop our business. . Expanding Internationally. We intend to replicate our business model and build our brand name in selected international markets with appropriate demographics and market characteristics. Corporate Information Fogdog, Inc. was incorporated in October 1994 in California as Cedro Group, Inc. In November 1998, we changed our name to Fogdog, Inc. We plan to reincorporate in Delaware prior to the commencement of this offering. References in this prospectus to Fogdog Sports refer to Fogdog, Inc., a Delaware corporation, its subsidiaries and its California predecessor, and not to the underwriters. Our principal executive offices are located at 500 Broadway, Redwood City, California 94063 and our telephone number is (650) 980- 2500. Our web site can be found at www.fogdog.com. Information contained in our web site is not intended to be a prospectus and does not constitute a part of this prospectus. Our trademarks and service marks include Fogdog(TM), Fogdog(TM) with the accompanying design, the Fogdog logo, "Fogdog Sports(TM)," "The Dog Knows Sports(TM)," "The Dog Knows(TM)" "Your Anytime, Anywhere Sports Store(TM)", "360 Info Spin(TM)," "The Ultimate Sports Store(TM)" and "Fogdog Fetch(TM)." All other brand names or trademarks appearing in this prospectus are the property of the companies that own them. The inclusion of other companies' brand names and products in this prospectus is not an endorsement of Fogdog Sports. These companies are not involved with the offering of our securities. 5 The Offering Common stock offered...... 6,000,000 Shares Common stock to be outstanding after the offering............. 35,665,236 Shares Use of proceeds........... For general corporate purposes, including marketing and sales activities, working capital and capital expenditures. We may use a portion of the proceeds for possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol............ FOGD
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 1999, and excludes: . 4,502,885 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 1999 at a weighted average exercise price of $1.05 per share, all of which are immediately exercisable; however, those shares which have not yet vested are subject to repurchase by the company; . 6,296,631 shares of common stock reserved for issuance under our 1999 Stock Incentive Plan that incorporates our Amended and Restated 1996 Stock Option Plan; . 500,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; . 4,114,349 shares of common stock issuable upon exercise of an outstanding warrant held by Nike USA, Inc. at an exercise price of $1.54 per share, all of which are fully vested and immediately exercisable; and . 204,782 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.97 per share, all of which are fully vested and immediately exercisable. For additional information regarding these shares, see "Management--Benefit Plans," "Description of Capital Stock" and Notes 7, 8 and 11 of Notes to Financial Statements. ---------------- Except as set forth in the financial statements or as otherwise specified in this prospectus, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . assumes the completion of a two for three reverse stock split; . reflects the conversion of all of our preferred stock into 23,425,333 shares of common stock upon the completion of this offering; and . reflects our reincorporation into Delaware before the commencement of this offering. See "Description of Capital Stock" and "Underwriting." 6 SUMMARY FINANCIAL INFORMATION (in thousands, except per share data)
Nine Months Ended Year Ended December 31, September 30, ------------------------ ----------------- 1996 1997 1998 1998 1999 ------ ------- ------ ------ -------- Statement of Operations Data: Total net revenues............... $ 677 $ 1,041 $ 765 $ 516 $ 2,577 Gross profit..................... 587 885 490 405 507 Total operating expenses......... 1,053 1,922 4,665 2,316 15,919 Operating loss................... (466) (1,037) (4,175) (1,911) (15,412) Net loss......................... (469) (1,045) (4,120) (1,883) (15,136) Basic and diluted net loss per share available to common stockholders............. $(0.13) $ (0.23) $(0.95) $(0.43) $ (6.04) Basic and diluted weighted average shares used in computation of net loss per share available to common stockholders............. 3,631 4,543 4,323 4,391 4,645 Pro forma basic and diluted net loss per share.................. $ (.43) $ (1.33) Pro forma basic and diluted weighted average shares......... 9,622 21,059
September 30, 1999 -------------------- Actual As Adjusted -------- ----------- Balance Sheet Data: Cash, cash equivalents and short-term investments......... $ 21,880 $ 70,600 Working capital........................................... 17,931 66,651 Total assets.............................................. 57,291 106,011 Long-term liabilities..................................... 342 342 Stockholders' equity...................................... 51,340 100,060
The balance sheet data as of September 30, 1999 is set forth: . on an actual basis; and . on an as adjusted basis to reflect each of the adjustments listed above and the estimated net proceeds from the sale of 6,000,000 shares of common stock at an assumed initial public offering price of $9.00 per share after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. See "Use of Proceeds" and "Capitalization." See Note 1 to the consolidated financial statements for computation of basic and diluted net loss per share. 7 RISK FACTORS You should carefully consider the risks and uncertainties described below and the other information in this prospectus before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks could materially and adversely affect our business, financial condition and operating results. In this case, the trading price of our common stock could decline and you may lose part or all of your investment. Investing in our common stock may expose you to the following risks inherent in our business We expect significant increases in our operating expenses and continuing losses. We incurred a cumulative net loss of $20.9 million for the period from inception through September 30, 1999. Our operating loss for the nine months ended September 30, 1999 was $15.4 million, for the year ended December 31, 1998 was $4.2 million, and for the year ended December 31, 1997 was $1.0 million. We have not achieved profitability. We only began selling products under our current business model in November 1998. We may not obtain enough customer traffic or a high enough volume of purchases to generate sufficient revenues and achieve profitability. We believe that we will continue to incur operating and net losses for the next several years, and that the rate at which we will incur losses will increase significantly from current levels. We intend to increase our operating expenses substantially as we: . increase our sales and marketing activities, particularly advertising efforts; . provide our customers with promotional benefits, such as selling selected products or offering shipping below our actual costs; . increase our general and administrative functions to support our growing operations; . expand our customer support and sports consultant staffs to better serve customer needs; . develop enhanced technologies and features to improve our web site; . enhance our distribution and order fulfillment capabilities; and . expand third-party distribution facilities or possibly buy or build our own. Because we will spend these amounts before we receive any revenues from these efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results. Our limited operating history makes forecasting difficult. Because most of our expenses are based on planned operating results, failure to accurately forecast revenues could cause net losses in a given quarter to be greater than expected. As a result of our limited operating history, it is difficult to accurately forecast our revenues and we have limited meaningful historical financial data upon which to base planned operating expenses. We were incorporated in October 1994. We started as a web site design company and derived most of our revenues from the sale of web development services until August 1998, when we stopped selling those services. We began selling products on our web site only in November 1998. Our results since that time will not be comparable to our prior results. We base our current and future expense levels on our operating plans, expected traffic and purchases from our web site and estimates of future revenues, and our significant expenses are to a large extent fixed in the short term. Our sales and operating results are difficult to forecast because they generally depend on the volume and timing of the orders we receive. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. This inability could cause our net loss in a given quarter to be greater than expected. 8 Our operating results are volatile and difficult to predict. If we fail to meet the expectations of public market analysts and investors, the market price of our common stock may decline significantly. Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Because our operating results are volatile and difficult to predict, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may decline significantly. Factors that may harm our business or cause our operating results to fluctuate include the following: . our inability to obtain new customers at a reasonable cost, retain existing customers, or encourage repeat purchases; . decreases in the number of visitors to our web site or our inability to convert visitors to our web site into customers; . the mix of sporting goods, apparel, footwear and other products sold by us; . our inability to manage inventory levels; . our inability to adequately maintain, upgrade and develop our web site, the systems that we use to process customers' orders and payments or our computer network; . the ability of our competitors to offer new or enhanced web sites, services or products; . price competition; . fluctuations in the demand for sporting goods associated with sports events, movies, television and other entertainment events; . fluctuations in the amount of consumer spending on sporting goods and related products, which tend to be discretionary spending items; . the termination of existing marketing relationships with key business partners or failure to develop new ones; . increases in the cost of online or offline advertising; . the amount and timing of operating costs and capital expenditures relating to expansion of our operations; . unexpected increases in shipping costs or delivery times, particularly during the holiday season; and . technical difficulties, system downtime or Internet slowdowns. A number of factors will cause our gross margins to fluctuate in future periods, including the mix of products sold by us, inventory management, inbound and outbound shipping and handling costs, the level of product returns and the level of discount pricing and promotional coupon usage. Any change in one or more of these factors could reduce our gross margins in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations and Seasonality." Seasonal fluctuations in the sales of sporting goods could cause wide fluctuations in our quarterly results. We have experienced and expect to continue to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that the fourth calendar quarter will account for a large percentage of our total annual sales. In anticipation of increased sales activity during the fourth calendar quarter, we may hire a significant number of temporary employees to bolster our permanent staff and we intend to significantly increase our inventory levels. For this reason, if our revenues were below seasonal expectations during this quarter, our annual operating results could be below the expectations of securities analysts and investors. In the future, our seasonal sales patterns may become more 9 pronounced, may strain our personnel, product distribution and shipment activities and may cause a shortfall in revenues as compared to expenses in a given period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have been unable to fund our operations with the cash generated from our business. If we do not generate cash sufficient to fund our operations, we may need additional financing to continue our growth or our growth may be limited. To date, we have funded our operations from the sale of equity securities and have not generated sufficient cash from operations. Cash from revenues must increase significantly for us to fund anticipated operating expenses internally. If our cash flows are insufficient to fund these expenses, we may need to fund our growth through additional debt or equity financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience additional dilution or the new securities may have rights senior to those of our common stock. We must maintain relationships with our distributors and manufacturers to obtain sufficient quantities of quality merchandise on acceptable commercial terms. If we fail to maintain our relationships with those parties on acceptable terms, our sales and profitability could suffer. Because we rely primarily on product manufacturers and third-party distributors to stock the products we offer, our business would be seriously harmed if we were unable to develop and maintain relationships with suppliers that allow us to obtain sufficient quantities of quality merchandise on acceptable terms. Our product orders are fulfilled by more than 15 distributors and manufacturers. However, our contracts or arrangements with these parties do not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices. In addition, we do not have a written contract with most of our major suppliers. Although we have alternative sources of supply for a small percentage of the products we offer, we may have difficulty establishing alternative sources for many of our products. Our current suppliers may not continue to sell products to us on current terms or at all, and we may not be able to establish new supply relationships to ensure delivery of merchandise in a timely and efficient manner or on terms acceptable to us. Some sporting goods manufacturers may be slow to adopt the use of the Internet as a distribution channel. In addition, our supply contracts typically do not restrict a supplier from selling products to other retailers, which could limit our ability to supply the quantity of merchandise requested by our customers. If we cannot supply our products to consumers at acceptable prices, we may lose sales and market share as consumers make purchases elsewhere. Further, an increase in supply costs could cause our operating losses to increase beyond current expectations. If we are unable to establish and maintain relationships with key brand manufacturers, our sales will decrease. If we are unable to establish and maintain relationships with important brand manufacturers, we may be unable to obtain sufficient quantities of popular products and in-depth product information. This could result in lower sales. 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 nine months ended September 30, 1999, we derived approximately 15% of our net revenues from sales of our top selling brands, adidas and Nike, although neither of these brands accounted for in excess of 10% of our net revenues. We recently entered into an agreement with Nike that will give us access to Nike's generally available product lines and product information, as well as advance availability of mutually agreed upon, newly released Nike products. However, this agreement has a term of only two years and is subject to earlier termination if we breach the agreement. Moreover, Nike is not legally obligated to sell us any quantity of product or deliver on any particular schedule. Also, our purchases from Nike's online affiliate are subject to similar limitations. If our relationship with Nike deteriorates, our business and reputation could be seriously harmed. In addition, our relationship with Nike could cause other existing or future suppliers to modify their 10 existing relationships with us or prevent new relationships from being formed. We believe that some of Nike's competitors may be reluctant to enter into an agreement with us or to provide products for sale on our online store because of our agreement with Nike. For example, we believe that some competitors may not want to be featured on our web site because of Nike's involvement with us. Also, we believe that Nike's competitors may fear that Nike may use its relationship with us to attempt to gain access to competitive information concerning those competitors. We have experienced difficulty in obtaining sufficient product allocations from some of our key vendors. If we have to rely exclusively on distributors and not manufacturers, we may not be able to obtain the types and quantities of the products we desire because of varying demand from their other customers or temporal limitations on the availability of products from their suppliers. In addition, Nike and some of our other key vendors have established, and may continue to expand, their own online retailing efforts, which may impair our ability to acquire sufficient product allocations from these vendors. In connection with this expansion, or a decision by manufacturers not to offer products online or through our web site, manufacturers have asked us and may again ask us to remove their products from our web site. We depend on third parties to fulfill all of our customer orders, and any problems with these parties could impair our operating results and harm our reputation. Currently, we rely primarily on third-party distributors and product manufacturers to fulfill our customers' orders. These fulfillment partners are responsible for packaging products and arranging for them to be shipped to our customers. We may be unable to ensure that our fulfillment partners fill our customers' orders accurately and that orders are shipped promptly and in appropriate packaging. In addition, we have no written contracts with some of these fulfillment partners, and our contracts with the others are generally terminable upon short notice. If any of our existing fulfillment arrangements were to be terminated, our business could be disrupted and we could incur significant costs in attempting to make alternative arrangements. Our distribution network is also heavily dependent upon third-party carriers, primarily United Parcel Service, for product shipments. UPS accounted for approximately 90% of our customer shipments by units in the nine months ended September 30, 1999. We are therefore subject to the risk that labor shortages, strikes, inclement weather or other factors may limit the ability of UPS and other carriers to meet our shipping needs. Our shippers' failure to deliver products to our customers in a timely manner would damage our brand and adversely affect our operating results. If UPS or our other existing shippers are unable or unwilling to deliver our products to our customers, we would need to arrange for alternative carriers. We may be unable to engage an alternative carrier on a timely basis or upon terms favorable to us. Changing carriers would likely disrupt our business. If we fail to expand our fulfillment operations successfully, sales could fall below expectations and we could incur unexpected costs. We must be able to fill customer orders quickly and efficiently. If we do not expand our fulfillment operations and systems to accommodate increases in demand, particularly during the peak holiday selling season, we will not be able to increase our net sales in accordance with the expectations of securities analysts and investors. We intend to add to the capacity of our distribution network by entering into agreements with additional fulfillment partners. It may be difficult for us to assimilate new partners into our distribution system in time for the 1999 holiday season or at all. We may be unable to secure these additional partners or integrate their systems and technologies into ours. If we fail to do so, we may lose sales and our reputation for prompt delivery and customer service would suffer. Even if we are successful in expanding our distribution network, our planned expansion may cause disruptions in our business and our fulfillment operations may be inadequate to accommodate increases in customer demand. High merchandise returns could adversely affect our financial condition and results of operations. We allow our customers to return products within 45 days for a full refund. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates. However, actual returns 11 may exceed our allowances. If merchandise returns increase significantly or exceed our allowances, our financial condition and results of operations could be adversely affected. We plan to expand our inventory levels, and we may have to write down the value of our inventory if consumer demand changes after we order products. Although we currently rely primarily on our distributors and brand name suppliers to carry the inventory available for purchase on our site, we anticipate that we will carry an increasing amount of inventory and that the percentage of sales made from our own inventory will rise. As a result, it will be critical to our success that we accurately predict the rapidly changing trends in consumer preferences for sporting goods, and do not overstock unpopular products. Predicting these trends is difficult. If demand for one or more of our products falls short of our expectations, we may be required to take significant inventory markdowns, which could reduce our net sales and gross margins. This risk may be greatest in the first calendar quarter of each year, after we have significantly increased inventory levels for the holiday season. In addition, to the extent that demand for our products increases over time, we may be forced to increase inventory levels. Any increase would subject us to additional inventory risks. We rely substantially on our relationships with America Online and other online services, search engines and directories to drive traffic to our web site. If these relationships do not continue, it will be difficult for us to increase market share and achieve profitability. We have relationships with America Online, Inc. and other online services, search engines and directories to provide content and advertising banners that link to our web site. We rely on these relationships as significant sources of traffic to our web site and, therefore, new customers. However, these relationships are generally terminable on short notice, and they may not be available to us in the future on acceptable terms. If we are unable to maintain satisfactory relationships with high-traffic web sites on acceptable terms, our ability to attract new customers and enhance our brand could be harmed. Further, many of the web sites with which we have existing or potential online advertising arrangements may also provide advertising services for other marketers of sporting goods. As a result, these sites may be reluctant to enter into or maintain relationships with us. Our online advertising efforts may require costly, long-term commitments. We may not achieve sufficient online traffic or product purchases to realize sufficient sales to compensate for our significant obligations to these sites. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third-party web sites would likely reduce our profit margins and may result in termination of these types of relationships. Without these relationships, it is unlikely that we can sufficiently increase market share and achieve profitability. Because a key element of our strategy is to generate a high volume of traffic on our web site, our business could be harmed by capacity constraints. A key element of our strategy is to generate a high volume of traffic on, and use of, our web site, www.fogdog.com. Accordingly, the satisfactory performance, reliability and availability of our web site, transaction- processing systems and network infrastructure are critical to our reputation and our ability to attract and retain customers and maintain adequate customer service levels. Our revenue depends upon the number of visitors who shop on our web site and the volume of orders that we can fulfill. Any system interruptions that result in the unavailability of our web site or reduced order fulfillment would reduce the volume of goods that we sell and the attractiveness of our product offerings. We have experienced periodic system interruptions in the past, and we believe that system interruptions may continue to occur in the future. Any substantial increase in the volume of traffic on our web site or the number of orders placed by customers will require that we expand and upgrade our technology, transaction-processing systems and network infrastructure. We may not be able to accurately project the rate or timing of increases, if any, in the use of our web site or timely expand and upgrade our technology, transaction-processing systems and network infrastructure. We may not be able to accurately project the rate or timing of increases, if any, in the use of our web site or timely expand and upgrade our systems and infrastructure to accommodate these increases. 12 Our vital computer and communications hardware and software systems are vulnerable to damage and interruption which could harm our business. Our success, in particular our ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. We use internally developed systems for our web site and some aspects of transaction processing, including customer profiling and order verifications. Our systems and operations are vulnerable to damage or interruption from: . earthquake, fire, flood and other natural disasters; . power loss, computer systems failures, Internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data or security breaches, misappropriation and similar events; and . computer viruses. In 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 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 13 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: . traditional, store-based, national chain sporting goods retailers such as the Venator Group (Footlocker brands and Champs); . traditional, store-based, national chain outdoor equipment retailers, such as REI; . traditional, store-based, national chain athletic footwear retailers, such as Just for Feet; . traditional, store-based, regional chain sporting goods retailers such as The Sports Authority, Dick's Sporting Goods and Galyan's; . major discount retailers, such as Wal-Mart, Kmart and Target; . catalog sporting goods retailers, such as Eastbay, TSI and Edwin Watts; . numerous traditional local sporting goods and outdoor activity stores; . online efforts of these traditional retailers, including the online stores operated by Dick's Sporting Goods, Copeland's and REI; . vendors of sporting goods that currently sell some of their products directly online, such as K-Swiss and Patagonia; . Global Sports Interactive, a newly formed online joint venture established by The Sports Authority, The Athlete's Foot, MC Sports and Sport Chalet and which may include in the future other store-based retailers; . Internet portals and online service providers that feature shopping services, such as AOL, Excite@Home, GO Network and Lycos; . other online retailers that include sporting goods as part of their product offerings, such as Onsale and Buy.com; . physical and online stores of entertainment entities that sell sporting goods and fan memorabilia, such as ESPN.com and CBS Sportsline; and . retailers selling sporting goods exclusively online. There are no assurances that we will be able to be competitive against current or potential competitors. Many of our traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing, technical and other resources than we do. Many of these competitors have well established relationships with manufacturers, more extensive knowledge about our industry and can devote substantially more resources to web site development 14 and advertising. In addition, new competitors may emerge in the future and larger, well-established and well-financed entities may join with online competitors or sporting goods suppliers as the use of the Internet and other online services increases. Our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Furthermore, our competitors may be able to secure a broader range of products from or otherwise develop close relationships with primary vendors. Some competitors may price their products below cost in an attempt to gain market share. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. See "Business-- Competition." We may be unable to hire and retain the skilled personnel necessary to develop our business. We intend to hire a significant number of additional marketing, engineering, merchandising and retailing personnel in 1999 and beyond. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our business cannot continue to grow if we cannot attract qualified personnel. Our failure to attract and retain the highly trained personnel that are integral to our business may limit our growth rate, which would harm our business. We expect to face greater difficulty attracting these personnel with equity incentives as a public company than we did as a privately held company. See "Business--Employees." We are dependent upon our chief executive officer for our future success and our managers are not obligated to stay with us. Our future success depends to a significant degree on the skills, experience and efforts of Timothy Harrington, our Chief Executive Officer, and other key personnel. The loss of the services of any of these individuals could harm our business and operations. In addition, we have not obtained key person life insurance on any of our key employees. If any of our key employees left or was seriously injured and unable to work and we were unable to find a qualified replacement, our business could be harmed. We have experienced significant growth in our business in recent periods and any inability to manage this growth and any future growth could harm our business. Our historical growth has placed, and any further growth is likely to continue to place, a significant strain on our management, administrative resources, software and systems. Any failure to manage growth effectively could seriously harm our business. We have grown from 40 employees on September 30, 1998 to 96 employees on September 30, 1999. We have also recently moved into a new headquarters building and significantly expanded our operations. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations organizations. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. If the protection of our trademarks and proprietary rights is inadequate, our brand and reputation could be damaged and we could lose customers. The steps we take to protect our proprietary rights may be inadequate. We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization. We have applied to register the trademark Fogdog in the United States and internationally. Effective trademark, service mark, copyright and trade secret protection may not be available in every country 15 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. 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 9% of total merchandise revenue for the nine months ended September 30, 1999, and we expect to increase our international sales efforts. International sales are subject to inherent risks and challenges that could affect our profitability, including: . the need to develop new supplier and manufacturer relationships, particularly because major sporting goods manufacturers may require that our international operations deal with local distributors; . unexpected changes in international regulatory requirements and tariffs; . difficulties in staffing and managing foreign operations; . longer payment cycles from credit card companies; . greater difficulty in accounts receivable collection; . potential adverse tax consequences; . price controls or other restrictions on foreign currency; and . difficulties in obtaining export and import licenses. To the extent we generate international sales in the future, any negative effects on our international business could negatively impact our business, operating results and financial condition as a whole. In particular, gains and losses on the conversion of foreign payments into U.S. dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross margins from dollar-denominated international sales. 16 We may encounter significant difficulties in integrating our recent acquisition, Sports Universe, which could divert our management's attention and harm our business. In early September 1999, we completed the acquisition of Sports Universe, Inc. We acquired Sports Universe because we believe that we can achieve a broader and more complete product offering for our consumers by combining our products, marketing, consumer experience, distribution channels and client base with the "action sports" line of Sports Universe. We may not be able to successfully integrate the businesses and product offerings of the two companies. The process of combining the two companies and their product offerings may cause an interruption of, or a loss of momentum in, the activities of either or both of the companies' businesses, which could adversely affect their combined operations. Our management may have to divert attention from our day-to-day business and devote substantial resources to retaining employees and maintaining other relationships. If we fail to successfully complete the integration of Sports Universe, our business could be harmed. Acquisitions of companies or technologies may result in disruptions to our business and management due to difficulties in assimilating personnel and operations. We may make acquisitions or investments in other companies or technologies. We may not realize the anticipated benefits of any acquisition or investment. If we make any acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management's attention from day-to-day operations, which could impair our relationships with our current employees, customers and strategic partners. In addition, our profitability may suffer because of acquisition- related costs or amortization costs for acquired goodwill and other intangible assets. We may be subject to product liability claims or other claims that could be costly and time consuming. We sell products manufactured by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted against us. Similarly, we could be subject to claims that users of the site were harmed due to their reliance on our product information, product selection guides and configurators, advice or instruction. If a successful claim were brought against us in excess of our insurance coverage, it could harm our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. Because of their significant stock ownership, our officers and directors will be able to exert significant control over our future direction. After this offering, our executive officers and directors, their affiliates and other substantial stockholders will together control approximately 49.3% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control all matters requiring our stockholders' approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, prevent or deter a change in control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the company or its assets and might adversely affect the market price of our common stock. Provisions of our certificate of incorporation and bylaws may make changes of control difficult, even if they would be beneficial to stockholders. After this offering, the board of directors will have the authority to issue up to 5,000,000 shares of preferred stock. Also, without any further vote or action on the part of the stockholders, the board of directors 17 will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. If we issue preferred stock, it might have preference over and harm the rights of the holders of common stock. Although the availability of this preferred stock will provide us with flexibility in connection with possible acquisitions and other corporate purposes, the issuance of preferred stock may make it more difficult for a third-party to acquire a majority of our outstanding voting stock. We currently have no plans to issue preferred stock. Our certificate of incorporation and bylaws include provisions that may deter an unsolicited offer to purchase us. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest. Further, upon reincorporation into Delaware, our board of directors will be divided into three classes, only one of which will be elected each year. Our directors will only be removable by the affirmative vote of at least 66 2/3% of all classes of voting stock. These factors may further delay or prevent a change of control. See "Description of Capital Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." We will rely on email and other forms of direct online marketing. Our business could suffer if these marketing techniques encounter consumer resistance or increased governmental regulation. We send emails to our registered users to obtain feedback about our online store, to provide order information and to promote repeat sales. We may expand our use of email and other direct online marketing techniques. If consumers resist these forms of communication due to concerns about privacy, computer viruses or the proliferation of commercial email, our business and reputation could be damaged. We also anticipate that our use of email and other direct online marketing techniques will be subject to increasingly stringent regulation. For example, several states have passed laws limiting the use of email for marketing purposes. To date, these laws have not had a significant effect on us because they focus primarily on unsolicited email marketing and we currently ask for our customers' permission before sending them email. However, other states and Congress have begun to consider placing restrictions on email marketing. This additional legislation could hamper our ability to provide effective customer service and generate repeat sales. If we experience significant inventory theft, our gross margin may decrease. If the security measures used at any distribution facility we use or operate do not significantly reduce or prevent inventory theft, our gross margin may significantly decrease. During the nine months ended September 30, 1999, we experienced an immaterial amount of inventory theft. However, this theft may increase as we expand our fulfillment operations and distribution network. If measures we take to address inventory theft do not reduce or prevent inventory theft, our gross margin and results of operations could be significantly below expectations in future periods. Risks specific to the Internet and our industry Sporting goods consumers may not accept our online business model. This may result in slower revenue growth, loss of revenue and increased operating losses. To be successful, we must attract and retain a significant number of consumers to our web site at a reasonable cost. Any significant shortfall in the number of transactions occurring over our web site will negatively affect our financial results by increasing or prolonging operating losses. Conversion of customers from traditional shopping methods to electronic shopping may not occur as rapidly as we expect, or at all. Therefore, we may not achieve the critical mass of customer traffic we believe is necessary to become successful. Specific factors that could prevent widespread customer acceptance of our online business model, and our ability to grow our revenue, include: . customer concerns about the security of online transactions; . customer concerns about buying sporting goods, footwear and other products without first seeing them; 18 . delivery time before customers receive Internet orders, unlike the immediate receipt of products at traditional retail outlets; . pricing that may not meet customer expectations; . customer resistance to shipping charges, which generally do not apply to purchases from traditional retail outlets; . shipment of damaged goods or wrong products from our suppliers; and . difficulties in returning or exchanging orders. The success of our business model is dependent upon the continued growth of the online commerce infrastructure. Our future revenue and any future profits are also dependent upon the continued development of the online commerce infrastructure. The Internet and other online services may not be accepted as a viable commercial marketplace for a number of reasons, including potentially inadequate development of enabling technologies and performance improvements. To the extent that the Internet and other online services continue to experience significant growth in the number of users, their frequency of use or an increase in their bandwidth requirements, there can be no assurance that the infrastructure for the Internet and other online services will be able to support the demands placed upon them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity. Changes in or insufficient availability of telecommunications services to support the Internet or other online services could result in slower response times and adversely affect usage of the Internet and other online services, including fogdog.com. These problems would adversely affect our business and cause our stock price to decline. Sporting goods and apparel are subject to changing consumer preferences. If we fail to anticipate these changes, we will experience lower sales, higher inventory markdowns and lower margins. Our success depends upon our ability to anticipate and respond to trends in sporting goods merchandise and consumers' participation in sports. Consumers' tastes in apparel and sporting goods equipment are subject to frequent and significant changes, due in part to manufacturers' efforts to incorporate advanced technologies into some types of sporting goods. In addition, the level of consumer interest in a given sport can fluctuate dramatically. If we fail to identify and respond to changes in sporting goods merchandising and recreational sports participation, our sales could suffer and we could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers' recreational sports habits could allow our competitors to gain market share and could hurt our reputation. If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. 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 19 could materially harm our business, operating results and financial condition. In addition, the growth of the Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws would be likely to impose additional burdens on our business. The adoption of any additional laws or regulations may also inhibit the expansion of the Internet, which could reduce visits to our online store or otherwise harm our business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as qualifications to do business, property ownership, sales tax, obscenity, employment, libel, intellectual property and personal privacy is uncertain and may take years to resolve. In order to comply with new or existing laws regulating online commerce, we may need to modify the manner in which we do business, which may result in additional expenses and could slow our growth. For instance, we may need to spend time and money revising the process by which we fulfill customer orders to ensure that each shipment complies with applicable laws. We may also need to revise our customer acquisition and registration processes to comply with increasingly stringent laws relating to dealing with minors online. We may need to hire additional personnel to monitor our compliance with applicable laws. We may also need to modify our software to further protect our customers' personal information. Regulations imposed by the Federal Trade Commission may adversely affect the growth of our Internet business or our marketing efforts. The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing web sites, with particular emphasis on access by minors. These regulations may include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. These regulations may also include enforcement and remedial provisions. Even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above. We may become a party to a similar investigation or enforcement proceeding, or the Federal Trade Commission's regulatory and enforcement efforts may harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts. Our inability to securely transmit confidential information over public networks may harm our business and cause our stock price to decline. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. We rely upon encryption and authentication technology licensed from third parties to effect the secure transmission of confidential information, such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other events may result in a compromise or breach of the systems that we use to protect customer transaction data. A party who is able to circumvent our security measures may misappropriate proprietary information or customers' personal data such as credit card numbers, and could interrupt our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by these breaches. 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. 20 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 issues present technological risks, could disrupt our business and could decrease our sales. Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with these year 2000 requirements or risk system failure or miscalculations causing disruption of normal business activities. Any failure of our material systems, our suppliers' and fulfillment partners' material systems or the Internet to be year 2000 compliant could result in financial loss to us, harm to our reputation and legal liability. We are currently assessing the year 2000 readiness of the software, computer technology and other services that we use that may not be year 2000 compliant. We have not completed all operational tests on our internal systems. Accordingly, we are unable to predict to what extent our business may be affected if our software, the systems that operate in conjunction with our software or our internal systems experience a material year 2000 failure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." Risks Related to This Offering Our management has broad discretion as to how to use the proceeds from this offering and the proceeds may not be appropriately used. We intend to use the proceeds from this offering for general corporate purposes, including working capital and capital expenditures, and we may use a portion of the proceeds to acquire other businesses, products or technologies. We will in any case have broad discretion over how we use these proceeds. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions regarding how to use the proceeds from this offering, and we may spend these proceeds in ways with which you may disagree. Pending any of these uses, we plan to invest the proceeds of this offering in short-term, investment-grade, interest-bearing securities. We cannot predict whether these investments will yield a favorable return. See "Use of Proceeds." 21 The price of our common stock after this offering may be lower than the offering price you pay and may be volatile. Prior to this offering, our common stock has not been sold in a public market. After this offering, an active trading market in our stock might not develop. If an active trading market develops, it may not continue. Moreover, if an active market develops, the trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many Internet related companies, and which have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters based upon a number of factors. The price of our common stock that will prevail in the market after this offering may be higher or lower than the offering price. See "Underwriting." You will experience immediate and substantial dilution in the value of your shares following this offering. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, in that the price you pay per share will be substantially greater than our net tangible book value per share, or the per share value of our assets after subtracting our liabilities. Specifically, purchasers of shares of our common stock in this offering will contribute 56.3% of the total amount paid to fund our company but will own only 16.8% of our outstanding shares. Additionally, if the holders of outstanding options and warrants exercise their options or warrants, purchasers of shares of our common stock in this offering will own only 13.5% of our outstanding shares while contributing 50.3% of the total amount paid to fund our company. See "Dilution." Substantial amounts of our common stock could be sold in the near future, which could depress our stock price. Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price of the common stock prevailing from time to time. If our stockholders sell substantial amounts of our common stock in the public market following this offering, including shares issued upon the exercise of outstanding options and warrants, the trading price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of this offering, based upon shares outstanding as of September 30, 1999, we will have 35,665,236 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants. All of the shares we are selling in this offering may be resold in the public market immediately. Another 29,602,871 shares are subject to lock-up agreements and will become available for resale in the public market beginning 180 days after the date of this prospectus. As restrictions on resale end, our stock price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. See "Shares Available for Future Sale." 22 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws, which involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. We undertake no obligation to update these statements or publicly release the result of any revision to the forward-looking statements that we may make to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. 23 USE OF PROCEEDS Our net proceeds from the sale and issuance of the 6,000,000 shares of common stock offered are estimated to be $48.7 million at an assumed initial public offering price of $9.00 per share after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. If the underwriters' over-allotment option is exercised in full, our estimated net proceeds will be $56.3 million. We intend to use the net proceeds for general corporate purposes, including marketing and sales activities, working capital and capital expenditures, but we have no specific plans for use of the net proceeds of this offering. Pending these uses, we will invest the net proceeds of the offering in short-term, interest-bearing investment-grade securities. See "Risk Factors--Our management has broad discretion as to how to use the proceeds from this offering and the proceeds may not be appropriately used." In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We currently have no agreements or commitments with respect to any acquisition or investment, and we are not involved in any negotiations with respect to any similar transaction. DIVIDEND POLICY We have never declared or paid dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. Our credit facility with Imperial Bank prohibits us from paying dividends without prior approval. 24 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999 on the following three bases: . on an actual basis; . on a pro forma basis giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the completion of this offering; and . on a pro forma as adjusted basis to reflect each of the adjustments listed above and the estimated net proceeds from the sale of 6,000,000 shares of our common stock at an assumed initial public offering price of $9.00 per share after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. You should read this table in conjunction with our financial statements and the notes to our financial statements appearing elsewhere in this prospectus.
September 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Long-term debt, less current portion........... $ 342 $ 342 $ 342 -------- -------- -------- Stockholders' equity: Convertible Preferred Stock, issuable in series, $0.001 par value, 41,796,282, 41,796,282 and 5,000,000 shares authorized actual, pro forma and pro forma as adjusted, respectively; 23,425,000, no shares and no shares issued and outstanding actual, pro forma and pro forma as adjusted, respectively................................ 24 -- -- Common Stock, $0.001 par value, 72,000,000, 72,000,000 and 100,000,000 shares authorized actual, pro forma and pro forma as adjusted, respectively; and 6,240,000, 29,665,000 and 35,665,000 shares issued and outstanding actual, pro forma and pro forma as adjusted, respectively................................ 6 30 36 Additional paid-in capital................... 82,592 82,592 131,306 Notes receivable ............................ (94) (94) (94) Unearned stock-based compensation............ (10,270) (10,270) (10,270) Accumulated deficit.......................... (20,918) (20,918) (20,918) -------- -------- -------- Total stockholders' equity................. 51,340 51,340 100,060 -------- -------- -------- Total capitalization..................... $ 51,682 $ 51,682 $100,402 ======== ======== ========
The number of shares outstanding as of September 30, 1999 excludes: . 4,502,885 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 1999 at a weighted average exercise price of $1.15 per share, all of which are immediately exercisable; however, those shares which have not yet vested are subject to repurchase by the company; . 6,296,631 shares of common stock reserved for issuance under the 1999 Stock Incentive Plan that incorporates our Amended and Restated 1996 Stock Option Plan; . 500,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; . 4,114,349 shares of common stock issuable upon exercise of an outstanding warrant held by Nike USA, Inc. at an exercise price of $1.54 per share, all of which are fully vested and immediately exercisable; and . 204,782 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.97 per share, all of which are fully vested and immediately exercisable. For additional information regarding these shares, see "Management--Benefit Plans," "Description of Capital Stock" and Notes 7, 8 and 11 of Notes to Financial Statements. 25 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value at September 30, 1999, was approximately $48.9 million, or $1.65 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all outstanding convertible preferred stock. After giving effect to the sale of 6,000,000 shares of our common stock at an assumed initial public offering price of $9.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at September 30, 1999, would have been $97.6 million, or $2.74 per share. This represents an immediate increase in net tangible book value of $1.09 per share to existing stockholders and an immediate dilution of $6.26 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share................... $9.00 Pro forma net tangible book value per share at September 30, 1999........................................................... $1.65 Increase per share attributable to new investors................ 1.09 ----- Pro forma as adjusted net tangible book value per share after the offering......................................................... 2.74 ----- Dilution per share to new investors............................... $6.26 =====
The following table summarizes, at September 30, 1999, on a pro forma as adjusted basis, the total number of shares and consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $9.00 per share and before deducting the estimated underwriting discounts and commissions and estimated offering expenses:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders...... 29,665,236 83.2% $41,937,000 43.7% $1.41 New public investors....... 6,000,000 16.8 54,000,000 56.3 9.00 ---------- ----- ----------- ----- Totals................... 35,665,236 100.0% $95,937,000 100.0% ========== ===== =========== =====
The above computations are based on the number of shares of common stock outstanding as of September 30, 1999 and exclude: . 4,502,885 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 1999 at a weighted average exercise price of $1.05 per share, all of which are immediately exercisable; however, those shares which have not yet vested are subject to repurchase by the company; . 6,296,631 shares of common stock reserved for issuance under the 1999 Stock Incentive Plan that incorporates our Amended and Restated 1996 Stock Option Plan; . 500,000 shares of common stock reserved for issuance under the 1999 Employee Stock Purchase Plan; . 4,114,349 shares of common stock issuable upon exercise of an outstanding warrant held by Nike USA, Inc. at an exercise price of $1.54 per share, all of which are fully vested and immediately exercisable; and . 204,782 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.97 per share, all of which are fully vested and immediately exercisable. If these options or warrants are exercised, new investors will own only 13.5% of our outstanding shares while contributing 50.3% of the total amount paid to fund our company. For additional information regarding these shares, see "Capitalization," "Management--Benefit Plans," "Description of Capital Stock" and Notes 7, 8 and 11 of Notes to Financial Statements. 26 SELECTED FINANCIAL DATA You should read the following selected financial data in conjunction with our financial statements and related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the audited financial statements included elsewhere in this prospectus. The statement of operations data for the period from inception (October 28, 1994) to December 31, 1994 and for the year ended December 31, 1995, and the balance sheet data as of December 31, 1994, 1995 and 1996, are derived from the audited financial statements not included elsewhere in this prospectus. The statement of operations data for the nine months ended September 30, 1998 and 1999 and the balance sheet data as of September 30, 1999 are derived from the unaudited financial statements included elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of this information when read in conjunction with the audited financial statements and related notes. The diluted net loss per share computation excludes potential shares of common stock (preferred stock, options and warrants to purchase common stock and common stock subject to repurchase rights that we hold), since their effect would be antidilutive. See Note 1 of Notes to Financial Statements for a detailed explanation of the determination of the shares used to compute actual and pro forma basic and diluted net loss per share. The historical results are not necessarily indicative of results to be expected for future periods.
Period from Nine Months October 28, 1994 Ended September (inception) to Years Ended December 31, 30, December 31, -------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ---------------- ------ ------ ------- ------- ------- -------- (in thousands, except per share data) Statement of Operations Data: Net revenues: Merchandise........... $ -- $ -- $ -- $ -- $ 195 $ -- $ 2,542 Commission............ -- -- -- 11 123 69 35 Web development....... -- 213 677 1,030 447 447 -- ------ ------ ------ ------- ------- ------- -------- Total net revenues.. -- 213 677 1,041 765 516 2,577 ------ ------ ------ ------- ------- ------- -------- Cost of revenues: Merchandise........... -- -- -- -- 157 -- 2,070 Commission............ -- -- -- -- 19 12 -- Web development....... -- 84 90 156 99 99 -- ------ ------ ------ ------- ------- ------- -------- Total cost of revenues........... -- 84 90 156 275 111 2,070 ------ ------ ------ ------- ------- ------- -------- Gross profit............ -- 129 587 885 490 405 507 ------ ------ ------ ------- ------- ------- -------- Operating expenses: Marketing and sales... 2 65 686 1,285 2,399 997 10,807 Site development...... 90 15 119 259 1,318 737 2,205 General and administrative....... 11 87 248 378 705 457 1,181 Amortization of intangible assets ... -- -- -- -- -- -- 144 Amortization of stock- based compensation... -- -- -- -- 243 125 1,582 ------ ------ ------ ------- ------- ------- -------- Total operating expenses........... 103 167 1,053 1,922 4,665 2,316 15,919 ------ ------ ------ ------- ------- ------- -------- Operating loss ......... (103) (38) (466) (1,037) (4,175) (1,911) (15,412) Interest income (expense), net......... (1) (6) (3) (8) 29 2 276 Other income............ -- -- -- -- 26 26 -- ------ ------ ------ ------- ------- ------- -------- Net loss................ (104) (44) (469) (1,045) (4,120) (1,883) (15,136) Deemed preferred stock dividend............... -- -- -- -- -- -- (12,918) ------ ------ ------ ------- ------- ------- -------- Net loss available to common stockholders.... $ (104) $ (447) $ (469) $(1,045) $(4,120) $(1,883) $(28,054) ====== ====== ====== ======= ======= ======= ======== Basic and diluted net loss per share available to common stockholders........... $(0.20) $(0.14) $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04) ====== ====== ====== ======= ======= ======= ======== Basic and diluted weighted average shares used in computation of net loss per share available to common stockholders .......... 525 3,105 3,631 4,543 4,323 4,391 4,645 ====== ====== ====== ======= ======= ======= ======== Pro forma basic and diluted net loss per share.................. $ (.43) $ (1.33) ======= ======== Pro forma basic and diluted weighted average shares......... 9,622 21,059 ======= ========
December 31, ------------------------------ September 30, 1994 1995 1996 1997 1998 1999 ---- ---- ---- ----- ------ ------------- (in thousands) Balance Sheet Data: Cash, cash equivalents and short- term investments................ $ 23 $ 36 $471 $ 311 $2,117 $21,880 Working capital (deficit)........ (11) (71) 375 (172) 590 17,931 Total assets..................... 51 144 763 580 2,840 57,291 Long-term liabilities............ -- 8 87 3 189 342 Total stockholders' equity (deficit)....................... 17 (21) 483 (13) 917 51,340
27 SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA Effective September 3, 1999, Fogdog Sports merged with Sports Universe, Inc. Sports Universe sells equipment and apparel for wakeboarding, waterskiing, inline skating, surfing and skateboarding on the Internet. The merger was accounted for using the purchase method of accounting and accordingly the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values as of the acquisition date. The total purchase price of approximately $2.1 million consisted of 266,665 shares of Fogdog Sports common stock with an estimated fair value of approximately $8.00 per share and other acquisition related expenses of approximately $30,000, consisting primarily of payments for professional fees. The purchase price was allocated as follows: $451,000 to net tangible liabilities assumed and $2.6 million to goodwill. The acquired goodwill will be amortized over its estimated useful life of two years. The following unaudited pro forma consolidated statement of operations gives effect to this merger as if it had occurred on February 9, 1998 (inception) by consolidating the results of operations of Sports Universe from inception through December 31, 1998 and the nine months ended September 30, 1999 with the results of operations of Fogdog Sports. See Note B to Pro Forma Consolidated Financial Information for a description of the method used to compute basic and diluted net loss per share.
Pro Forma ------------------------------------ Nine Months Year Ended Ended December 31, 1998 September 30, 1999 ----------------- ------------------ (in thousands, except per share data) Pro Forma Consolidated Statement of Operations Data: Net revenues.............................. $ 944 $ 3,062 Cost of revenues.......................... 401 2,397 ------- -------- Gross profit............................ 543 665 ------- -------- Operating expenses: Marketing and sales..................... 2,660 10,928 Site development........................ 1,318 2,205 General and administrative.............. 983 1,395 Amortization of intangible assets ...... 1,184 1,005 Amortization of stock-based compensation........................... 243 1,582 ------- -------- Total operating expenses.............. 6,388 17,115 ------- -------- Loss from operations...................... (5,845) (16,450) Interest and other income, net............ 55 276 ------- -------- Net loss.................................. (5,790) (16,174) Deemed preferred stock dividend........... -- (12,918) ------- -------- Net loss available to common stockholders............................. $(5,790) $(29,092) ======= ======== Basic and diluted loss per share available to common stockholders................... $ (1.27) $ (5.96) ======= ======== Basic and diluted weighted average shares used in computation of net loss per share available to common stockholders......... 4,561 4,885 ======= ========
28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, among others, those statements including the words "expects," "anticipates," "intends," "believes" and similar language. Our actual results could differ materially from those discussed in this prospectus. Factors that could cause or contribute to these differences include, but are not limited to, the risks discussed in the section entitled "Risk Factors" in this prospectus. Overview We are a leading Internet retailer focused exclusively on sporting goods. We currently offer an extensive selection of competitively priced sporting goods consisting of up to 60,000 distinct stock keeping units representing more than 500 brands in all major sports categories. We were incorporated in October 1994. From our inception through July 1998, we were engaged in providing web development and design services to sporting goods manufacturers, trade associations, retailers and other industry members. In July 1997, we launched a web site, "SportSite.com," and established partnerships with sporting goods catalog and distribution companies to process orders, manage inventory and ship goods directly to customers. In the third quarter of 1998, we phased out the design services portion of our business to focus exclusively on online retail. In November 1998, we changed our name to Fogdog, Inc. and the name of our web site to "fogdog.com." We derive our revenue from the sale of sporting goods from our web site. Merchandise revenue is recognized when goods are shipped to our customers from manufacturers, distributors or third-party warehouses, which occurs only after credit card authorization. For sales of merchandise, we are responsible for pricing, processing and fulfilling the orders. We process merchandise returns and bear the credit risk for these transactions. We generally allow returns for any reason within 45 days of the sale. Accordingly, we provide for allowances for estimated future returns at the time of shipment based on historical data. Historically, our rate of product returns has ranged between 8% and 10% of total revenues, but our future return rates could differ significantly from our historical averages. Currently, less than 15% of our transactions are shipped from inventory held at third-party warehouses. We expect this percentage to increase in future periods. From October 1994 through March 1999, we derived revenue from commissions. Our commission revenue was earned from transactions processed through our online stores, fogdog.com and SportSite.com, whereby we obtained and processed customer orders in exchange for a commission on the sale of the vendor's merchandise. At the conclusion of the sale, we forwarded the order information to the vendor, which then charged the customer's credit card and shipped the merchandise directly to the customer. We recognized commission revenue when we forwarded the order to the vendor. In a commission sale transaction, we did not take title or possession of the merchandise, and the vendor bore all the risk of credit card chargebacks and merchandise returns. When we launched our fogdog.com web site in November 1998, we began to take title to our own merchandise and also to bear customer credit and return risk on a substantial number of our transactions. In April 1999, we began to take title to the merchandise on all transactions processed on our web site. We have also earned commission revenue from transactions processed on several client sites, which has been immaterial to date. From October 1994 to July 1998, we also earned revenue from web development. Revenue from the sale of web development services was recognized when we had the right to invoice the customer, the collection of the receivable was probable, there were no significant obligations remaining and the client's web site was either placed on-line or completed to the client's satisfaction. We terminated our web development services in July 1998, and transitioned our remaining support obligations to a third party. 29 We have incurred substantial costs to develop our web site and to recruit, train and compensate personnel for our creative, engineering, sales, marketing, merchandising, customer service and administration departments. As a result, we have incurred substantial losses since inception and, as of September 30, 1999, had an accumulated deficit of $20.9 million. In order to expand our business, we intend to invest heavily in sales, marketing, merchandising, operations, site development and additional personnel to support these activities. We therefore expect to continue to incur substantial operating losses for the foreseeable future. We had 96 full-time employees as of September 30, 1999 and intend to hire a significant number of employees in the future. This expansion will place significant demands on our management and our operational resources. To manage this rapid growth, we must invest in and implement operational systems, procedures and controls that can be expanded easily. We expect future expansion to continue to challenge our ability to hire, train, manage and retain employees. In September 1999, we purchased Sports Universe, Inc., and Sports Universe became our wholly owned subsidiary. Sports Universe derives its revenue primarily from the sales of sporting goods from its web site, "sportsuniverse.com." Sports Universe is a Delaware corporation that is based in Austin, Texas and has fewer than 10 full-time employees. In the merger, we exchanged 266,665 shares of our common stock for all outstanding shares of Sports Universe capital stock. The transaction was accounted for using the purchase method. We have recorded goodwill of approximately $2.6 million, which will be amortized over a two-year period, in connection with the merger. Results of Operations The following table presents selected financial data for the periods indicated as a percentage of total net revenues.
Nine Months Ended Year Ended September December 31, 30, ------------------ ----------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Net revenues: Merchandise............................... --% --% 25% --% 99 % Commission................................ -- 1 16 13 1 Web development........................... 100 99 59 87 -- --- ---- ---- ---- ---- Total net revenues...................... 100 100 100 100 100 --- ---- ---- ---- ---- Cost of revenues: Merchandise............................... -- -- 21 -- 80 Commission................................ -- -- 2 2 -- Web development........................... 13 15 13 19 -- --- ---- ---- ---- ---- Total cost of revenues.................. 13 15 36 22 80 --- ---- ---- ---- ---- Gross profit................................ 87 85 64 78 20 --- ---- ---- ---- ---- Operating expenses: Marketing and sales....................... 101 123 314 193 419 Site development.......................... 18 25 172 143 86 General and administrative................ 37 36 92 89 46 Amortization of intangible assets......... -- -- -- -- 6 Amortization of stock-based compensation.. -- -- 32 24 61 --- ---- ---- ---- ---- Total operating expenses................ 156 184 610 449 618 --- ---- ---- ---- ---- Operating loss.............................. (69) (99) (546) (371) (598) Interest income (expense), net.............. -- (1) 4 -- 11 Other income................................ -- -- 3 5 -- --- ---- ---- ---- ---- Net loss................................. (69)% (100)% (539)% (366)% (587)% === ==== ==== ==== ====
30 Nine Months Ended September 30, 1998 and 1999 Net Revenues We had no merchandise revenue for the nine months ended September 30, 1998 and $2.5 million for the nine months ended September 30, 1999. Our merchandise revenue resulted from customer transactions on our fogdog.com web site. In November 1998, we began taking title to our own merchandise and bearing the credit risk on an increasing number of transactions. Revenue from merchandise shipped outside the United States was approximately 9% of total merchandise revenue for the nine months ended September 30, 1999. Commission revenue was $69,000 for the nine months ended September 30, 1998 and $35,000 for the nine months ended September 30, 1999. The decrease in commission revenue was due to the elimination of commission transactions in March 1999. Web development revenue was $447,000 for the nine months ended September 30, 1998, and we had no web development revenue for the nine months ended September 30, 1999. We terminated our web development services in July 1998. Cost of Revenues Cost of merchandise revenue consists of product, shipping and handling costs, and credit card processing fees. We incurred no cost of merchandise revenue for the nine months ended September 30, 1998, and cost of merchandise revenue was $2.1 million for the nine months ended September 30, 1999. As a percentage of merchandise revenue, cost of merchandise revenue was 81% for the nine months ended September 30, 1999. We began to incur cost of merchandise revenue as we began taking title to our own merchandise and bearing customer credit risk. Cost of web development revenue consists of third-party fees and salaries and related costs for site development and maintenance on behalf of clients. Cost of web development revenue was $99,000 for the nine months ended September 30, 1998, and we had no cost of web development revenue for the nine months ended September 30, 1999. The decrease in the cost of web development revenue in dollars was due to the elimination of our hosting and maintenance activity. Gross Profit Gross profit was $405,000 for the nine months ended September 30, 1998 and $507,000 for the nine months ended September 30, 1999. As a percentage of total net revenues, gross profit was 78% for the nine months ended September 30, 1998 and 20% for the nine months ended September 30, 1999. The decrease in gross profit in dollars and as a percentage of total net revenues was due to the shift in our revenue from web development services to the sale of merchandise on our web site. Marketing and Sales Expenses Our marketing and sales expenses consist primarily of advertising and promotional expenditures, distribution facility expenses, including equipment and supplies, credit card verification fees and payroll and related expenses for personnel engaged in marketing, merchandising, customer service and distribution activities. Marketing and sales expenses were $997,000 for the nine months ended September 30, 1998 and $10.8 million for the nine months ended September 30, 1999. As a percentage of net revenues, marketing and sales expenses were 193% for the nine months ended September 30, 1998 and 419% for the nine months ended September 30, 1999. The increase in marketing and sales expenses in dollars and as a percentage of net revenues was attributable to an increase in advertising and merchandising, customer service, distribution, and marketing personnel and related costs as we continued to expand our online store and establish the Fogdog brand. In September 1999, we entered into an agreement with Nike USA, Inc. to distribute Nike products on our web site. In connection with this agreement, we granted Nike a warrant to purchase 4,114,349 shares of our 31 common stock at an exercise price of $1.54 per share. Our sales and marketing expenses in each quarter over the two-year term of the agreement will include a portion of the warrant's estimated fair value of approximately $28.8 million, calculated on a straight-line basis. We expect to continue to substantially increase our marketing and promotional efforts and hire additional marketing, merchandising, customer service and operations personnel. For the nine months ended September 30, 1999 we amortized $463,000 of expense related to the Nike warrant. Site Development Expenses Our site development expenses consist of payroll and related expenses for web site development and information technology personnel, Internet access, hosting charges and logistics engineering, and web content and design expenses. Site development expenses were $737,000 for the nine months ended September 30, 1998 and $2.2 million for the nine months ended September 30, 1999. As a percentage of net revenues, site development expenses were 143% for the nine months ended September 30, 1998 and 86% for the nine months ended September 30, 1999. The increase in site development expenses in dollars was due to the introduction and enhancement of our fogdog.com web site in November 1998 and subsequent enhancements. We expect to continue to make substantial investments in site development and anticipate that site development expenses will continue to increase. General and Administrative Expenses General and administrative expenses consist of payroll and related expenses for executive and administrative personnel, facilities expenses, professional service expenses and other general corporate expenses. General and administrative expenses were $457,000 for the six months ended June 30, 1998 and $1.2 million for the nine months ended September 30, 1999. As a percentage of net revenues, general and administrative expenses were 89% for the nine months ended September 30, 1998 and 46% for the nine months ended September 30, 1999. The increase in general and administrative expenses in dollars was due to increased personnel and related costs to support the implementation of our business strategy. The decrease in general and administrative expenses as a percentage of net revenues was due to the growth in merchandise revenue without a proportionate increase in general and administrative expenses. We expect that general and administrative expenses will increase substantially as we add personnel and incur additional costs related to the anticipated growth of our business and operation as a public company. Amortization of Stock-Based Compensation In connection with the grant of employee stock options, we recorded aggregate unearned stock-based compensation of $12.1 million through September 30, 1999. Employee stock-based compensation expense is amortized over the vesting period of the options, which is generally four years, using the multiple-option approach. We expect to record additional unearned stock-based compensation of approximately $503,000 for stock options granted in October and November 1999. We expect to record employee stock-based compensation expenses of approximately $1.6 million for the quarter ending December 31, 1999, $1.5 million for the quarter ending March 31, 2000 and $1.5 million for the quarter ending June 30, 2000. We anticipate this expense to decrease in future periods. Unearned stock-based compensation expense will be reduced in future periods to the extent that options are terminated prior to full vesting. Interest Income (Expense), Net Interest income (expense), net consists of interest earned on cash and short-term investments, offset by interest expense related to bank borrowings and other financing lines. Interest income (expense), net was $2,000 for the nine months ended September 30, 1998 and $276,000 for the nine months ended September 30, 1999. The increase in interest income was due to higher average cash balances from additional sales of preferred stock completed in the first three quarters of 1999. Other Income Other income consists of the proceeds we received when we transitioned our remaining web development service obligations to a third-party, which was completed in the third quarter of 1998. 32 Years Ended December 31, 1996, 1997 and 1998 Net Revenues We had no merchandise revenue for the years ended December 31, 1996 and 1997, and merchandise revenue of $195,000 for the year ended December 31, 1998. Our merchandise revenue resulted from customer transactions on our fogdog.com web site. In November 1998, we began taking title to our own merchandise and bearing the credit risk on an increasing number of transactions. Our merchandise revenue increased due to an increase in the number of merchandise transactions processed on our web site. Revenue from merchandise shipped outside the United States was approximately 6% of total merchandise revenue for the year ended December 31, 1998. We had no commission revenue for the year ended December 31, 1996. Commission revenue was $11,000 and $123,000 for the years ended December 31, 1997 and 1998, respectively. This increase in commission revenue was due to an increased number of commission transactions processed on our web site. Web development revenue was $677,000, $1.0 million and $447,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in web development revenue from 1996 to 1997 was due to an increase in the number of development contracts that we signed. The decrease in web development revenue from 1997 to 1998 occurred as we shifted our focus from being a web development services provider to an online retailer. Cost of Revenues We had no cost of merchandise revenue for the years ended December 31, 1996 and 1997, and cost of merchandise revenue was $157,000 or 81% of merchandise revenue for the year ended December 31, 1998. We began to incur cost of merchandise revenue as we began to take title to the merchandise and bear the credit risk prior to delivery to the customer. Cost of commission revenue consists of the value of services rendered and fees paid to trade associations. We had no cost of commission revenue for the years ended December 31, 1996 and 1997, and cost of commission revenue was $19,000 or 15% of commission revenue for the year ended December 31, 1998. We had no commission revenue in 1996. We had no cost of commission revenue for 1997 because all commission revenue in 1997 was derived from third-party web sites for which we incurred no verification fees. Cost of web development revenue was $90,000, $156,000 and $99,000 for the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of web development revenue, cost of web development revenue was 13%, 15% and 22% for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in the cost of web development revenue in dollars and as a percentage of web development revenue from 1996 to 1997 was attributable to an increase in our hosting and maintenance activity for which we incurred initial start-up costs. The decrease in the cost of web development revenue in dollars and as a percentage of web development revenue from 1997 to 1998 was due to a reduction of our hosting and maintenance activity as we shifted our focus from being a web development services provider to an online retailer. Gross Profit Gross profit was $587,000, $885,000 and $490,000 for the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of total net revenues, gross profit was 87%, 85% and 64% for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in gross profit from 1996 to 1997 was due to an increase in web development revenue. The decrease in gross profit in dollars and as a percentage of total net revenues from 1997 to 1998 was due to the shift in our revenue from web development to the sale of merchandise. Marketing and Sales Expenses Marketing and sales expenses were $686,000, $1.3 million and $2.4 million for the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of net revenues, marketing and sales expenses were 101%, 123% and 314% for the years ended December 31, 1996, 1997 and 1998, respectively. 33 The increase in dollars and as a percentage of net revenues from 1996 to 1997 was attributable to an increase in personnel and related costs required to implement our sales and marketing strategy. The increase in marketing and sales expenses in dollars and as a percentage of net revenues from 1997 to 1998 was attributable to an increase in advertising and merchandising, customer service, distribution, and marketing personnel and related costs. Site Development Expenses Site development expenses were $119,000, $259,000 and $1.3 million for the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of net revenues, site development expenses were 18%, 25% and 172% for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in site development expenses in dollars and as a percentage of net revenues from 1996 to 1997 was due to the introduction and enhancement of the SportSite.com web site and subsequent enhancements. The increase in dollars and as a percentage of net revenues from 1997 to 1998 was due to the introduction and enhancement of our fogdog.com web site and the development of technologies for integrating with our suppliers. General and Administrative Expenses General and administrative expenses were $248,000, $378,000 and $705,000 for the years ended December 31, 1996, 1997 and 1998, respectively. As a percentage of net revenues, general and administrative expenses were 37%, 36% and 92% for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in general and administrative expenses in dollars and as a percentage of net revenues was due to increased personnel and related costs to support the implementation of our business strategy. Amortization of Stock-Based Compensation In connection with the grant of employee stock options, we recorded aggregate unearned stock-based compensation of $1.2 million for the year ended December 31, 1998 which is being amortized over a four-year vesting period using the multiple-option approach. Interest Income (Expense), Net Interest income (expense), net was $(3,000), $(8,000) and $29,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The increase in interest income (expense), net was due to higher average cash balances from additional sales of securities completed in the second quarter of 1998. Other Income Other income consists of the proceeds we received when we transitioned our remaining web development service obligations to a third-party, which was completed in the third quarter of 1998. Provision for Income Taxes We have incurred operating losses for all periods from inception through June 30, 1999, and therefore have not recorded a provision for income taxes. Our deferred tax asset primarily consists of net operating loss carryforwards and nondeductible accruals and allowances. We have recorded a valuation allowance for the full amount of our net deferred tax assets, as the future realization of the tax benefit is not currently likely. As of December 31, 1998, we had net operating loss carryforwards for federal and state tax purposes of approximately $4.3 million and $4.7 million, respectively. These federal and state tax loss carryforwards are available to reduce future taxable income and expire at various dates into the year 2019. We expect that the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income will be limited by "change in ownership" provisions of the Internal Revenue Code. This annual limitation may result in the expiration of net operating loss carryforwards before their utilization. 34 Quarterly Results of Operations and Seasonality The following tables set forth a summary of our unaudited quarterly operating results for each of the seven quarters in the period ended September 30, 1999. This information has been derived from our unaudited financial statements which, in management's opinion, have been prepared on a basis consistent with the audited financial statements contained elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this information when read in conjunction with our audited financial statements and related notes. The amount and timing of our operating expenses generally will vary from quarter to quarter depending on our level of actual and anticipated business activities. Our revenue and operating results are difficult to forecast and will fluctuate, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance.
Quarter Ended ------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1998 1998 1998 1998 1999 1999 1999 -------- -------- --------- -------- -------- -------- --------- Statement of Operations Data: (in thousands) Net revenues: Merchandise............... $ -- $ -- $ -- $ 195 $ 318 $ 731 $ 1,493 Commission................ 11 26 32 54 35 -- -- Web development........... 206 122 119 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Total net revenues...... 217 148 151 249 353 731 1,493 ------ ------ ------ -------- -------- -------- ------- Cost of revenues: Merchandise............... -- -- -- 157 232 589 1,249 Commission................ -- -- 12 7 -- -- -- Web development........... 62 25 12 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Total cost of revenues.. 62 25 24 164 232 589 1,249 ------ ------ ------ -------- -------- -------- ------- Gross profit................ 155 123 127 85 121 142 244 ------ ------ ------ -------- -------- -------- ------- Operating expenses: Marketing and sales....... 192 257 548 1,402 1,536 2,809 6,462 Site development.......... 185 224 328 581 482 726 997 General and administrative........... 131 158 168 248 304 448 429 Amortization of intangible assets .................. -- -- -- -- 12 12 120 Amortization of stock- based compensation....... -- 23 102 118 331 409 842 ------ ------ ------ -------- -------- -------- ------- Total operating expenses............... 508 662 1,146 2,349 2,665 4,404 8,850 ------ ------ ------ -------- -------- -------- ------- Operating loss.............. (353) (539) (1,019) (2,264) (2,544) (4,262) (8,606) ------ ------ ------ -------- -------- -------- ------- Interest income (expense), net........................ (11) (13) 26 27 22 136 118 Other income................ -- -- 26 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Net loss.................... $(364) $(552) $(967) $(2,237) $(2,522) $(4,126) $(8,488) ====== ====== ====== ======== ======== ======== ======= As a Percentage of Total Net Revenues: Net revenues: Merchandise............... --% --% --% 78% 90% 100% 100% Commission................ 5 18 21 22 10 -- -- Web development........... 95 82 79 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Total net revenues...... 100 100 100 100 100 100 100 ------ ------ ------ -------- -------- -------- ------- Cost of revenues: Merchandise............... -- -- -- 63 66 81 84 Commission................ -- -- 8 3 -- -- -- Web development........... 29 17 8 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Total cost of revenues.. 29 17 16 66 66 81 84 ------ ------ ------ -------- -------- -------- ------- Gross profit................ 71 83 84 34 34 19 16 ------ ------ ------ -------- -------- -------- ------- Operating expenses: Marketing and sales....... 89 173 363 563 435 384 433 Site development.......... 85 151 217 233 137 99 67 General and administrative........... 60 107 110 100 86 61 29 Amortization of intangible assets................... -- -- -- -- 3 2 8 Amortization of stock- based compensation....... -- 16 68 47 94 56 56 ------ ------ ------ -------- -------- -------- ------- Total operating expenses............... 234 447 759 943 755 602 593 ------ ------ ------ -------- -------- -------- ------- Operating loss.............. (163) (364) (675) (909) (721) (583) (576) ------ ------ ------ -------- -------- -------- ------- Interest income (expense), net........................ (5) (9) 17 11 6 19 8 Other income................ -- -- 17 -- -- -- -- ------ ------ ------ -------- -------- -------- ------- Net loss.................... (168)% (373)% (640)% (898)% (715)% (564)% (569)% ====== ====== ====== ======== ======== ======== =======
35 Commencing with the launch of our fogdog.com web site in November 1998, our merchandise revenue has increased during each quarter. These increases resulted from growth in the number of customers and products available for sale on our web site. Cost of merchandise revenue increased from the fourth quarter of 1998 through the third quarter of 1999 as we increased merchandise sales. Our cost of merchandise revenue as a percentage of net revenues increased from the fourth quarter of 1998 to the first through third quarters of 1999 due to increased shipping and handling costs. Marketing and sales expenses increased each quarter from the first quarter of 1998 through the third quarter of 1999 as we began online and offline advertising and as we launched the fogdog.com web site in the fourth quarter of 1998. We also increased personnel and related expenses required to implement our marketing and sales strategy. Site development expenses increased each quarter from the first quarter of 1998 through the fourth quarter of 1998 as we began enhancing our web site to accommodate the increased transaction volume and product offerings for the holiday season. After completion of the launch of our fogdog.com web site in the fourth quarter of 1998, site development expenses decreased from the fourth quarter of 1998 to the first quarter of 1999 as we did not have any launch related expenses. Site development expenses increased from the first quarter of 1999 through the third quarter of 1999 as we increased spending on design and content to develop additional specialty shops. General and administrative expenses increased each quarter from the first quarter of 1998 through the third quarter of 1999 as we increased personnel and related expenses to support our new business strategy. We expect our business to be highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter. We believe that a substantial portion of our annual sales will occur in the fourth quarter. We expect to experience lower sales during the other quarters, and as is typical in the retail industry, have incurred and may continue to incur greater losses in these quarters. See "Risk Factors--Seasonal fluctuations in the sales of sporting goods could cause wide fluctuations in our quarterly results." Results of Operations--Sports Universe We acquired Sports Universe, Inc. in September 1999. Since its inception in February 1998, Sports Universe has incurred operating losses. During the six months ended June 30, 1999, Sports Universe recorded revenue of approximately $262,000 from the sale of merchandise on its web site and from web design services, and incurred a net loss of $63,000. During the six months ended June 30, 1999, Sports Universe incurred total operating expenses of approximately $170,000, which consisted primarily of personnel and related costs for marketing, sales and administrative staff. At June 30, 1999, Sports Universe had negative working capital of $571,000 and an accumulated deficit of $549,000. Liquidity and Capital Resources Since inception, we have financed our operations primarily from private sales of convertible preferred stock totaling $38.8 million and, to a lesser extent, from bank borrowings and lease financing. Our operating activities used cash of $399,000 during 1996, $915,000 during 1997, $3.0 million during 1998 and $11.8 million during the first nine months of 1999. This negative operating cash flow resulted primarily from our net losses experienced during these periods. In 1998 and 1999, we invested in the development of our brand and online store, hired additional personnel and expanded our technology infrastructure to support our growth. Our investing activities, consisting of purchases of furniture, fixtures and computer equipment to support our growing number of employees, used cash of $137,000 during 1996, $81,000 during 1997, $692,000 during 1998 and $970,000 during the first nine months of 1999. 36 Our financing activities generated cash of $971,000 during 1996, $836,000 during 1997, $5.0 million during 1998 and $32.9 million during the first nine months of 1999. Of these financing activities, the issuance of convertible preferred stock generated net proceeds of $945,000 during 1996, $528,000 during 1997, $4.5 million during 1998 and $32.5 million for the nine months ended September 30, 1999. We also had proceeds from bank borrowings of $452,000 in 1998. At September 30, 1999, we had cash and cash equivalents and short-term investments aggregating $21.9 million. Our short-term investments secure a letter of credit issued in connection with the lease of our corporate offices. We have an agreement with a bank, which provides us with the ability to borrow up to $1.0 million, subject to specified limitations. The agreement provides for the following: . an equipment loan for $800,000, payable in 24 equal installments commencing October 15, 1999, limited to 75% of the invoice amount of the equipment; and . an equipment term loan for $150,000 payable in 24 equal installments commencing January 28, 1999. We had an outstanding aggregate balance at September 30, 1999 of $877,000. Interest on the borrowings range from the prime rate plus one-half percent to the prime rate plus one percent and is payable monthly. We must meet financial covenants with respect to the borrowings, which we were in compliance with at September 30, 1999. We also have an agreement with a software company to purchase software under a one-year loan agreement which bears interest at 7.5%. The principal and interest is payable in 12 equal monthly installments beginning in October 1998. We had an outstanding balance at September 30, 1999 of $19,000. During 1999, we entered into a number of commitments for online and traditional offline advertising. As of September 30, 1999, our remaining commitments were approximately $4.0 million. In addition, we have remaining commitments under the lease for our headquarters of $4.8 million. We expect to devote substantial resources to continue development of our brand and online store, expand our sales, support, marketing and engineering organizations, establish additional facilities worldwide and build the systems necessary to support our growth. Although we believe that the proceeds of this offering, together with our current cash and cash equivalents and our borrowing capacity, will be sufficient to fund our activities for at least the next 12 months, there can be no assurance that we will not require additional financing within this time frame or that additional funding, if needed, will be available on terms acceptable to us or at all. In addition, although there are no present understandings, commitments or agreements with respect to any acquisition of other businesses, products or technologies, we may, from time to time, evaluate potential acquisitions of other businesses, products and technologies. In order to consummate potential acquisitions, we may issue additional securities or need additional equity or debt financing and these financings may be dilutive to existing investors. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirements to capitalize specified costs and amortization of such costs. The adoption of the provisions of SOP 98-1 during our fiscal year beginning January 1, 1999 did not have a material effect on our financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 37 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for other hedging activities. SFAS 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 1999. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 deferred the effective date until the first fiscal quarter ending June 30, 2000. We will adopt SFAS 133 in our quarter ending June 30, 2000. We do not currently engage in hedging activities or invest in derivative instruments. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. In the second quarter of 1999, we initiated a Year 2000 compliance program. The program is being directed by our information technology group. Our IT group is charged with identifying issues of potential risk within each department and making the appropriate evaluation, modification, upgrade or replacement. Members of our IT group have worked with members of each of our principal internal divisions in the course of assessing our Year 2000 compliance. Scope of Year 2000 Assessment The scope of our Year 2000 compliance program included testing our web site and the IT and non-IT systems used in our business at our headquarters and at our third-party warehouses. The operational areas that we investigated include: . software applications; . facilities; . suppliers and vendors, including distributors; and . computer systems. We do not currently have information concerning the Year 2000 compliance status of all of our vendors and distributors. If our suppliers, distributors and manufacturers fail to achieve Year 2000 compliance, our business could suffer. Budget and Schedule We have funded our Year 2000 plan from available cash and have not separately accounted for these expenses in the past. As a result of our short operating history, we believe that most of our third-party systems were purchased in Year 2000 compliant condition. To date, expenditures for Year 2000 compliance have not been material and have totaled less than $150,000. Most of our expenses have related to, and are expected to continue to relate to, the operating costs associated with time spent by employees in the evaluation process and Year 2000 compliance matters generally. We expect to incur no more than an additional $100,000 to verify that our IT and non-IT systems are capable of properly distinguishing between 20th century and 21st century dates. However, we may experience unanticipated, material problems and expenses associated with Year 2000 compliance that could harm our business. Finally, we are also subject to external forces that might generally affect industry and commerce, such as Year 2000 compliance failures by utility or transportation companies and related service interruptions. 38 We have not yet completed the evaluation of our web site and our third-party software systems. We are in the process of obtaining Year 2000 assurances from our principal third-party hardware vendors and service providers, and installing Year 2000 "patch kits", where appropriate. We anticipate concluding these activities by the end of November 1999. Internal Third-Party Hardware and Software Systems and Services We have evaluated all of our material internal third-party hardware and software systems we use on our web site and in our business. We have received written assurances of Year 2000 compliance from substantially all of the providers of hardware used in our business. We have identified approximately 20 different software vendors that provide software products for our web site and in our business. We have received adequate assurances of Year 2000 compliance from substantially all of our software vendors. We had determined that our server software was not Year 2000 compliant, but we upgraded it to a Year 2000 compliant version. If any of the assurances we have received from our third- party software or hardware providers are false, our internal systems and our ability to ship our product would be materially harmed. We have also obtained assurances as to Year 2000 compliance from our hosting service provider and we are in the process of obtaining written assurances from our other third-party service providers. We expect to receive assurances from such entities without additional expenditures by us. We have made written inquiry of all of our current vendors and distributors and approximately two-thirds of these entities responded to our request. Of those entities all but one vendor and one fulfillment partner have provided us with written assurances as to Year 2000 compliance. We are working with the remaining vendor, an equipment supplier in one of our sports categories, and fulfillment partner to assess how their possible failure to be Year 2000 compliant will affect our business. We are attempting to obtain Year 2000 compliance assurance from the vendors and distributors that did not respond to our request. We cannot assure you that we will obtain Year 2000 assurances from these entities, and if they do not upgrade their systems for Year 2000 compliance, our ability to ship products would be materially impaired. Contingency Plan We substantially completed our compliance program in November 1999. However, we will continue to engage in testing and re-testing of non-compliant areas and develop a back up plan which we would expect to complete in December 1999. We may discover Year 2000 compliance problems in our systems that will require substantial revision. In addition, third-party software, hardware or services incorporated into our business or used in our web site may need to be revised or replaced, all of which could be time-consuming and expensive and result in the following, any of which could adversely affect our business: . delay or loss of revenue; . diversion of development and information technology resources; . damage to our reputation; and . litigation costs. Our failure to fix or replace our third-party software, hardware or services on a timely basis could result in lost revenues, increased operating costs, the loss of customers and other business interruptions. Quantitative and Qualitative Disclosure About Market Risk We currently market our merchandise in the United States and anticipate expanding our marketing efforts in Europe in late 1999 and throughout 2000. As a result, our financial results could be affected by factors 39 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. 40 BUSINESS Fogdog Sports is a leading online retailer of sporting goods. We have designed fogdog.com, our online store, to offer an extensive product selection, detailed product information and other value-added services. We believe that we offer the largest selection of sporting goods online, with up to 60,000 distinct stock keeping units representing more than 500 brands in all major sports categories. According to Media Metrix, Inc., our web site received more visits during September 1999 than any other online retailer focusing exclusively on sporting goods. Fogdog.com features a collection of specialty shops, including soccer, baseball, golf, outdoors, fan/memorabilia and other popular categories, organized to appeal to a broad base of customers from the avid enthusiast to the occasional participant. We provide information and analysis authored by our own experts, helpful shopping services, innovative merchandising and an emphasis on customer service to help customers make more educated purchasing decisions. We offer customers the convenience and flexibility of shopping 24 hours a day, seven days a week, which makes fogdog.com the "anytime, anywhere, sports store." We intend to establish Fogdog as the first global brand for retail sporting goods, and in the process build consumer trust, confidence and loyalty. Industry Overview Electronic Commerce. The Internet is an increasingly significant medium for communication, information exchange and commerce. Forrester Research estimates that online purchases by U.S. consumers will grow from approximately $20 billion in 1999 to $184 billion by 2004, representing a compound annual growth rate of 56%. International Data Corporation estimates that the number of total online purchasers will grow from approximately 31 million in 1998 to 183 million in 2003, representing a compound annual growth rate of 43%. Forrester Research projects that U.S. consumers will purchase $4.2 billion of sporting goods online in 2004. We believe that growth in Internet usage is being fueled primarily by easier and cheaper access to the Internet and improvements in network security, infrastructure and bandwidth. We believe that these trends are also helping to fuel the growth and consumer acceptance of online commerce. The Internet provides a number of advantages for online retailers. Because online retailers are not constrained by shelf space or catalog page limitations, they are able to "display" a larger number of products at a lower cost than traditional store-based or catalog retailers. In addition, online retailers can more easily and frequently adjust their featured selections, editorial content and pricing, providing significant merchandising flexibility. Online retailers also benefit from the ability to reach a large group of customers from a central location, and the potential for low-cost customer interaction. Unlike traditional retail channels, online retailers do not have the burdensome costs of managing and maintaining a retail store infrastructure or the significant printing and mailing costs of catalogs. Online retailers also can more easily obtain demographic and behavioral data about customers, increasing their opportunities for targeted marketing and personalized services. Traditional Sporting Goods Industry. We believe that the sporting goods industry, which includes apparel, equipment and athletic footwear, is large and growing. According to the Sports Business Research Network, total U.S. retail sales of sporting goods were approximately $77 billion in 1998 and have grown at a 6.8% compound annual rate since 1994. Additionally, according to Sports Trend, a trade publication, in 1998 the top five U.S.-based sporting goods specialty retailers, excluding mass merchandisers, accounted for only $6.6 billion of total industry sales, demonstrating the highly fragmented nature of the sporting goods retail market. According to the Sporting Goods Manufacturers Association, the number of people who actively participate in sports, fitness and outdoor activities grew 19% from 68.5 million in 1987 to 81.6 million in 1996. We believe that the sporting goods industry will continue to benefit from the continued growth in participation and interest in sports, recreation, health, fitness and outdoor activities. Limitations of the Traditional Sporting Goods Retail Channel. The traditional sporting goods retail channel is fragmented, including mass merchant retailers and discount stores, regional or national chain stores, local specialty shops and mail order catalogers. Mass merchant retailers and discount stores often offer 41 attractive pricing. However, they typically offer only a limited selection of each brand's products and lack trained, knowledgeable sales people. Local and regional chain stores often have a broader line of branded products, but lack extensive product knowledge at the individual store level. Specialty stores such as golf and ski shops may offer better customer service, but with higher prices and a narrower selection. Mail order catalogers typically focus on one sport category, and are limited by catalog space constraints in offering either extensive selection or in-depth product information. As a result of these factors, we believe that the traditional retail channel for sporting goods fails to satisfy fully consumers' desire for selection, product information, expert advice, personalized service and convenience. We believe that, in addition to failing to fully satisfy the needs of the customer, the traditional sporting goods retail channel presents significant limitations for manufacturers. Traditional sporting goods retailers often do not provide manufacturers global distribution or proper and consistent brand merchandising and allow discounts below minimum advertised price policy. In addition, traditional sporting goods retailers cannot offer manufacturers unlimited shelf space, full product line presentation with high-quality product information and extensive customer service with knowledgeable salespersons. Similarly, traditional retailers offer manufacturers limited flexibility in how a product is sold and presented directly to the consumer. Taken together, we believe that these factors serve to make the traditional retail sporting goods experience inefficient and inconvenient for both customers and manufacturers. The Fogdog Sports Solution We have designed our online store to offer an extensive product selection, detailed product information and other value-added services to address the limitations of the traditional sporting goods retail channel for customers and manufacturers. With up to 60,000 distinct stock keeping units representing more than 500 brands, we believe we offer a broader product selection and more sporting goods categories than many of the largest, brick and mortar retailers. Our online store is designed to provide customers with a convenient and enjoyable shopping experience through a collection of specialty shops for popular sporting goods categories. Our exclusive focus on sporting goods and commitment to excellent customer service enable us to effectively address the needs and desires of our customers. In order to further deploy our solution, we have entered into a strategic relationship with Nike which will allow us to offer Nike's generally available product lines, present product information and give us advance availability of mutually agreed upon, newly released Nike products. The key components of our solution include: Specialty Shops Featuring Extensive Product Selection. We offer a broad range of product lines in a wide variety of sports in order to make Fogdog Sports a "one-stop-shop." Most of our products, representing 30 different sports, are featured in fourteen specialty shops and five brand concept shops. This presentation gives manufacturers an opportunity to merchandise their entire product lines and maintain brand identity and pricing. Our specialty shops feature soccer, outdoor, baseball, golf, tennis and racquet sports, football, hockey, fan/memorabilia and other categories and provide useful information and expert advice to help customers make product selections. Each shop offers equipment, apparel and accessories designed to appeal to avid enthusiasts and occasional participants. For example, our soccer shop features soccer cleats, protective equipment, balls, uniforms, shorts, tops, cross training shoes, pants, tights, warm-ups, athletic tape, socks, equipment bags and other goods. Because we believe that our customers tend to participate in several sports, a positive shopping experience in one specialty shop may encourage shopping in our other specialty shops. Value-Added Shopping Services. We offer helpful services to assist our customers with their purchasing decisions, including: . Detailed Product Information, Guides and Comparison Charts. Fogdog.com features extensive information on products, including product descriptions, high-quality product pictures, technical specifications and the intended product use descriptions. Our web site's technology allows the user to zoom in on selected products to view construction, materials and other product details. We recently added our "360 Info Spin" feature to our web site, allowing consumers to zoom in on and spin a product image to better understand its features and benefits. To further aid consumers in finding the 42 right product for their specific needs, our staff of experts writes product guides which incorporate manufacturers' data and are intended to help consumers learn about various product features, sizing and fit information and other relevant information to know before purchasing. Our experts research the products and summarize the information in easy- to-read comparison charts. . Brand Concept Shops. In addition to our specialty shops, we offer brand shops devoted exclusively to selected high-end brands for customers loyal to a particular brand. Created in conjunction with top brand manufacturers, such as Callaway and Moving Comfort, these shops surround the customer with in-depth information, broad selection and the "look and feel" consistent with the manufacturers' product merchandising. These shops are accessible from our home page and from our specialty shops. . Advice and Product Recommendations by Recognized Sports Experts. We offer information to help customers select the right product for their sports needs. We have a staff of world-class athletes, notable equipment experts and recognized sports journalists who write product articles for the site, respond to customer emails, answer customer service questions and recommend products as "Fogdog Picks," chosen for their features and value. We also host bulletin board sessions in which our expert staff shares ideas with visitors to our web site. . Consumer Reviews. To further enhance the site experience and to increase involvement in our online sporting community, we encourage customers to offer their personal reviews of any product available on the site. Our customers review products on a five-star rating scale. We moderate the reviews for appropriate language and user authenticity. To encourage reviews, recent shoppers at fogdog.com receive a follow-up email generally within three weeks after their purchase, which inquires about the overall shopping experience and asks the customer to submit a review of the purchased products. This email also serves as an opportunity for cross selling of additional related products. . My Fogdog. To provide a more personalized shopping experience, we have developed an environment for registered users of the site known as "My Fogdog." Every registered user of fogdog.com is greeted by name on the home page and is offered a link into a customized area focusing on the individual's product interests and buying history. This area includes merchandised items that are specific to that individual's interests, targeted promotions and links to our online order history and tracking system which enables customers to check order status and reorder more easily. Registered My Fogdog users are able to receive product offers that are relevant to their sports preferences, check-out faster with "Express Shopper" which stores shipping and credit card information, gain access to special items and promotions and reorder items easily. Convenient Shopping Experience. Our online store provides customers with an easy-to-use web site. Fogdog.com is available 24 hours a day, seven days a week and may be reached from the shopper's home or office. Our online store enables us to deliver a broad selection of products to customers who do not have convenient access to physical stores. Our "Power Search" technology allows customers to locate products more efficiently based on user-defined criteria such as shoe size, gender, product category and manufacturer. Commitment to Excellent Customer Service. We emphasize customer service during all phases of the customer's online shopping experience. Our staff includes sports consultants who are hired for their broad knowledge of athletics, sports products and training to assist customers in their purchasing decisions. To ensure that our staff receives ongoing information on product features and functionality, we offer training sessions sponsored by key manufacturers. Our consultants, together with our in-house staff, provide free pre- and post-sales support via both email and toll-free telephone service during extended business hours. Once a customer places an order, that customer can view order-tracking information on our web site or contact our customer service department to obtain the status of the order and, when necessary, resolve order and product questions. Furthermore, our web site contains extensive information for first-time and repeat visitors, including helpful hints in searching for, selecting, ordering and returning our products. If the purchased product does not satisfy the customer, we offer an unconditional, 45-day money-back return policy. If customers are unable to find a product, they can submit a form asking the "Fogdog Search Squad" to find it for them. The Fogdog Search 43 Squad are members of our customer service staff who locate and ship hard-to- find products for customers. This service addresses our customers' desire for a single trusted source for sporting goods. Network of Fulfillment Partners. We believe the Fogdog Sports solution simplifies the order fulfillment process in the complex and highly fragmented sporting goods industry. We have developed proprietary technologies and implemented a fulfillment system that utilizes two third-party warehouses, distributors, converted catalogers and direct shipping from select manufacturers to support and secure reliable online retailing. We believe that our distribution network provides us with competitive advantages in offering our customers and partners an efficient and cost-effective order fulfillment solution. The use of this network is transparent to the customer and allows us to effectively manage the distribution process and deliver products to the customer in Fogdog Sports packaging. Growth Strategy The Fogdog Sports vision is to reinvent the sporting goods industry by providing customers with a new value proposition of selection, information and service. Our goal is to be the world's leading sporting goods retailer. Key elements of our growth strategy are to: Build Brand Recognition. We intend to establish the Fogdog brand as the first global brand for retail sporting goods and in the process build consumer trust, confidence and loyalty. We believe that through a compelling shopping experience and aggressive advertising and promotional activities, we can continue to build awareness for Fogdog. We are targeting a broad base of customers who are passionate about their sports, from the avid enthusiast to the occasional participant. A compelling site experience reinforces the brand promise that fogdog.com is the "ultimate sports store" and "your anytime, anywhere sports store." We use a combination of traditional and online marketing strategies to maximize our brand recognition: . Television, Radio, Print and Outdoor Advertising. We intend to continue to use a mix of traditional media to build awareness for the Fogdog brand, relying primarily on cable and broadcast TV. We plan to focus our TV advertising on high-profile, national cable and broadcast television networks to associate Fogdog Sports with the active sporting lifestyle. In addition, we intend to continue to use radio, print and outdoor advertising to reach potential customers, particularly in markets with high Internet use. . Online Advertising. We intend to continue to establish relationships with major online services and Internet shopping portals to target active online sporting goods shoppers. For example, we have entered into a marketing agreement with America Online, and we also have agreements with WebTV Networks, Inc., GO Network, Snap.com and Women.com for prominent positioning in their online shopping areas. We advertise on these sites as well as sites of other major online portals, including Excite, HotBot and MSN.com. We also advertise on Yahoo! with over 8,000 Fogdog products available through the Yahoo! shopping area. We intend to continue to maintain high visibility on major web sites and portals. . Affiliate Network. We have agreements with numerous web sites which we refer to as "affiliates." 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. We have a program of sponsoring high profile, local sporting events, such as the Hi-Tec Adventure Racing Series and the Escape from Alcatraz Triathlon. We intend to continue to expand our sponsorship programs in order to build credibility with and recognition by athletes. Promote Repeat Purchases. We are focused on promoting customer loyalty and building relationships with our customers to drive repeat sales. To accomplish this strategy, we strive to provide quality customer service seven days per week, ship products promptly and for a low cost and provide an easy-to-shop online retail environment. We also employ technology which targets returning customers and makes specific offers to 44 them based on the customers' purchase history, sports preferences and shopping behavior. We intend to continue to build features that will enhance loyalty, provide offerings unique to each individual customer and continually strive to enhance our customer service. In addition, we intend to expand our direct, online marketing by delivering meaningful information and special offers to our customers. Expand Specialty Shops. We have created a collection of specialty shops within our online store, and we intend to provide additional shops organized by sport or brand. We anticipate adding five to ten of these specialty shops during the next twelve months. We design these shops to be destination sites for sports enthusiasts by including top branded products, extensive product information and superior customer service. We intend to further enhance our specialty shops by offering the best of a traditional offline specialty shop in service and information along with the best product selection for all sports across top brands. Maximize Product Selection and Fulfillment Capabilities. We intend to employ a three-part strategy so that we can sell and deliver the broadest possible array of top branded products to our customers. We believe that our focus on product availability and use of multiple fulfillment partners and channels will enable us to increase our margins while serving a rapidly expanding customer base. Our strategy is to: . Expand Fulfillment Network. We plan to augment our network of partners that manage inventory, shipping, warehousing and general purchasing, as well as our relationships with manufacturers that ship directly to customers. We believe the strength of our fulfillment network provides a competitive advantage by increasing product availability without exposing us to all of the inventory risk of a traditional retailer. . Extend Brand Relationships. We currently buy products directly from numerous sporting goods manufacturers with well-known consumer brands. We intend to continue to develop relationships with top brand manufacturers to secure the highest level of premium product inventory available. We also plan to continuously improve our relationships and the efficiency of our interactions with these key vendors by incorporating brand and product information into our site, and by featuring certain brands within brand concept shops. Our strategic relationship with Nike will give us access to all Nike brands including Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports. . Augment Distribution Technology and Expertise. We have developed a broad range of technologies to integrate our web site and other systems directly with the systems of our fulfillment partners. We plan to leverage and expand our technical expertise to increase this integration. We also have built and will continue to enhance a team devoted to executing our warehousing, inventory management, buying and merchandising activities to ensure superior product selection. Enhance and Form Strategic Relationships. We have agreements with Nike, America Online and Keystone Fulfillment. We intend to leverage our agreements in order to provide us with competitive advantages in merchandising, marketing and distributing our products. For example, we believe our agreement with Nike will allow us to offer the broadest possible product selection of the leading sporting goods brand. Under the agreement, we will have access to Nike's generally available product lines and advance product availability for mutually agreed upon, newly released products. In addition, we intend to leverage our agreements with major online services and Internet shopping portals such as AOL to provide us with key positioning in online sporting goods shopping areas. We intend to augment our distribution capabilities through agreements with third parties, such as our agreement with Keystone Fulfillment, which provides outsourced inventory management, warehousing and shipping services. We intend to continue to pursue similar arrangements, which may include written agreements, partnerships or other arrangements that allow us to further develop our business. Expand Internationally. Although to date we have focused on the United States, we believe that growth in sales of sporting goods outside of the United States will represent additional market opportunities for us. To take advantage of these opportunities, we intend to replicate our business model and build our brand name in selected international markets with appropriate demographics and market characteristics. For example, we have opened an office in London to serve as a launching point for our European operations. 45 The Fogdog Sports Store We designed our online retail store to be a destination site for sports enthusiasts from the avid enthusiast to the occasional participant. We believe our online store is well organized, attractive and easy to use, and offers customers an enjoyable shopping experience. The look and feel of our web site is action-oriented, and navigation is user-friendly and consistent throughout. All of our product pages are "three clicks" from our home page, allowing customers to find and purchase products easily. A consumer shopping on our web site can, in addition to ordering products, browse the different specialty shops, conduct targeted searches by product or brand, view recommended products, participate in promotions and check order status. Specialty Shops We categorize many of our products into different specialty shops, including soccer, baseball, golf, outdoor, and others. Within each shop, products are organized by brand, such as Nike and Callaway, by department, such as footwear, apparel and equipment, and by our recommendations, which we call "bestsellers" and "Fogdog Picks." Each shop has helpful product information and many feature tips from a site expert with extensive knowledge about the right gear for specific sports. The following is a summary of our largest specialty shops: Soccer. We offer an extensive selection of soccer footwear, apparel, and equipment, with key brands such as adidas, Kappa, Nike, Puma and Umbro. Our soccer shop includes a Power Search feature, which allows customers to search all soccer products for available in-stock merchandise in their size. Our on- site expert provides advice on soccer cleat selection and evaluates equipment. The soccer shop features a technology report with information on the way different manufacturers design their cleats, along with a special section on "What the Pros Wear," where customers can click directly to purchase products worn by professional athletes. Outdoor. The outdoor shop features an extensive selection of products for hiking, climbing, mountaineering and other outdoor activities from manufacturers such as Hi-Tec, Kelty, Nike ACG, The North Face and Sierra Designs. Our outdoor shop expert provides helpful information in areas such as camping and back packing, as well as detailed product reviews. We also feature a bulletin board service where customers can post questions about products and sports activities. We offer an extensive product information resource online, with comparison charts for items such as backpacks, tents and sleeping bags. Baseball. We believe that we offer the largest selection of baseball equipment available on the Internet. We also provide a comprehensive selection of apparel and footwear, including such key brands as Easton, Louisville Slugger, Mizuno, Nike, Rawlings and Wilson. In our baseball shop, customers can use a bat configurator that takes input on the individual's height, weight and league type and chooses an appropriate selection of product. This shop will have regular equipment reviews by our staff journalists. Golf. The golf shop offers golf equipment, apparel and footwear including brands such as Adams, Callaway, Nike Golf, Orlimar, Spalding and Taylor Made. This shop features a Callaway brand golf shop, with information on how to select Callaway clubs, what they are made of and how they are designed. We worked closely with Callaway to develop the content of this area and the shop offers the entire line of Callaway products. The golf shop also includes an area called "What's in the Bag," which shows what professional golfers carry on the course. Hockey. Our hockey shop features equipment to outfit players of all skill levels from the novice to the expert. We offer products from leading brands such as CCM, Bauer, Jofa and Koho. Snowboard. We believe that our snowboard shop is one of the most complete snowboard stores online today with manufacturers including Santa Cruz, Ride, Switch, Flow and Westbeach. The shop also features expert advice on carving and equipment selection. 46 Tennis & Racquet Sports. The tennis and racquet shop includes a wide selection of tennis equipment, footwear and apparel from top manufacturers such as Head, Penn, Pro Kennex and Wilson. The tennis racquet shop also offers a racquet configurator which gives customers the ability to customize their racquets with their desired grip, string and stringing tension, which generally ship the same day the order is placed. Football. The football shop serves a range of players from the recreational, weekend participant to the serious league player. We offer the merchandise necessary to outfit a player and/or team including pads, helmets, guards and braces, from leading manufacturers such as Bike, Nike, Pony, Rawlings and Wilson. Fan/Memorabilia. Our fan/memorabilia shop is designed to outfit fans with apparel and souvenirs from their favorite teams and players. We help fans of a specific league, player or team find the products that support their teams. The shop includes products licensed from NCAA collegiate athletics, the National Football League, Major League Baseball, the National Basketball Association, the National Hockey League, Major League Soccer and international soccer teams. The shop also carries vintage era replicas and other related sports memorabilia such as autographed photos. Fitness & Health. Our fitness and health shop is an extensive collection of products and content associated with general fitness. Our fitness shop offers Avia, Champion, Fitness Quest, Harbinger, Hind and Moving Comfort. The shop features advice on exercise, apparel selection and nutrition tips. Group Sales. We believe that Fogdog Sports is the first and currently the only online retailer to offer custom uniforms and volume discounts for teams. Our group sales shop enables the team buyer to design custom uniforms and place the entire order online. We feature a large in-stock selection of uniforms, and we are able to ship most orders the same day, with a five to seven day turnaround for custom orders as compared to three to four weeks for most traditional team dealers. Shopping At Our Store Customers navigate our online store through our simple, intuitive and easy- to-use web site. Our goal is to make the shopping process as easy as possible for customers. Users accessing our online store generally fall into two categories: individuals who want to purchase a particular product immediately in a highly convenient manner, and individuals who browse the store, seeking an entertaining and informative shopping experience. We designed our online store to satisfy both types of users in a simple, intuitive fashion. Browsing and Comparing. Our web site offers visitors a variety of highlighted subject areas and special features arranged in a simple, easy-to- use format intended to enhance product search, selection and discovery. By clicking on the permanently displayed specialty shop names, the consumer moves directly to the home page of the desired shop and can quickly view promotions and featured products. On our web site customers can find detailed product information, including expert reviews of a product, how to use the product and how to care for it. Customers can use a quick keyword search or search by brand in order to locate a specific product. They can also execute more sophisticated searches based on pre-selected criteria depending upon the department. In addition, customers can browse our online store by linking to specially designed pages dedicated to products from key national and specialty brands. We provide product information in tabular form across brands and stock keeping units for easy comparison of features and benefits. Customization and Personalization. We use configurators which we call the "Fogdog Fetch" to identify merchandise unique to a customer's sport requirements and interests. We also cross-sell merchandise to customers based on what they have identified as their sport preferences in My Fogdog, what they have added to their shopping basket during the checkout process and what they have purchased. Our Fogdog Power Search tool also enables customers to search for products in some of our shops based on size and brand preferences. Selecting a Product and Checking Out. To purchase products, customers simply click on the "add to basket" button to add products to their virtual shopping cart. Customers can add and subtract products from their shopping cart as they browse around our store prior to making a final purchase decision, just as in a 47 traditional store. Our web site is updated through the direct uploading of supply information from distributors to remove products that are out of stock. To execute orders, customers click on the "checkout" button and, depending upon whether the customer has previously shopped with us, are prompted to supply shipping details online. We also offer customers a variety of shipping options during the checkout process. Prior to finalizing an order by clicking the "submit order" button, customers are shown their total charges along with the various options chosen at which point customers still have the ability to change their order or cancel it entirely. Paying. To pay for orders, a customer must use a gift certificate or credit card, which is authorized during the checkout process, but which is charged when the product is shipped. Our web site uses a security technology that works with the most common Internet browsers. Our system automatically confirms receipt of each order via email within minutes and notifies the customer when the order is shipped, typically within one to two business days for in-stock items. We also offer our customers an unconditional, 45-day money-back return policy. Repeat customers can use an "Express Checkout" feature in which customer data and payment information is automatically entered into our system. Getting Help. From every page of our web site, a customer can click on a "help" button to go to our customer service area. The customer service area of our web site contains extensive information for first-time and repeat visitors. In this area, we assist customers in searching for, shopping for, ordering and returning our products as well as provide information on our low price guarantee, shipping charges and other policies. In addition, we provide customers with answers to the most frequently asked questions and encourage our visitors to send us feedback and suggestions via email. Furthermore, customer service agents are available to answer questions about products and the shopping process during extended business hours via our toll-free number, which is displayed in the customer service area of our web site. Promotional Area. Through our promotional area, which is located on the Fogdog Sports home page, we offer products that tie into recent sporting events or seasonal themes. For example, we offered soccer jerseys and equipment following the Women's World Cup, golf equipment and apparel to tie into the U.S. Open, and backpacks in time for back to school. Customers can also purchase gift certificates from us in any denomination. We keep each customer's gift certificate balance on record on the site. Marketing We have implemented an aggressive advertising and marketing campaign to increase awareness of the Fogdog brand. We plan to acquire new customers through multiple channels, including traditional and online advertising, direct marketing and expansion and strengthening of our strategic relationships. We intend to use a significant portion of the net proceeds from this offering to continue to pursue advertising and marketing campaigns. Our marketing strategy is designed to: . build global brand recognition; . differentiate and build a unique positioning for Fogdog Sports in the marketplace; . increase consumer traffic to our web site; . acquire new customers; . build strong customer loyalty; . emphasize a one-on-one relationship with our customers; . maximize repeat purchases; and . develop additional ways to increase our net sales. Positioning and Branding Strategy. We aggressively seek to brand the Fogdog online experience at every customer touch point, including advertising, promotions, site experience, packaging and delivery. We seek to position Fogdog Sports as the trusted online sports store built for people who "live to play sports" with a selection of top brands, information and expertise. We target a broad range of customers in active lifestyle households. Our primary demographic focus is on active sports participants, male and female. 48 Advertising Mix. To build brand awareness, the primary elements of our marketing mix include cable and network television, broad reach online services, such as AOL, and Web shopping portals. We also employ targeted radio, print and outdoor media campaigns in specific markets during key sporting goods shopping seasons. We believe that through a sustained national TV campaign, we can drive consistent growth in awareness, and reach a broad audience of active sports participants with high-impact creative advertising. Our TV media plan includes advertising during major cable and network sports programming and events. We have also secured agreements with leading shopping portals, with positioning in sporting goods shopping areas. For example, under our agreement with AOL, we are a "Shopping Anchor" in two of the four AOL sports shopping areas. We also have agreements with WebTV, GO Network, Snap.com and Women.com for prominent positioning in their online shopping areas. In addition, we advertise on Yahoo! with over 8,000 Fogdog products available through the Yahoo! shopping area. Under our contracts with Internet portals and online service providers, we typically pay a fixed dollar amount in exchange for placement of an enlarged icon in high traffic areas of their sites. These agreements are generally for a fixed term of one to two years. For example, under our agreement with AOL, we have an "anchor" position providing prominent placement in the camping and outdoor fitness and sports sections of AOL Shopping for the next two years. AOL guarantees a minimum number of user impressions of our material through AOL's online service or AOL.com. Affiliate Network. 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. Promotions, Events and Sponsorships. We sponsor multiple events to build credibility with and recognition by athletes and sports enthusiasts, including the Hi-Tec Adventure Racing Series, an extreme type of triathlon, Let it Fly Football, a football program that has attracted more than 50,000 participants and triathlons such as the recent Escape from Alcatraz triathlon in San Francisco. Promotions on the site, such as a free gym bag with purchase, the chance to win a Volkswagen Jetta loaded with sports gear, and "A Buck Buys It," are designed to encourage consumers to try our service. We have also offered sports-related sweepstakes to win baseball gloves, soccer gear, adventure trips and trips to baseball spring training. Loyalty, Retention and Personalization. We believe that we are building a loyal base of customers through a total shopping experience which emphasizes customer service and marketing incentive programs. For example, we communicate with prospective customers through email campaigns and with customers through follow-up emails. In addition, through My Fogdog, we collect relevant information from registered customers that allow us to market more specifically to each customer's interest. Each registered member of My Fogdog has access to special product offerings, promotions and targeted offers, which we believe helps build loyalty. Distribution Strategy and Operations Our strategy for delivering our products to our customers is to focus on obtaining products through authorized distribution channels while maximizing customer selection and product availability. Inventory available to us is either reserved for our customers, shared with other partners or purchased for our account. Our shared and reserved inventory partners include distributors, manufacturers and catalogers who purchase and inventory products and then make products available for sale on our web site. These partners ship products directly to our customers from these partners using our packaging and shipping materials, so that customers only interact with the Fogdog brand throughout the order and delivery process. Our purchased inventory is held at two third-party distribution centers for processing, packaging and shipment to customers. The shipment of products directly from our distributors, manufacturers and catalogers to our customers reduces the level of inventory we are required to carry. We generally handle merchandise returns ourselves. We are currently evaluating various alternatives to expand the capacity of our distribution system. 49 We use technology to optimize the exchange of information between Fogdog, our third party distribution centers and our distribution partners, so that we can properly set customer expectations about product availability and delivery dates. Our distribution, engineering and logistics teams work with our partners and third-party warehouses to manage and monitor order accuracy, fulfillment rate, shipment speed, and overall delivery reliability and timeliness. We measure performance through daily reports, frequent on-site visits with partners and our warehouses and quarterly reviews. The following diagram illustrates our distribution system: [DIAGRAM OF OUR DISTRIBUTION STRUCTURE SHOWING A BOX LABELED "WWW.FOGDOG.COM," OVER A BOX LABELED "FULFILLER MANAGEMENT SYSTEMS (FMS)" OVER THREE ARROWS, ONE OF WHICH IS LABELED ORDERS AND POINTS DOWN, ONE OF WHICH IS LABELED INVENTORY AND POINTS UP AND ONE OF WHICH IS LABELED ORDER STATUS AND POINTS UP, ALL THREE OF WHICH ARROWS ARE OVER A BOX LABELED FULFILLMENT PARTNERS, WHICH BOX IS OVER FOUR SIDE BY SIDE BOXES LABELED "FOGDOG WAREHOUSE," "DISTRIBUTORS," "DIRECT SHIP" AND "SEARCH SQUAD."] Merchandising Merchandising. Our merchandising strategy is to provide a broad assortment of quality equipment, athletic footwear and apparel at prices that meet those of leading sporting goods retailers. Our web site, particularly in our specialty and brand shops, offers a core selection of brand name merchandise complemented by a selection of accessories and related products designed to enable enthusiasts to have a quality shopping experience. Our leading product category is sporting equipment, followed by apparel and athletic footwear. No single product category accounts for more than 50% of sales. Brand Name Merchandise. We emphasize quality brand name merchandise. We believe that the breadth of our brand name merchandise selection generally exceeds the merchandise selection carried by traditional, store-based competitors. Many of these branded products are technical and our customers benefit from extensive product information and sales assistance. We work with manufacturers to obtain product information and educate the sports consultants we keep on staff on the latest features and trends. Strategic Relationship with Nike. We expect that our relationship with Nike will provide us with an extensive selection of high quality branded products. Under the terms of our agreement, Nike will not sell its products to any other retailer that sells only on the Internet, except for entities affiliated with Nike customers that derive the majority of their revenue from traditional retail stores or entities that serve as web sales outsourcing providers for these Nike customers, through March 2000. In addition, we will have access to all of Nike's generally available product lines, including Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports. Our agreement also allows us advance availability on mutually agreed upon products included in Nike's 50 generally available product line and the right to return a percentage of some product lines to Nike for a full refund. Under the agreement, Nike and its affiliates are not legally obligated to sell us any quantity of product or deliver on any particular schedule. Purchasing. Our merchandising manager and merchandise buyers analyze current sporting goods trends by maintaining close relationships with our manufacturers, monitoring sales at competing stores, studying specialized data about traffic to our web site and reviewing industry trade publications. Customer Service We believe that a high level of customer service and support is critical to retaining and expanding our customer base. First, our web site is designed to help answer many questions customers might have in selecting products. Our customer service representatives are available seven days a week to provide assistance via email or telephone. We strive to answer all customer inquiries within 24 hours. Sports consultants on our customer service team are hired for their extensive knowledge and background in athletics and sporting goods. Their backgrounds include experience as athletes, coaches and working for sporting goods manufacturers and retailers. The combination of specific sport and category understanding, knowledge of products and their use, and technical capabilities enable them to guide our customers in making an informed product selection. Our sports consultants also handle questions about orders, assist customers in finding desired products and register customers' credit card information over the telephone. We generally allow returns for any reason within 45 days of the sale for a full refund. Further, if a customer cannot find a product on our site, we provide the Fogdog Search Squad, which helps locate products primarily through our existing distribution channels. Our web site also contains a customer service page that outlines store policies and provides answers to frequently asked questions. Technology We have implemented a broad array of web site management, search, customer interaction, distribution services and systems that we use to process customers' orders and payments. These services and systems use a combination of our own technologies and commercially available, licensed technologies and are designed to be easily expanded to grow with our business. The systems that we use to process customers' orders and payments are integrated with our accounting and financial systems. We focus our internal development efforts on creating and enhancing specialized software for our business. We use a set of applications for: . generating and running our web site; . managing product data, including product details, inventory and pricing; . accepting and validating customer orders; . organizing, placing and managing orders with suppliers and partners; and . capturing and analyzing customer information and trends. Our systems are based on commercially available software and industry standard protocols and have been designed to reduce downtime in the event of outages or catastrophic occurrences. Our system hardware is hosted at a third- party data center in Mountain View, California, which provides redundant communications lines and emergency power backup. We have implemented load balancing systems and our own redundant servers to provide for fault tolerance. System security is managed by both internal staff as well as by security staff at our third-party data center. Government Regulation We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing or electronic commerce. However, as the Internet becomes increasingly popular, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and 51 quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties and has proposed regulations restricting the collection and use of information from minors online. We do not currently provide individual personal information regarding our users to third parties and we currently do not identify registered users by age. However, the adoption of additional privacy or consumer protection laws could create uncertainty in Web usage and reduce the demand for our products and services or require us to redesign our web site. We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty in the Internet marketplace. This uncertainty could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs. Competition The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future. Our primary competitors are currently traditional national chain retailers of sporting goods, including Venator Group, which operates Footlocker stores and Champs, national chain retailers of outdoor equipment, such as REI, and national chain retailers of athletic footwear, such as Just For Feet. We also compete against traditional regional chain retailers of sporting goods, such as The Sports Authority, Dick's Sporting Goods and Galyan's. Our competitors also include major discount retailers, such as Wal-Mart, Kmart and Target, catalog retailers and numerous local sporting goods or outdoor activities stores. In addition to traditional store-based retailers, we compete with numerous online retailers. Online retailers that we compete with include the online efforts of traditional retailers such as Dick's, Copeland's and REI and manufacturers of sporting goods that currently sell some of their products directly online, such as K- Swiss and Patagonia. The Sports Authority, The Athlete's Foot, MC Sports and Sport Chalet have also announced the formation of an online joint venture which we expect to compete with in the future. In addition, we compete against Internet portal sites and online service providers that either offer or feature shopping services, such as AOL, Yahoo!, Excite@Home, GO Network and Lycos. We also compete against other online retailers that include sporting goods as part of their product lines, such as Buy.com, Onsale and Value America. In addition, sports-oriented web sites such as ESPN.com and CBS Sportsline offer sporting goods and fan memorabilia over the Web, and we expect greater competition from these web sites in the future. Finally, we compete with other retailers selling sporting goods exclusively online, many of which sell products in only one or a few sports categories. We believe that we compete primarily on the basis of recognition of the brands we offer on our web site, the breadth of our product offerings, the amount of product information provided to customers, convenience of the shopping experience and price. Particularly with online retailers, we compete on the basis of speed and accessibility of our web site, quality of site content, customer service and reliability and speed of order shipment. Although we believe we compete favorably with both traditional, store-based retailers and our online competitors, our market is relatively new and is evolving rapidly. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and more traffic to their web sites. In addition, many of our competitors have well-established relationships with manufacturers and more extensive knowledge about our industry. It is possible that new competitors or alliances among competitors will emerge in the future. 52 Legal Proceedings From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a materially adverse effect on us. Intellectual Property We rely on various intellectual property laws and contractual restrictions to protect our proprietary rights in services and technology. These include confidentiality, invention assignment and nondisclosure agreements with employees, contractors, suppliers and strategic partners. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization. In addition, we pursue the registration of our trademarks and service marks in the U.S. and internationally. However, effective intellectual property protection may not be available in every country in which our services are made available online. Our trademarks and service marks include Fogdog, Fogdog with the accompanying design and the Fogdog logo. We rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. As a result, we may be required to obtain substitute technology of lower quality or at greater cost, which could materially adversely affect our business, results of operations and financial condition. We do not believe that our technologies infringe the proprietary rights of third parties. However, third parties have in the past and may in the future claim that our business or technologies infringe their rights. From time to time, we have received notices from third parties questioning our right to present specific images or mention athletes' names on our Web site, or stating that we have infringed their trademarks or copyrights. For example, in June 1999 we received a letter from a third party stating his belief that our Internet marketing activities infringe a patent for a home shopping device, and inviting us to license this technology. 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. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, with or without merit, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim of infringement against us could have a material adverse effect upon our business, results of operations and financial condition. Employees As of September 30, 1999, we had 96 full-time employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good. Facilities Our corporate offices are located in Redwood City, California, where we lease 32,000 square feet under a lease that expires in July 2004. We believe our existing facilities are adequate to meet our needs for at least the next 12 months. 53 MANAGEMENT Executive Officers, Directors and Key Employees The following table sets forth certain information regarding our executive officers, directors and key employees as of November 1, 1999:
Name Age Position - ---- --- -------- Executive Officers and Directors Timothy P. Harrington......... 42 Chief Executive Officer and Director Timothy J. Joyce.............. 43 President Marcy E. von Lossberg......... 30 Chief Financial Officer Brett M. Allsop............... 29 President, International Division, and Chairman of the Board Robert S. Chea................ 28 Vice President, Engineering Mark S. Garrett .............. 41 Vice President, Finance Frederick M. Gibbons.......... 49 Director Peter J. Huff................. 29 Director Robert R. Maxfield............ 57 Director Warren J. Packard............. 32 Director Ralph T. Parks................ 53 Director Ray A. Rothrock............... 44 Director Lloyd D. Ruth................. 52 Director Key Employees Ronald L. Berry............... 50 Vice President, General Merchandising Andrew Y. Chen................ 28 Vice President, Team Sports Mark G. Loncar................ 36 Vice President, Executive Producer John P. McGovern.............. 41 General Counsel Thomas G. Romary.............. 33 Vice President, Marketing Executive Vice President, Strategic Robin R. Smith................ 52 Development Phillip A. Winters............ 42 Vice President, Business Development
Timothy P. Harrington. Mr. Harrington joined Fogdog Sports in June 1998 as President, Chief Operating Officer and a director. In January 1999 he became Chief Executive Officer and ceased serving as Chief Operating Officer. Prior to joining Fogdog Sports, from March 1997 to April 1998, Mr. Harrington served as General Manager of GolfWeb, Inc., a golf information and e-commerce web site. From June 1996 to December 1996, Mr. Harrington served as the Director of National Accounts for Cobra Golf, Inc., a manufacturer of golf equipment. Prior to working with Cobra Golf, Inc., from June 1979 to June 1996, Mr. Harrington served in various financial management positions with International Business Machines Corporation, a computer systems corporation, including Chief Operating Officer for International Business Machines' education division. Mr. Harrington was a Sloan Fellow at Stanford University's Graduate School of Business. Mr. Harrington holds a B.B.A. in accounting from Siena College and an M.S. in business management from Stanford University's Graduate School of Business. Timothy J. Joyce. Mr. Joyce joined Fogdog Sports in August 1999 as President. Prior to joining Fogdog Sports, from April 1980 to August 1999, Mr. Joyce held various positions at Nike, Inc., an athletic apparel and footwear manufacturer, serving as Divisional Vice President for Global Sales from February 1997 to August 1999, Director of European Sales from August 1994 to February 1997, Director of USA Footwear Sales from May 1990 to August 1994 and Regional Sales Manager from March 1987 to May 1990. Mr. Joyce holds both a B.A. and an M.S. in sports administration from Ohio University. Marcy E. von Lossberg. Ms. von Lossberg joined Fogdog Sports in January 1995 as Chief Financial Officer. Prior to joining Fogdog Sports, from April 1993 to December 1994, Ms. von Lossberg served as a 54 Senior Business Planner for Walt Disney Studios, an entertainment and media company. From June 1991 to March 1993, Ms von Lossberg served as a financial analyst for BT Securities, a financial services company. Ms. von Lossberg holds a B.A. in economics and political science from Stanford University. Brett M. Allsop. Mr. Allsop is a co-founder of Fogdog Sports, and he has served as Chairman of the Board of Directors and President of the International Division of Fogdog Sports since January 1999. From June 1998 to January 1999 Mr. Allsop served as our Chief Executive Officer. From October 1994 to June 1998 Mr. Allsop served as our President. Mr. Allsop holds a B.A. engineering degree in values, technology, science and society from Stanford University. Robert S. Chea. Mr. Chea is a co-founder of Fogdog Sports and has served as Vice President of Engineering since October 1994. Prior to joining Fogdog Sports, from January 1994 to September 1994, Mr. Chea served as an engineer at Award Software International, Inc., a firmware software vendor. Mr. Chea holds a B.S. in electrical engineering from Stanford University. Mark S. Garrett. Mr. Garrett joined Fogdog Sports in November 1999 as Vice President, Finance. Prior to joining Fogdog Sports, from January 1997 until October 1999, Mr. Garrett served as the Vice President, Chief Financial Officer and Secretary of Documentum, Inc., a software development and consulting corporation. Prior to joining Documentum, Inc., from June 1991 through December 1996, Mr. Garrett held various positions at Cadence Design Systems, Inc., a supplier of electronic design automation software, serving as Vice President of Worldwide Corporate Financial Planning and Analysis from February 1995 through December 1996, Finance Group Director for the Spectrum Services division from August 1994 to February 1995, Finance Group Director for Technology Development from January 1993 to July 1994, and Division Controller and Finance Director for the Systems and CAE Divisions of Cadence from June 1991 to December 1992. From June 1979 to May 1991, Mr. Garrett held various financial positions at IBM Corporation. Mr. Garrett holds an M.B.A. from Marist College and a B.S.B.A. from Boston University. Frederick M. Gibbons. Mr. Gibbons has served as a director of Fogdog Sports since April 1996. Since January 1995, Mr. Gibbons has been a lecturer in business management at Stanford University's Graduate School of Engineering. From September 1980 to April 1994, Mr. Gibbons served as the Chief Executive Officer of Software Publishing Corporation, a personal computer productivity software company that he founded in 1981. Mr. Gibbons holds both a B.S. in electrical engineering and a M.S. in computer science from the University of Michigan and an M.B.A. from the Harvard Business School. Peter J. Huff. Mr. Huff has served as a director of Fogdog Sports since August 1999. Mr. Huff joined J.H. Whitney and Co., a private venture capital firm, in September 1997 and now serves as Managing Director of Whitney Internet Venture Investing. Mr. Huff is also currently a General Partner and Co-Founder of Triad Media Ventures, a private venture capital firm. From May 1993 to September 1997, Mr. Huff was a management consultant with McKinsey and Company, Inc. From June 1992 to June 1993, Mr. Huff served as a Fulbright Fellow at the National University of Singapore. He currently serves as a director of Brooks, Business Data Services, ExpertCentral.com and other private companies. Mr. Huff received a B.A. from Southern Methodist University and an M.B.A. from Stanford University's Graduate School of Business. Robert R. Maxfield. Mr. Maxfield has served as a director of Fogdog Sports since September 1996. Since January 1989, Mr. Maxfield has served as a professional consultant and has invested in private start-up and emerging growth companies. From March 1989 to September 1992, Mr. Maxfield was a venture partner with Kleiner Perkins Caufield & Byers, a venture capital firm. From June 1969 to November 1988 Mr. Maxfield served as an Executive Vice President of ROLM Corporation, a telecommunications and computer equipment company which he co-founded. Mr. Maxfield was a director of ROLM Corporation from June 1980 to November 1984. Mr. Maxfield also serves on the board of directors of Echelon Corporation, a public company. Mr. Maxfield holds both a B.A. and a B.S. in electrical engineering from Rice University and an M.S. and a Ph.D. in electrical engineering from Stanford University. 55 Warren J. Packard. Mr. Packard has served as a director of Fogdog Sports since June 1999. Since June 1997, Mr. Packard has been a venture capitalist with Draper Fisher Jurvetson, a venture capital firm. Prior to joining Draper Fisher Jurvetson, from January 1996 until June 1997, Mr. Packard was Vice President of Business Development of Angara Database Systems, a main-memory database technology company which he founded. From June 1996 to January 1997, Mr. Packard was an Associate at Institutional Venture Partners, a venture capital firm, investing in early-stage technology companies. From August 1991 to August 1995, Mr. Packard served as a Senior Principal Engineer in the New Business and Advanced Product Development Group at Baxter International. He currently serves as a director of Chili!Soft, Inc., Corvia Networks, Inc., Digital Impact, Inc., DigitalWork, Inc., Direct Hit Technologies, Inc., Eclipse International and Best Offer.Com, Inc. Mr. Packard holds a B.S. and M.S. in Mechanical Engineering from Stanford University and an M.B.A. from Stanford University's Graduate School of Business. Ralph T. Parks. Mr. Parks has served as a director of Fogdog Sports since September 1999. Mr. Parks served as President of Footaction USA, a footwear retailer, from 1991 to 1999 and as Footaction's Executive Vice President and Chief Operating Officer from 1987 to 1991. Ray A. Rothrock. Mr. Rothrock has served as a director of Fogdog Sports since March 1999. Mr. Rothrock serves as a General Partner of Venrock Associates, a venture capital firm. Mr. Rothrock also serves on the boards of directors of Check Point Software Technologies Ltd., USinternetworking, Inc. and several private companies, including Appliant, General Bandwidth, PrintNation.com, QPass, Reciprocal, Simba Technology, Shym Technology, Space.com and Versity.com. Mr. Rothrock holds a B.S. in nuclear engineering from Texas A&M University, an M.S. in nuclear engineering from the Massachusetts Institute of Technology and an M.B.A. with distinction from the Harvard Business School. Lloyd D. "Chip" Ruth. Mr. Ruth has served as a director of Fogdog Sports since March 1999. Since January 1987, Mr. Ruth has served as a Partner of Marquette Venture Partners, a venture capital firm that he co-founded. Mr. Ruth holds a B.S. in industrial engineering from Cornell University, an M.S. in computer science from the Naval Postgraduate School in Monterey and an M.B.A. from Stanford University's Graduate School of Business. Ronald L. Berry. Mr. Berry joined Fogdog Sports in July 1999 as our Vice President of General Merchandising. Prior to joining Fogdog Sports, from April 1996 to May 1998, Mr. Berry served as Vice President, Division Merchandising Manager for Footlocker U.S.A., an athletic footwear and apparel company. From February 1992 to March 1996, Mr. Berry served as the General Merchandising Manager of Footlocker Europe. Andrew Y. Chen. Mr. Chen is a co-founder of Fogdog Sports. From October 1994 to June 1996, he served as our Director of Technical Development. From June 1996 until August 1998, he served as our Vice President of Production. In August 1998, he became the Vice President of Quality Control and in January 1999 was appointed Vice President of Team Sports. Mark G. Loncar. Mr. Loncar joined Fogdog Sports in August 1998 as our Vice President and Executive Producer. Prior to joining Fogdog Sports, from June 1992 to August 1998, Mr. Loncar was a partner with the CKS Group, a marketing, communications and design company. Prior to June 1992, Mr. Loncar served as a Vice President and Director of Worldwide Technology with BBDO Advertising. John P. McGovern. Mr. McGovern joined Fogdog Sports in March 1999 as our General Counsel. Prior to joining Fogdog Sports, from December 1984 to March 1999, Mr. McGovern was an attorney in private practice, focusing on business and employment law. Mr. McGovern holds a B.A. in economics and philosophy from the University of California at San Diego and a J.D. from Martin Luther King, Jr. Hall at the University of California at Davis. 56 Thomas G. Romary. Mr. Romary joined Fogdog Sports in July 1998 as our Vice President of Marketing. Prior to joining Fogdog Sports, from June 1997 to June 1998, Mr. Romary served as the Director of Marketing of GolfWeb, Inc., a golf information and e-commerce web site. From May 1995 to May 1997, Mr. Romary served in various marketing positions with Creative Wonders, an educational software company, including Product Manager, Group Product Manager and Director of Channel Marketing. From August 1992 to May 1995, Mr. Romary served in brand management for General Mills, a consumer goods corporation. Mr. Romary holds a B.S. in engineering from Duke University and an M.B.A. from the Harvard Business School. Robin R. Smith. Mr. Smith joined Fogdog Sports in July 1996 as Vice President of Sales and Marketing and has served as our Executive Vice President of Strategic Business Development since April 1999. Prior to joining Fogdog Sports, from February 1989 to October 1995, Mr. Smith served as Vice President and General Manager of Mizuno Sports, Inc., a manufacturer of sporting goods footwear, apparel and equipment. From 1983 to 1988, Mr. Smith held several senior positions with Avia Athletic Footwear, including Vice President of Marketing for Avia and Vice President and General Manager for the Donner Mountain division. Mr. Smith holds a B.A. in economics from Occidental College and an M.B.A. in Marketing and Finance from the Wharton School at the University of Pennsylvania. Phillip A. Winters. Mr. Winters joined Fogdog Sports in January 1999 as Director of Business Development and has served as our Vice President of Business Development since April 1999. Prior to joining Fogdog Sports, from June 1978 to December 1998, Mr. Winters served in United States Naval Aviation in positions including global logistics, operations, strategic management, and command of a squadron. Mr. Winters served as a commanding officer from January 1997 to December 1998. Mr. Winters holds a B.S. in engineering from the United States Naval Academy and an M.S. in management from Stanford University's Graduate School of Business. Board of Directors We currently have authorized nine directors. Following this offering, our board will consist of nine directors divided into three classes, with each class serving for a term of three years. At each annual meeting of stockholders, directors will be elected by the holders of common stock to succeed the directors whose terms are expiring. Messrs. Maxfield, Gibbons and Huff are Class I directors whose terms will expire in 2000, Messrs. Ruth, Packard and Allsop are Class II directors whose terms will expire in 2001 and Messrs. Harrington, Rothrock and Parks are Class III directors whose terms will expire in 2002. This classification of the board of directors may delay or prevent a change in control of our company or in our management. See "Description of Capital Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." Board Committees We have established an audit committee composed of independent directors that reviews and supervises our financial controls, including the selection of our auditors, reviews our books and accounts, meets with our officers regarding our financial controls, acts upon recommendations of our auditors and takes further actions as the audit committee deems necessary to complete an audit of our books and accounts, as well as other matters that may come before it or as directed by the board. The audit committee currently consists of three directors, Messrs. Gibbons, Rothrock and Packard. We have also established a compensation committee that reviews and approves the compensation and benefits for our executive officers, administers our stock plans and performs other duties as may from time to time be determined by the board. The compensation committee currently consists of three directors, Messrs. Maxfield, Ruth and Huff. 57 Director Compensation We currently do not compensate any non-employee member of the board. Directors who are also employees do not receive additional compensation for serving as directors. Under the 1999 Stock Incentive Plan, non-employee directors will receive automatic option grants upon becoming directors and on the date of each annual meeting of stockholders. The 1999 Stock Incentive Plan also contains a director fee option grant program. Should this program be activated in the future, each non-employee board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of an option with an exercise price below the then fair market value. Non-employee directors will also be eligible to receive discretionary option grants and direct stock issuances under the 1999 Stock Incentive Plan. See "Management-- Benefit Plans." In August 1999, we granted Mr. Parks an option to purchase 26,666 shares of common stock at an exercise price of $1.32 per share, vesting in annual installments over a four-year period measured from the option grant date. Compensation Committee Interlocks and Insider Participation None of our compensation committee members is an employee of or ever was an employee of Fogdog Sports. Messrs. Huff and Rothrock, who serve on our compensation committee, are affiliated with two of our significant stockholders. See "Transactions and Relationships with Related Parties." None of our executive officers serves on the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or our compensation committee. Executive Officers Our executive officers are appointed by and serve at the discretion of our board of directors. There are no family relationships among any of our directors, officers or key employees. Executive Compensation Summary Compensation Table The following table sets forth certain information concerning all compensation earned during the year ended December 31, 1998 by our Chief Executive Officer and each of the four other most highly compensated executive officers for the fiscal year ended December 31, 1998, referred to in this prospectus as the named executive officers for services rendered during the fiscal year. In August 1999, Mr. Joyce joined us as our President. Mr. Joyce's annualized salary for 1999 is $280,000. In November 1999, Mr. Garrett joined us as our Vice President, Finance. His annualized salary for 1999 is $240,000. In March 1999, the board of directors approved increases in the annual salaries that we pay our named executive officers. Pursuant to this increase: . Mr. Allsop's annualized salary for 1999 is $135,000; . Mr. Harrington's annualized salary for 1999 is $170,000; . Ms. von Lossberg's annualized salary for 1999 is $115,000; and . Mr. Chea's annualized salary for 1999 is $110,000. No individual who would otherwise have been includable in the table on the basis of salary and bonus earned during 1998 has resigned or otherwise terminated his or her employment during 1998. 58
Long-Term Annual Compensation Compensation(1) Awards -------------------- ------------ Fiscal Securities Year Underlying Name and Principal Position Ended Salary ($) Bonus ($) Options (#) - --------------------------- ------ ---------- --------- ------------ Brett M. Allsop....................... 1998 86,884 -- 33,333 President, International Division and former Chief Executive Officer Timothy P. Harrington (2)............. 1998 86,442 -- 800,000 Chief Executive Officer Robin R. Smith........................ 1998 114,308 -- -- Executive Vice President, Strategic Development Marcy E. von Lossberg................. 1998 95,517 13,000 -- Chief Financial Officer Robert S. Chea........................ 1998 78,585 -- 33,333 Vice President, Engineering
- -------- (1) Excludes other compensation in the form of perquisites and other personal benefits that constitutes the lesser of $50,000 or 10% of the total annual salary and bonus of each of the named executive officers in 1998. (2) Mr. Harrington joined us in June 1998. His annualized salary for 1998 was $150,000. Option Grants in Fiscal Year 1998 The following table sets forth certain information with respect to stock options granted to each of our named executive officers in 1998, including the potential realizable value over the term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. No stock appreciation rights were granted during 1998.
Individual Grants ------------------------------------------------ Potential Realizable Value at Assumed Annual Rates Number of Percent of of Stock Price Appreciation Securities Total Options for Option Term Underlying Granted at Public Offering Price ($) Options to Employees in Exercise Expiration ------------------------------ Name Granted Fiscal 1998 Price ($) Date 5% 10% - ---- ---------- --------------- ---------- ---------- -------------- --------------- Brett M. Allsop......... 33,333 1.7% 0.082 12/31/02 380,147 480,414 Timothy P. Harrington... 800,000 41.2 0.082 06/02/02 9,123,626 11,530,072 Robin R. Smith.......... -- -- -- -- -- -- Marcy E. von Lossberg... -- -- -- -- -- -- Robert S. Chea.......... 33,333 1.7 0.082 12/31/02 380,147 480,414
In 1998, we granted options to purchase an aggregate of 1,944,000 shares to employees, directors and consultants under our Amended and Restated 1996 Stock Option Plan at exercise prices equal to the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors. Options granted are immediately exercisable in full, but any shares purchased under these options that are not vested are subject to our right to repurchase the shares at the shares' option exercise price. In general, this repurchase right lapses as to 25% of the shares after one year of service and as to the remaining shares in equal monthly installments over an additional three-year period. However: . the options granted to Mr. Harrington vest in 48 equal monthly installments; and . 8,333 of the options granted to Mr. Chea and Mr. Allsop vested on January 1, 1999 and the remaining options vest in a series of 36 equal monthly installments beginning on January 1, 1999. 59 The potential realizable value is calculated assuming the aggregate exercise price on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised and sold on the last day of its term at the appreciated price. Stock price appreciation of 5% and 10% is assumed pursuant to the rules of the Commission. We can give no assurance that the actual stock price will appreciate over the term of the options at the assumed 5% and 10% levels or at any other defined level. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the named executive officers. In March 1999, we granted to the following named executive officers, options to purchase the following numbers of shares of common stock at an exercise price of $0.33 per share: . Mr. Allsop received an option to purchase 33,333 shares of common stock; . Mr. Harrington received an option to purchase 533,333 shares of common stock; . Mr. Smith received an option to purchase 40,000 shares of common stock; . Ms. von Lossberg received an option to purchase 66,666 shares of common stock; and . Mr. Chea received an option to purchase 33,333 shares of common stock. The options are immediately exercisable, but any shares purchased under these options that are not vested are subject to repurchase by us at the option exercise price. This repurchase right lapses with respect to shares in 48 equal monthly installments. Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values The following table sets forth information concerning the number and value of shares of common stock underlying the unexercised options held by the named executive officers. No options or stock appreciation rights were exercised during 1998 and no stock appreciation rights were outstanding as of December 31, 1998. The value of unexercised in-the-money options at December 31, 1998 is calculated on the basis of the assumed initial public offering price of $9.00, less the aggregate exercise price of the options.
Number of Securities Underlying Value of Unexercised Unexercised Options at December In-the-Money Options at 31, 1998 December 31, 1998 ------------------------------------ ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------------- ---------------- ----------- ------------- Brett M. Allsop......... 33,333 -- $ 297,247 -- Timothy P. Harrington... 800,000 -- 7,134,000 -- Robin R. Smith.......... 381,406 -- 3,401,188 -- Marcy E. von Lossberg... 100,000 -- 891,741 -- Robert S. Chea.......... 33,333 -- 297,247 --
Benefit Plans 1999 Stock Incentive Plan Introduction. Our 1999 Stock Incentive Plan is intended to serve as the successor program to our Amended and Restated 1996 Stock Option Plan. The 1999 plan was adopted by our board in September 1999 and will be approved by our stockholders prior to the consummation of this offering. The 1999 plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under our existing plan will be transferred to the 1999 plan, and no further option grants will be made under the prior plan. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 1999 plan to those options. Except as otherwise noted below, the transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 1999 plan. 60 Share Reserve. 6,296,631 shares of our common stock have been authorized for issuance under the 1999 plan. This share reserve consists of the number of shares we estimate will be carried over from the 1996 plan plus an additional increase of 800,000 shares. The share reserve under our 1999 plan will automatically increase on the first trading day in January of each year from 2001 through 2005, by an amount equal to 3% of the total number of shares of our common stock outstanding on the last trading day of December in the prior year, but in no event will this annual increase exceed 2,000,000 shares. In addition, no participant in our 1999 plan may be granted stock options or direct stock issuances for more than 1,000,000 shares of common stock in total in any calendar year. Programs. Our 1999 plan has five separate programs: . the discretionary option grant program, under which eligible individuals in our employ may be granted options to purchase shares of our common stock at an exercise price not less than the fair market value of those shares on the grant date; . the stock issuance program, under which eligible individuals may be issued shares of our common stock that will vest upon the attainment of performance milestones or upon the completion of a period of service or that are fully vested at issuance as a bonus for past services; . the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below market stock option grants; . the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and . the director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash for the year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 1999 plan include our officers and other employees, our board members and any consultants that we hire. Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a nonstatutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The compensation committee will also have the authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program if that program is put into effect for one or more calendar years. Plan Features. Our 1999 plan will include the following features: . The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. . The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including any transferred options from our 1996 plan, in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from 61 us equal to the fair market value of the shares subject to the surrendered options less the exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the options under our 1996 plan have any stock appreciation rights. Change in Control. The 1999 plan will include the following change in control provisions that may result in the accelerated vesting of outstanding option grants and stock issuances: . If we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program that is not to be assumed by the successor corporation will immediately become exercisable for all the option shares, and all outstanding unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. . The compensation committee will have complete discretion to grant one or more options that will become exercisable for all the option shares if those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of any outstanding shares under our 1999 plan may be accelerated upon similar terms and conditions. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a successful tender offer for more than fifty percent of our outstanding voting stock or a change in the majority of our board through one or more contested elections. Such accelerated vesting may occur either at the time of such transaction or upon the subsequent termination of the individual's service. . The compensation committee will have the discretionary authority to extend any of the acceleration provisions of the 1999 plan to one or more options transferred from our 1996 plan which do not otherwise contain those provisions. Currently, the transferred options are structured so that we may cancel those options, to the extent not exercised within five days prior to an acquisition by merger or asset sale, in return for a cash payment per option share equal to the price payable per share of our common stock in connection with the acquisition, less the option exercise price. To the extent such cash payment is not made, then the options will immediately terminate upon the closing of the acquisition, unless those options are assumed in the acquisition. Salary Investment Option Grant Program. If the compensation committee decides to put this program into effect for one or more calendar years, each of our executive officers and other highly compensated employees may elect to reduce his or her base salary for the calendar year by an amount not less than $10,000 nor more than $50,000. Each selected individual who makes such an election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount of the salary reduction. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will receive an option grant for 10,000 shares of common stock on the date such individual joins the board. In addition, on the date of each annual stockholders meeting held after the effective date of this offering, each non- employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board members, will automatically be granted an option to purchase 2,500 shares of common stock, provided such individual has served on the board for at least six months. 62 Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of 10 years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option that are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 10,000-share automatic option grant will vest in a series of three successive annual installments upon the optionee's completion of each year of board service over the three-year period measured from the grant date. The shares subject to each annual 2,500-share automatic option grant will vest upon the optionee's completion of one year of board service measured from the grant date. However, the shares will immediately vest in full upon certain changes in control or ownership or upon the optionee's death or disability while a board member. Director Fee Option Grant Program. If this program is put into effect in the future, then each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the non-employee board member would otherwise be paid the cash retainer fee in the absence of his or her election. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the election is in effect. However, the option will become immediately exercisable for all the option shares upon the death or disability of the optionee while serving as a board member. Additional Program Features. Our 1999 plan will also have the following features: . Outstanding options under the salary investment and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The board may amend or modify the 1999 plan at any time, subject to any required stockholder approval. The 1999 plan will terminate no later than September 2009. 1999 Employee Stock Purchase Plan Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board in September 1999 and will be approved by the stockholders prior to the consummation of this offering. The plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of our common stock, at semi- annual intervals, with their accumulated payroll deductions. Share Reserve. 500,000 shares of our common stock will initially be reserved for issuance. The reserve will automatically increase on the first trading day in January of each year from 2001 through 2005, by an 63 amount equal to 1% of the total number of outstanding shares of our common stock on the last trading day in December in the prior year. In no event will any such annual increase exceed 1,000,000 shares. Offering Periods. The plan will have a series of successive overlapping offering periods with a new offering period beginning on the first business day of February and August each year and each continuing for a period of 24 months. However, the initial offering period will start on the date the underwriting agreement for the offering is signed and will end on the last business day in January 2002. Eligible Employees. Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the start date of that period. Employees may participate in only one offering period at a time. Payroll Deductions. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. Semi-annual purchase dates will occur on the last business day of January and July each year. The first purchase date will occur on the last business day of July 2000. In no event, however, may any participant purchase more than 750 shares on any purchase date, and not more than 125,000 shares may be purchased in total by all participants on any purchase date. Reset Feature. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and participants in that offering period will automatically be enrolled in the new 24-month offering period beginning on the next business day. Change in Control. Should we be acquired by merger or sale of substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price will be equal to 85% of the market value per share on the start date of the offering period in which the acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. Plan Provisions. The following provisions will also be in effect under the plan: . The plan will terminate no later than the last business day of July 2009. . The board may at any time amend, suspend or discontinue the plan. However, certain amendments may require stockholder approval. Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements In March 1997, we entered into a letter agreement with Mr. Smith to serve as our Vice President of Business Development and General Manager of Multi-Brand Stores. Mr. Smith's base annualized salary for his services was $90,000. Pursuant to the agreement, this base annualized salary was increased to $135,000 when we completed a venture financing in June 1998. Additional terms under the agreement are as follows. . Mr. Smith received options to purchase 224,740 shares of our common stock in March 1997 at an exercise price of $0.082 per share. Of these options, 56,184 vested on July 1, 1997 and the remaining options are vesting in a series of 36 monthly installments over the period of Mr. Smith's service measured from July 1, 1997. These options will vest in full if we complete an initial public offering or if we are acquired. However, Mr. Smith will not receive accelerated vesting in connection with an acquisition if the acceleration would make the acquisition ineligible for selected accounting treatment. . Mr. Smith also received options to purchase 156,666 shares of our common stock in December 1997 at an exercise price of $ 0.082 per share. Of these options, 39,166 vested on July 1, 1997, 39,166 64 vested upon our closing of a venture financing in June, 1998 and the remaining options are vesting thereafter in a series of equal monthly installments of 3,263 shares until July 1, 2000. In June 1998, we entered into an employment agreement with Mr. Harrington to serve as our President, Chief Operating Officer and a member of our board of directors. The agreement was amended in September 1999. Mr. Harrington's base salary for his services was initially $150,000 per year and was increased to $170,000 per year in 1999 when Mr. Harrington became our Chief Executive Officer. Additional terms under the agreement are as follows. . Mr. Harrington is eligible to receive a bonus of up to 20% of his base salary based on the achievement of performance goals that are mutually agreeable to Mr. Harrington and the board of directors. . Mr. Harrington also received options to purchase 800,000 shares of our common stock at an exercise price of $0.082 per share. The options are vesting in 48 equal monthly installments over Mr. Harrington's period of service with us. However, the options will become fully vested if we are acquired and the successor corporation does not assume the options or if Mr. Harrington is involuntarily terminated within 12 months following an acquisition. In addition, if Mr. Harrington is terminated by us for any reason other than cause at any time other than within 12 months following an acquisition, he will receive a payment of $200,000 or one full year of salary, whichever is greater, an additional 333,333 option shares will accelerate and Mr. Harrington will provide services to us as a consultant for a period of six months during which time he will continue to vest in his remaining options. Mr. Harrington's employment agreement terminates in September 2000 and automatically renews for successive one year periods, unless terminated earlier upon death, disability, notice from us, with or without cause, or voluntary resignation. In June 1998, we entered into an employment agreement with Mr. Chea to serve as our Vice President of Technology. Mr. Chea's initial base salary for his services was $90,000 and was increased to $110,000 per year in 1999 when Mr. Chea became Vice President, Engineering. Additional terms under the agreement are as follows. . Mr. Chea is entitled to receive an annual bonus of up to 20% of his annual base salary based on the achievement of performance goals. . Mr. Chea received options to purchase 33,333 shares of our common stock at an exercise price of $0.082 per share. Of these options, 8,333 vested on January 1, 1999 and the remainder are vesting in a series of 36 equal monthly installments thereafter over Mr. Chea's period of service with us measured from January 1, 1999. . Mr. Chea granted us the right to repurchase 333,333 shares of his Fogdog Sports common stock at fair market value if he voluntarily terminates his employment without good reason. The repurchase right lapses in 30 equal monthly installments over Mr. Chea's period of service with us. However, the repurchase right lapses with respect to all of the shares upon the completion of an initial public offering of our common stock, if we are acquired, if Mr. Chea dies, becomes disabled or terminates his employment for good cause, if we terminate his employment without cause or if we hire a technology officer with a senior title, duties and responsibilities. . Mr. Chea is entitled to 12 weeks of severance pay if he is terminated without cause or if he voluntarily departs with good reason. Mr. Chea's employment agreement terminates in January 2001, unless terminated earlier upon death, disability, notice from us with or without cause or if he voluntary resigns. In April 1999, we entered into an amended and restated employment agreement with Mr. Allsop to serve as our President of International Division and Chairman of the Board for a base salary of $105,000 per year. 65 Pursuant to the agreement, Mr. Allsop's base salary was increased to $135,000 per year upon Mr. Allsop's relocation to our new London office. Additional terms under the agreement are as follows. . Mr. Allsop is entitled to receive a supplement of $8,000 to his base salary to compensate him for the higher cost of living abroad. . Mr. Allsop is eligible to receive a bonus of up to 20% of his base salary upon achievement of performance goals mutually determined by Mr. Allsop and our chief executive officer. . Mr. Allsop granted us the right to repurchase 115,555 shares of his Fogdog Sports common stock at fair market value if he voluntarily terminates his employment without good reason. The repurchase right lapses in 26 equal monthly installments over Mr. Allsop's period of service with us. However, the repurchase right lapses with respect to all of the shares upon the completion of an initial public offering of our common stock, if we are acquired or if Mr. Allsop dies, becomes disabled or terminates his employment for good cause. . Mr. Allsop is also entitled to 26 additional weeks of salary if he is terminated without cause. Mr. Allsop's employment agreement terminates in June 2001, unless terminated earlier upon death, disability, notice from us with or without cause or voluntary resignation. In August 1999, we entered into a letter agreement with Mr. Joyce to serve as our President. Additional terms under the agreement are as follows. . Mr. Joyce is entitled to a base salary of $280,000 per year. . Mr. Joyce is also eligible to receive a target bonus of 20% of his base salary with the opportunity to earn more through the attainment of performance goals. . Mr. Joyce is also entitled to receive options to purchase 666,666 shares of our common stock, at an exercise price of $1.32 per share, which were granted on August 26, 1999, and vest over a period of four years in a series of 48 equal monthly installments over Mr. Joyce's continued period of service with us. However, if we are acquired within one year of the date of the agreement and the successor corporation does not assume Mr. Joyce's options, the options will vest on an accelerated basis such that 24 months worth of unvested options shall become vested. . Mr. Joyce also received a grant of options to purchase 83,333 shares of our common stock, at an exercise price of $1.32 per share, when Nike USA, Inc. opened a retail account for its premium products with us in September 1999, which options will vest fully six months from the date of grant. . Mr. Joyce is eligible for a reimbursement of $60,000 for relocation expenses. In September 1999, our board of directors approved a severance package for Ms. von Lossberg. Pursuant to this severance package, she is entitled to three months of salary if she is terminated without cause. In November 1999, we entered into a letter agreement with Mr. Garrett to serve as our Vice President, Finance. Additional terms under the agreement are as follows: . Mr. Garrett is entitled to a base salary of $240,000 per year. . Mr. Garrett is also eligible to receive a target bonus of 20% of his base salary with the opportunity to earn more through the attainment of performance goals. . Mr. Garrett is entitled to receive options to purchase 310,000 shares of our common stock. These options will have an exercise price equal to the fair market value of our common stock on the date of the grant. Of these options, 38,750 options vest six months from his employment date, and the remaining options vest in equal monthly installments of 6,458 options thereafter. However, if we are acquired within one year of Mr. Garrett's first day of employment and the successor corporation does not assume his options, the options will vest on an accelerated basis such that 12 months worth of unvested options shall become vested. 66 Limitation of Liability and Indemnification Our certificate of incorporation eliminates, to the maximum extent allowed by the Delaware General Corporation Law, directors' personal liability to Fogdog Sports or its stockholders for monetary damages for breaches of fiduciary duties. The certificate of incorporation of Fogdog Sports does not, however, eliminate or limit the personal liability of a director for the following: . any breach of the director's duty of loyalty to Fogdog Sports or its stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. Our bylaws provide that we shall indemnify our directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify our other officers, employees and other agents as set forth in the Delaware General Corporation Law. In addition, we have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements contain provisions that require us, among other things, to indemnify our directors and executive officers against liabilities (other than liabilities arising from intentional or knowing and culpable violations of law) that may arise by reason of their status or service as directors or executive officers of Fogdog Sports or other entities to which they provide service at our request and to advance expenses they may incur as a result of any proceeding against them as to which they could be indemnified. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified directors and officers. Prior to the consummation of the offering, we will obtain an insurance policy covering directors and officers for claims they may otherwise be required to pay or for which we are required to indemnify them. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 67 TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES Sales of Securities Since January 1996, we have raised capital primarily through the sale of our securities, including: . In September 1996, we issued to various investors including Novus Ventures, L.P., the Robert Maxfield Separate Property Trust and Frederick Gibbons an aggregate of 1,155,554 shares of our Series A preferred stock for an aggregate consideration of $974,999. At the time of this transaction, Mr. Gibbons and Mr. Robert Maxfield became directors of Fogdog, as did Mr. Dan Tompkins, a partner with Novus Ventures. . In September 1996, we issued and sold an aggregate of 221,164 shares of common stock to Robert Maxfield, one of our directors, for an aggregate consideration of $18,661. . In September 1996, we issued and sold an aggregate of 110,581 shares of common stock to Frederick M. Gibbons, one of our directors, for an aggregate consideration of $9,330. . In December 1997, we issued to Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of our Series A preferred stock at an exercise price of $0.844 per share, 17,778 of which shares were exercised in November 1999 by Novus Ventures, L.P., and convertible promissory notes in aggregate principal amount of $162,500 accruing interest at a rate of 8% per annum. . In May 1998, we issued to Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of our Series A preferred stock at an exercise price of $0.844 per share, 17,778 of which shares were exercised in November 1999 by Novus Ventures, L.P., and convertible promissory notes in aggregate principal amount of $162,500 accruing interest at a rate of 8% per annum. . In June 1998, Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons converted the principal of the convertible promissory notes, a total of $325,000, into an aggregate of 434,622 shares of our Series B preferred stock. . In June 1998, we sold to various investors, including entities affiliated with Draper Fisher Jurvetson Management and entities affiliated with Whitney Equity Partners, an aggregate of 6,017,844 shares of our Series B preferred stock for an aggregate consideration of $4,500,000, which included $75,000 of cancellation of indebtedness. At the time of the transaction, Draper Fisher Jurvetson and Whitney Equity Partners became greater than five percent stockholders of Fogdog, and Draper Fisher Jurvetson and Whitney Equity Partners appointed representatives to our Board of Directors. . In March and April 1999, we sold to various investors, including Novus Ventures, L.P., entities affiliated with Vertex Management, Inc., entities affiliated with Draper Fisher Jurvetson Management, entities affiliated with Whitney Equity Partners, entities affiliated with Sprout Group, entities affiliated with Marquette Ventures and entities affiliated with Venrock Associates, an aggregate of 11,657,277 shares of our Series C preferred stock for an aggregate consideration of $18,000,000. At the time of the transaction, Vertex Management, Sprout Group and Venrock Associates became greater than five percent stockholders of Fogdog, and Sprout Group and Marquette Ventures and Venrock Associates appointed representatives to our Board of Directors. . In September 1999, we issued and sold 3,529,410 shares of our Series D preferred stock for an aggregate purchase price of $15,300,000 to entities affiliated with Draper Fisher Jurvetson, entities affiliated with Whitney Equity Partners, entities affiliated with Venrock Associates, entities affiliated with Sprout Group L.P., entities affiliated with Marquette Venture Partners and Vertex Technologies Fund (II) Ltd. We also sold Series D preferred stock to entities affiliated with Worldview Technology Partners, Boston Millennia Partners, L.P., entities affiliated with Lycos Ventures, Hikari Tsushin, Inc., Aman Ventures L.L.C., Peder Smedvig Capital Venture III and certain individual investors which are neither officers, directors, nor greater than five percent stockholders of our company. 68 In September 1999, we issued to Nike USA, Inc. a warrant to purchase an aggregate of 4,114,349 shares of our Series C preferred stock at an exercise price of $1.54 per share. Upon the consummation of our public offering, this warrant will automatically become exercisable for 4,114,349 shares of our common stock. The following table summarizes the shares of common stock and preferred stock purchased by our executive officers, directors and five percent stockholders and persons associated with them since January 1996. The number of total shares on an as-converted basis reflects a one-to-one conversion to common stock ratio for each share of Series A, Series B, Series C and Series D preferred stock.
Warrants Warrants Total to Purchase to Purchase Shares on Series A Series B Series C Series D Series A Series C an As- Common Preferred Preferred Preferred Preferred Preferred Preferred Converted Investor Stock Stock Stock Stock Stock Stock Stock Basis -------- --------- --------- --------- --------- --------- ----------- ----------- --------- Entities affiliated with Draper Fisher Jurvetson Management............. -- -- 2,942,058 1,100,964 276,816 -- -- 4,319,838 Entities affiliated with Whitney Equity Partners............... -- -- 3,075,788 1,100,964 196,078 -- -- 4,372,830 Novus Ventures.......... -- 983,704 267,460 323,813 -- -- -- 1,574,977 Entities affiliated with Venrock Associates..... -- -- -- 2,849,556 196,079 -- -- 3,045,635 Entities affiliated with Vertex Management, Inc.................... -- -- -- 1,392,396 69,204 -- -- 1,461,600 Entities affiliated with Sprout Group........... -- -- -- 2,558,124 173,010 -- -- 2,731,134 Nike USA, Inc. ......... -- -- -- -- -- -- 4,114,349 4,114,349 Timothy P. Harrington... 294,444 -- -- -- -- -- -- 294,444 Brett M. Allsop......... 1,133,333 -- -- -- -- -- -- 1,133,333 Marcy E. von Lossberg... 260,528 -- -- -- -- -- -- 260,528 Robert S. Chea.......... 1,150,694 -- -- -- -- -- -- 1,150,694 Frederick M. Gibbons.... 110,581 59,258 33,432 -- -- 5,333 -- 208,604 Robert R. Maxfield...... 221,164 118,518 133,728 -- -- 18,666 -- 492,076
Holders of shares of our preferred stock and our common stock issued or issuable upon conversion thereof and some holders of our common stock are entitled to registration rights. See "Description of Capital Stock-- Registration Rights." Agreement with Nike USA, Inc. In September 1999, we entered into an agreement with Nike USA, Inc. pursuant to which we have the right to market on our web site the generally available Nike product lines, including Jordan, Bauer, Nike ACG, Nike Golf and Nike Team Sports. We will receive a discount on the products we purchase. Under the agreement, we also have advance product availability for mutually agreed upon, newly released products. The agreement prohibits us from selling any of these products to consumers with shipping addresses outside of the United States unless Nike.com is allowed to sell in those countries and the sales do not constitute a violation of any agreement with any third party. We also agreed to use Nike USA as the exclusive supplier of Nike brand products, and Nike USA agreed not to sell its products to any other retailer that sells only on the Internet, except entities affiliated with Nike customers that derive the majority of their revenue from traditional retail stores or entities that serve as web sales outsourcing providers for these Nike customers through March 2000. Nike USA may terminate the agreement at any time without cause upon 90 days notice to us, but must pay us a termination fee if it exercises this right prior to December 31, 2001. We also issued Nike USA a warrant to purchase 4,114,349 shares of our Series C preferred stock at an exercise price of $1.54 per share. Upon the consummation of this offering, this warrant will automatically become exercisable for 4,114,349 shares of our common stock. 69 Agreements with Officers and Directors In July 1995, we entered into an employment agreement with Ms. von Lossberg. Pursuant to the terms of this agreement, we agreed to grant Ms. von Lossberg a 2.5% equity interest in the company after six months of employment and another 2.5% equity interest in December 1995. In August 1996, we entered into an agreement with Ms. von Lossberg pursuant to which we issued 210,528 shares of our common stock to Ms. von Lossberg in satisfaction of our obligations under the prior employment agreement. In August 1999, Mr. Harrington exercised vested options to purchase 294,444 shares of our common stock for an aggregate purchase price of $35,292. Mr. Harrington exercised these options by issuing us a promissory note that is secured by the stock. In September 1999, Ms. von Lossberg exercised options to purchase 50,000 shares of our common stock for an aggregate purchase price of $4,192. Ms. von Lossberg exercised these options by issuing us a promissory note that is secured by the common stock. We have entered into employment arrangements with our executive officers. See "Management--Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements." We have granted options and issued common stock to our executive officers and directors. See "Management--Executive Compensation" and "Principal Stockholders." We have entered into an indemnification agreement with each of our executive officers and directors. See "Management--Limitation of Liability and Indemnification." We have entered into non-competition and confidentiality agreements with some of our officers. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties. All future transactions, including loans, if any, between the company and our officers, directors and principal stockholders and their affiliates and any transactions between the company and any entity with which our officers, directors or five percent stockholders are affiliated will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors of the board of directors and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 70 PRINCIPAL STOCKHOLDERS The table below sets forth information regarding the beneficial ownership of our common stock as of September 30, 1999, by the following individuals or groups: . each person or entity who is known by us to own beneficially more than 5% of our outstanding stock; . each of the named executive officers; . each of our directors; and . all directors and executive officers as a group. Each stockholder's percentage ownership in the following table is based on 29,665,236 shares of common stock outstanding as of September 30, 1999, as adjusted to reflect the conversion of all outstanding shares of preferred stock upon the closing of this offering into 23,425,333 shares of common stock. For purposes of calculating each stockholder's percentage ownership, all options and warrants exercisable within 60 days of September 30, 1999 held by the particular stockholder and that are included in the first column are treated as outstanding shares. The numbers shown in the table below assume no exercise by the underwriters of their over-allotment option. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Fogdog, Inc., 500 Broadway, Redwood City, California 94063. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
Percentage of Shares Number of Beneficially Owned Shares ------------------------ Beneficially Prior After Name and Address of Beneficial Owner Owned to Offering the Offering ------------------------------------ ------------ ----------- ------------ Entities affiliated with Whitney Equity Partners(1)............................ 4,372,830 14.7% 12.2% Entities affiliated with Draper Fisher Jurvetson(2)........................... 4,319,838 14.6 12.1 Nike USA, Inc.(3)....................... 4,114,349 12.2 10.3 Entities affiliated with Sprout Group, L.P.(5)................................ 2,731,135 9.2 7.7 Entities affiliated with Venrock Associates(4).......................... 3,045,635 10.3 8.5 Timothy P. Harrington(6)................ 1,333,333 4.3 3.6 Brett M. Allsop(7)...................... 1,160,000 3.9 3.2 Marcy E. von Lossberg(8)................ 377,199 1.3 1.0 Robin R. Smith(9)....................... 421,406 1.4 1.2 Robert S. Chea(10)...................... 1,200,000 4.0 3.4 Frederick M. Gibbons(11)................ 208,605 * * Peter J. Huff(1)........................ 4,372,830 14.7 12.2 Robert R. Maxfield(12).................. 492,079 1.7 1.4 Warren J. Packard(2).................... 4,319,838 14.6 12.1 Ralph T. Parks(13)...................... 26,666 * * Lloyd D. Ruth(14)....................... 1,086,780 3.7 3.0 Ray A. Rothrock(4)...................... 3,045,636 10.3 8.5 All directors and executive officers as a group (13 persons)(15)............... 18,794,370 58.5 49.3
- -------- * Less than one percent. (1) Principal address is 177 Broad Street, Stamford, CT 06901. Represents 4,269,942 shares of common stock held by J.H. Whitney III, L.P. and 102,888 shares of common stock held by Whitney Strategic Partners III, L.P. Mr. Huff disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in entities affiliated with Whitney Equity Partners. 71 (2) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063. Represents 4,017,450 shares of common stock held by Draper Fisher Associates Fund IV, L.P. and 283,011 shares of common stock and 19,377 shares of common stock held by Draper Fisher Partners IV, L.P. Mr. Packard disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in entities affiliated with Draper Fisher Jurvetson. (3) Principal address is One Bowerman Drive, Beaverton, OR 97005. Represents warrants held by Nike USA, Inc. to purchase 4,114,349 shares of common stock at an exercise price of $1.54 per share. (4) Principal address is 2494 Sand Hill Road, Suite 200, Menlo Park, CA 94025. Represents 1,248,710 shares of common stock held by Venrock Associates and 1,796,925 shares of common stock held by Venrock Associates II, L.P. Mr. Rothrock disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in entities affiliated with Venrock Associates. (5) Principal address is 3000 Sand Hill Road, Building 3, Suite 170, Menlo Park, CA 94025-7114. Includes 7,914 shares of common stock held by DLJ Capital Corp., 206,432 shares of common stock held by DLJ ESC II, L.P., 2,372,288 shares of common stock held by Sprout Capital VIII, L.P. and 142,338 shares of common stock held by Sprout Venture Capital, L.P. (6) Includes 1,038,888 shares of common stock issuable upon the exercise of immediately exercisable options. (7) Includes 66,666 shares of common stock issuable upon the exercise of immediately exercisable options. (8) Includes 116,666 shares of common stock issuable upon the exercise of immediately exercisable options. (9) Includes 421,406 shares of common stock issuable upon the exercise of immediately exercisable options. (10) Includes 49,306 shares of common stock issuable upon the exercise of immediately exercisable options. (11) Principal address is 11800 Murieta Lane, Los Altos Hills, CA 94022. Includes warrants to purchase 5,333 shares of common stock at an exercise price of $0.8438 per share. (12) Principal address is 12930 Saratoga Avenue, Suite B-3, Saratoga, CA 95070. Includes warrants to purchase 18,666 shares of common stock at an exercise price of $0.8438 per share. (13) Represents 26,666 shares of common stock issuable upon the exercise of immediately exercisable options. (14) Principal address is 520 Lake Cook Road, Suite 450, Deerfield, IL 60015. Represents 1,086,780 shares of common stock held by Marquette Venture Partners III, L.P. Mr. Ruth disclaims beneficial ownership of all of these shares except to the extent of his pecuniary interest in Marquette Venture Partners III, L.P. (15) Includes 2,469,601 shares of common stock issuable upon the exercise of options and warrants. 72 DESCRIPTION OF CAPITAL STOCK General At the closing of this offering, we will be authorized to issue 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value, after giving effect to the amendment of our certificate of incorporation to delete references to the existing preferred stock following conversion of that stock. The following description of capital stock gives effect to the certificate of incorporation to be filed upon closing of this offering. Immediately following the completion of this offering, and assuming no exercise of the underwriters' over-allotment option, based on the number of shares outstanding as of September 30, 1999, an aggregate of 35,665,236 shares of common stock will be issued and outstanding, and no shares of preferred stock will be issued and outstanding. The following description of our capital stock is subject to and qualified by our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of the applicable Delaware law. Common Stock The holders of our common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to preferences that may be applicable to any outstanding preferred stock that may come into existence, the holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for dividends. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Our common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be outstanding upon completion of this offering will be fully paid and nonassessable. Preferred Stock Our board of directors is authorized to issue from time to time, without stockholder authorization, in one or more designated series, any or all of our authorized but unissued shares of preferred stock with any dividend, redemption, conversion and exchange provisions as may be provided in the particular series. Any series of preferred stock may possess voting, dividend, liquidation and redemption rights superior to those of the common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of a new series of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of entrenching our board of directors and making it more difficult for a third-party to acquire, or discourage a third-party from acquiring, a majority of our outstanding voting stock. We have no present plans to issue any shares of or designate any series of preferred stock. Warrants At September 30, 1999, there were warrants outstanding to purchase a total of 4,319,131 shares of our common stock expiring through March 2003. Registration Rights Upon completion of the offering, the holders of an aggregate of approximately 27,533,333 shares of common stock and warrants to purchase approximately 4,133,333 shares of our common stock will be entitled to certain rights with respect to the registration of the shares under the Securities Act. Nike USA, Inc. has three 73 separate demand registration rights. These rights are provided under the terms of agreements between us and the holders of these securities. If we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of the registration and are entitled to include shares of common stock in the registration. The rights are subject to conditions and limitations, among them the right of the underwriters of an offering subject to the registration to limit the number of shares included in the registration. Holders of these rights may also require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect the registration, subject to conditions and limitations. Furthermore, stockholders with registration rights may require us to file additional registration statements on Form S-3, subject to conditions and limitations. Compliance with California Law We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, certain provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of the board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval; . places limitations on the distribution of dividends; . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market and that we will have at least 800 stockholders of record by the record date for our 2000 annual meeting of stockholders. If these two conditions occur, then we will no longer be subject to Section 2115 as of the record date for our 2000 annual meeting of stockholders. Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law Our certificate of incorporation authorizes our board to establish one or more series of undesignated preferred stock, the terms of which can be determined by our board at the time of issuance. See "--Preferred Stock." Our certificate of incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by written consent. In addition, our certificate of incorporation and bylaws do not permit our stockholders to call a special meeting of stockholders. Only our Chief Executive Officer, President, Chairman of the Board or a majority of the board of directors are permitted to call a special meeting of stockholders. Our certificate of incorporation also provides that the board of directors is divided into three classes, with each director assigned to a class with a term of three years, and that the number of directors may only be determined by the board of directors. Our bylaws require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting, and that the chairman of the board has the authority to adjourn any meeting called by the stockholders. Our bylaws also require a supermajority vote of members of the board of directors and/or 74 stockholders to amend certain bylaw provisions. These provisions of our restated certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the company. These provisions also may have the effect of preventing changes in the management of the company. See "Risk Factors--Provisions of our certificate of incorporation and bylaws may make changes of control difficult, even if they would be beneficial to stockholders." We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: (i) persons who are directors and also officers; and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. Transfer Agent and Registrar Our transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company. Its telephone number is (212) 845-3200. 75 SHARES AVAILABLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities. Upon the completion of this offering we will have 35,665,236 shares of common stock outstanding assuming no exercise of the underwriters' over- allotment option. The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 1999, and excludes: . 4,502,885 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 1999 at a weighted average exercise price of $1.05 per share, all of which are immediately exercisable; however, those shares which have not yet vested are subject to repurchase by the company; . 6,296,631 shares of common stock reserved for issuance under our 1999 Stock Incentive Plan that incorporates our Amended and Restated 1996 Stock Option Plan; . 500,000 shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; . 4,114,349 shares of common stock issuable upon exercise of an outstanding warrant held by Nike USA, Inc. of an exercise price of $1.54 per share; and . 204,782 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.97 per share. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our "affiliates," as that term is defined in Rule 144 promulgated under the Securities Act, may only be sold in compliance with the limitations described below. The remaining 29,602,871 shares of common stock will be deemed "restricted securities" as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Subject to the lock-up agreements described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows:
Number of Shares Date --------- ------------------------------------------------------------------ 6,062,366 After the date of this prospectus, freely tradable shares sold in this offering and shares saleable under Rule 144(k) that are not subject to the 180-day lock-up 24,569,910 After 180 days from the date of this prospectus, the 180-day lock- up is released and these shares are saleable under Rule 144 (subject, in some cases, to volume limitations) or Rule 144(k) 1,236,885 After 180 days from the date of this prospectus, the 180-day lock- up is released and these shares are saleable under Rule 701 (subject to repurchase by the Company) 3,796,076 After 180 days from the date of this prospectus, restricted securities that are held for less than one year and are not yet saleable under Rule 144
Rule 144 In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including any of our affiliates, who has beneficially owned shares for at least one year, including the holding period of any prior owner who is not an affiliate, is entitled to sell within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed 76 the greater of one percent of the then-outstanding shares of our common stock, which will be approximately 356,000 shares immediately after this offering, or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, would be entitled to sell these shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from one of our affiliates, a person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. Stock Options As of September 30, 1999, options to purchase a total of 4,502,885 shares of common stock were outstanding, all of which were currently exercisable but were subject to repurchase upon termination of employment until vested. We intend to file a Form S-8 registration statement under the Securities Act to register all shares of common stock issuable under our 1999 Stock Incentive Plan and our 1999 Employee Stock Purchase Plan. Accordingly, shares of common stock underlying these options will be eligible for sale in the public markets, subject to vesting restrictions or the lock-up agreements described below. See "Management--Benefit Plans." Lock-up Agreements We have agreed, and each of our officers and directors and substantially all of our securityholders have agreed, subject to specified exceptions, not to, without the prior written consent of Credit Suisse First Boston Corporation, sell, otherwise dispose of any shares of our common stock or options to acquire shares of our common stock or take any action to do any of the foregoing during the 180-day period following the date of this prospectus. Credit Suisse First Boston Corporation may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, pursuant to the terms of its warrant, Nike USA agreed that it would sell no more than a specified percentage of the stock issuable upon exercise of the warrant at each of the first, second and third year anniversaries of the warrant. Further, pursuant to the terms of the warrant that we issued to an individual in September 1999, this individual agreed that he would sell no more than a specified percentage of the stock issuable upon exercise of the warrant at each six month interval for the first two years that he holds the warrant. See "Underwriting." Following this offering, under specified circumstances and subject to customary conditions, holders of approximately 27,533,333 shares of our outstanding common stock and warrants to purchase approximately 4,133,333 shares of our common stock will have registration rights with respect to their shares of common stock, subject to the 180-day lock-up arrangement described above, to require us to register their shares of common stock under the Securities Act. If the holders of these registrable securities request that we register their shares, and if the registration is effected, these shares will become freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See "Description of Capital Stock-- Registration Rights." 77 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Thomas Weisel Partners LLC and Warburg Dillon Read LLC are acting as representatives, the following respective numbers of shares of common stock:
Underwriter Number of Shares ----------- ---------------- Credit Suisse First Boston Corporation...................... J.P. Morgan Securities Inc.................................. Thomas Weisel Partners LLC.................................. Warburg Dillon Read LLC..................................... --------- Total..................................................... 6,000,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 900,000 additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us..................... $ $ $ $ Expenses payable by us.. $ 0.25 $ 0.22 $1,500,000 $1,500,000
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We, our officers and directors and substantially all of our existing stockholders and option holders have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except in our case issuances pursuant to the exercise of employee stock options outstanding on the date hereof. The underwriters have reserved for sale, at the initial public offering price, up to 510,000 shares of the common stock for employees, directors and certain other persons associated with us who have expressed an 78 interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against certain liabilities under the Securities Act of 1933, or to contribute to payments which the underwriters may be required to make in that respect. Our common stock has been approved for listing on The Nasdaq Stock Market's National Market under the symbol "FOGD." Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the representatives. The principal factors to be considered in determining the public offering price include the following: . the information included in this prospectus and otherwise available to the representatives; . market conditions for initial public offerings; . the history and the prospects for the industry in which we will compete; . the ability of our management; . the prospects for our future earnings; . the present state of our development and our current financial condition; . the general condition of the securities markets at the time of this offering; and . the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has acted as lead or co-manager on over 60 public offerings of equity securities that have been completed. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 79 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of the common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or such persons outside of Canada. Notice to British Columbia Residents A purchaser of the common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of the common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 80 LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys at the firm of Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 22,867 shares of our common stock. Pillsbury Madison & Sutro LLP, San Francisco and Palo Alto, California, is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus. EXPERTS The financial statements of Fogdog, Inc. as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Sports Universe, Inc. as of December 31, 1998 and for the period from February 9, 1998 (inception) through December 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, under the Securities Act a registration statement on Form S-1 relating to the common stock offered. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedules. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other document filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the commission at 1-800-SEC-0330. The commission maintains a web site that contains reports, proxy information statements and other information regarding registrants that file electronically with the commission. The address of this web site is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law. 81 FOGDOG, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- FOGDOG, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheet................................................. F-3 Consolidated Statement of Operations....................................... F-4 Consolidated Statement of Stockholders' Equity (Deficit)................... F-5 Consolidated Statement of Cash Flows....................................... F-6 Notes to the Consolidated Financial Statements............................. F-7 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Pro Forma Consolidated Financial Information............................... F-24 Pro Forma Consolidated Statements of Operations............................ F-25 Notes to the Pro Forma Consolidated Financial Information.................. F-27 SPORTS UNIVERSE, INC. FINANCIAL STATEMENTS Report of Independent Accountants.......................................... F-28 Balance Sheet.............................................................. F-29 Statement of Operations.................................................... F-30 Statement of Stockholders' Deficit......................................... F-31 Statement of Cash Flows.................................................... F-32 Notes to the Financial Statements.......................................... F-33
F-1 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 (deficit), and of cash flows present fairly, in all material respects, the financial position of Fogdog, Inc. at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California April 28, 1999, except for Note 11, which is as of December 6, 1999 F-2 FOGDOG, INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts)
Pro Forma Stockholders' December 31, Equity at ---------------- September 30, September 30, 1997 1998 1999 1999 ------- ------- ------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents...... $ 311 $ 1,694 $ 21,880 Short-term investments......... -- 423 -- Accounts receivable, net of allowances of $5, $35 and $96, respectively.................. 93 75 205 Merchandise inventory.......... -- -- 722 Prepaid expenses and other current assets................ 14 132 733 ------- ------- -------- Total current assets......... 418 2,324 23,540 Property and equipment, net...... 162 470 1,621 Intangible assets, net........... -- 46 2,480 Other assets, net................ -- -- 29,650 ------- ------- -------- Total assets..................... $ 580 $ 2,840 $ 57,291 ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............... $ 60 $ 705 $ 2,841 Notes payable to stockholders.. 155 -- -- Current portion of long-term debt.......................... 252 606 554 Other current liabilities...... 123 423 2,214 ------- ------- -------- Total current liabilities.... 590 1,734 5,609 Long-term debt, less current portion......................... 3 189 342 Commitments and contingencies (Note 5) Stockholders' equity (deficit): Convertible Preferred Stock, issuable in series, $0.001 par value, 14,200 and 41,797 shares authorized at December 31, 1998 and September 30, 1999 (unaudited), respectively; 1,786, 8,239 and 23,425 shares issued and outstanding at December 31, 1997 and 1998 and September 30, 1999 (unaudited), respectively; 5,000 shares authorized; no shares issued and outstanding pro forma (unaudited)......... 2 8 24 $ -- Common Stock, $0.001 par value, 50,000 and 72,000 shares authorized at December 31, 1998 and September 30, 1999 (unaudited), respectively; 4,547, 4,886 and 6,240 shares issued and outstanding at December 31, 1997, 1998 and September 30, 1999 (unaudited), respectively; 100,000 shares authorized; 29,665 (unaudited) shares issued and outstanding pro forma......................... 5 5 6 30 Additional paid-in capital..... 1,642 7,664 82,592 82,592 Notes receivable............... -- -- (94) (94) Unearned stock-based compensation.................. -- (978) (10,270) (10,270) Accumulated deficit............ (1,662) (5,782) (20,918) (20,918) ------- ------- -------- -------- Total stockholders' equity (deficit)................... (13) 917 51,340 $ 51,340 ------- ------- -------- ======== Total liabilities and stockholders' equity (deficit).. $ 580 $ 2,840 $ 57,291 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 FOGDOG, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
Nine Months Year Ended December Ended 31, September 30, ------------------------ ----------------- 1996 1997 1998 1998 1999 ------ ------- ------- ------- -------- (unaudited) Net revenues: Merchandise.................... $ -- $ -- $ 195 $ -- $ 2,542 Commission..................... -- 11 123 69 35 Web development................ 677 1,030 447 447 -- ------ ------- ------- ------- -------- Total net revenues........... 677 1,041 765 516 2,577 ------ ------- ------- ------- -------- Cost of revenues: Merchandise.................... -- -- 157 -- 2,070 Commission..................... -- -- 19 12 -- Web development................ 90 156 99 99 -- ------ ------- ------- ------- -------- Total cost of revenues....... 90 156 275 111 2,070 ------ ------- ------- ------- -------- Gross profit..................... 587 885 490 405 507 ------ ------- ------- ------- -------- Operating expenses: Marketing and sales............ 686 1,285 2,399 997 10,807 Site development............... 119 259 1,318 737 2,205 General and administrative..... 248 378 705 457 1,181 Amortization of intangible assets........................ -- -- -- -- 144 Amortization of stock-based compensation.................. -- -- 243 125 1,582 ------ ------- ------- ------- -------- Total operating expenses..... 1,053 1,922 4,665 2,316 15,919 ------ ------- ------- ------- -------- Operating loss................... (466) (1,037) (4,175) (1,911) (15,412) Interest income (expense), net... (3) (8) 29 2 276 Other income..................... -- -- 26 26 -- ------ ------- ------- ------- -------- Net loss......................... (469) (1,045) (4,120) (1,883) (15,136) Deemed preferred stock dividend.. -- -- -- -- (12,918) ------ ------- ------- ------- -------- Net loss available to common stockholders.................... $ (469) $(1,045) $(4,120) $(1,883) $(28,054) ====== ======= ======= ======= ======== Basic and diluted net loss per share available to common stockholders.................... $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04) ====== ======= ======= ======= ======== Basic and diluted weighted average shares used in computation of net loss per share available to common stockholders.................... 3,631 4,544 4,323 4,391 4,645 ====== ======= ======= ======= ======== Pro forma basic and diluted net loss per share (unaudited)...... $ (0.43) $ (1.33) ======= ======== Pro forma basic and diluted weighted average shares (unaudited)..................... 9,622 21,058 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 FOGDOG, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
Convertible Preferred Total Stock Common Stock Additional Unearned Stockholders' ------------- ------------- Paid-In Notes Stock-Based Accumulated Equity Shares Amount Shares Amount Capital Receivable Compensation Deficit (Deficit) ------ ------ ------ ------ ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1995................... -- $ -- 3,211 $ 4 $ 122 $ -- $ -- $ (148) $ (22) Issuance of Series A Preferred Stock, net... 1,155 1 -- -- 944 -- -- -- 945 Issuance of Common Stock.................. -- -- 1,331 1 27 -- -- -- 28 Net loss................ -- -- -- -- -- -- -- (469) (469) ------ ---- ----- --- ------- ---- -------- -------- ------- Balance at December 31, 1996................... 1,155 1 4,542 5 1,093 -- -- (617) 482 Issuance of Series A Preferred Stock, net... 631 1 -- -- 527 -- -- -- 528 Issuance of warrants to purchase Series A Preferred Stock........ -- -- -- -- 21 -- -- -- 21 Issuance of Common Stock.................. -- -- 5 -- 1 -- -- -- 1 Net loss................ -- -- -- -- -- -- -- (1,045) (1,045) ------ ---- ----- --- ------- ---- -------- -------- ------- Balance at December 31, 1997................... 1,786 2 4,547 5 1,642 -- -- (1,662) (13) Issuance of Series B Preferred Stock, net... 6,453 6 -- -- 4,774 -- -- -- 4,780 Issuance of Common Stock.................. -- -- 292 -- 23 -- -- -- 23 Unearned stock-based compensation........... -- -- -- -- 1,221 -- (1,221) -- -- Amortization of stock- based compensation..... -- -- -- -- -- -- 243 -- 243 Issuance of Common Stock for services........... -- -- 47 -- 4 -- -- -- 4 Net loss................ -- -- -- -- -- -- -- (4,120) (4,120) ------ ---- ----- --- ------- ---- -------- -------- ------- Balance at December 31, 1998................... 8,239 8 4,886 5 7,664 -- (978) (5,782) 917 Issuance of Series C Preferred Stock, net (unaudited)............ 11,657 12 -- -- 17,911 -- -- -- 17,923 Issuance of Series D Preferred Stock, net (unaudited)............ 3,529 4 -- -- 14,646 (50) -- -- 14,600 Issuance of Common Stock (unaudited)............ -- -- 940 1 231 (44) -- -- 188 Common Stock issued for acquired business (unaudited)............ -- -- 267 -- 2,132 -- -- -- 2,132 Unearned stock-based compensation (unaudited)............ -- -- -- -- 10,874 -- (10,874) -- -- Amortization of stock- based compensation (unaudited)............ -- -- -- -- -- -- 1,582 -- 1,582 Issuance of warrants to purchase Series C Preferred Stock (unaudited)............ -- -- -- -- 28,840 -- -- -- 28,840 Issuance of warrants to purchase shares of Common Stock (unaudited)............ -- -- -- -- 184 -- -- -- 184 Issuance of Common Stock upon exercise of warrants (unaudited)... -- -- 147 -- 110 -- -- -- 110 Allocation of discount on Preferred Stock (unaudited)............ -- -- -- -- 12,918 -- -- -- 12,918 Deemed Preferred Stock dividend (unaudited)... -- -- -- -- (12,918) -- -- -- (12,918) Net loss (unaudited).... -- -- -- -- -- -- -- (15,136) (15,136) ------ ---- ----- --- ------- ---- -------- -------- ------- Balance at September 30, 1999 (unaudited)....... 23,425 $ 24 6,240 $ 6 $82,592 $(94) $(10,270) $(20,918) $51,340 ====== ==== ===== === ======= ==== ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 FOGDOG, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Nine Months Year Ended Ended December 31, September 30, ----------------------- ----------------- 1996 1997 1998 1998 1999 ----- ------- ------- ------- -------- (unaudited) Cash flows from operating activities: Net loss......................... $(469) $(1,045) $(4,120) $(1,883) $(15,136) Adjustments to reconcile net loss to net cash used in operating activities: Allowances for bad debt and sales returns................. -- -- 30 20 80 Depreciation and amortization.. 44 105 122 76 242 Amortization of intangible assets........................ -- -- -- -- 144 Amortization of stock-based compensation.................. -- -- 243 125 1,582 Non-employee stock-based expense....................... -- -- 4 -- 475 Changes in assets and liabilities: Accounts payable and other current liabilities......... 80 27 945 340 3,476 Accounts receivable.......... (26) (17) (12) 2 (210) Other assets................. (18) 8 -- -- (1,084) Merchandise inventory........ -- -- -- -- (722) Prepaid expenses and other current assets.............. (10) 7 (164) (152) (601) ----- ------- ------- ------- -------- Net cash used in operating activities................ (399) (915) (2,952) (1,472) (11,754) ----- ------- ------- ------- -------- Cash flows from investing activities: Purchase of property and equipment....................... (137) (81) (269) (193) (1,393) Sale of (purchase of) short-term investments..................... -- -- (423) (423) 423 ----- ------- ------- ------- -------- Net cash used in investing activities................ (137) (81) (692) (616) (970) ----- ------- ------- ------- -------- Cash flows from financing activities: Proceeds from the sale of Common Stock........................... 28 -- 23 9 298 Proceeds from the sale of Preferred Stock................. 945 528 4,455 4,455 32,523 Proceeds from (payments under) term loan....................... 35 (70) 266 129 599 Payments under capital leases.... (14) (21) (15) (15) (3) Proceeds from (payments under) line of credit.................. -- 237 186 186 (423) Payments under software loan..... -- -- (58) -- (84) Proceeds from (payments under) notes payable to stockholders... (23) 162 170 170 -- ----- ------- ------- ------- -------- Net cash provided by financing activities...... 971 836 5,027 4,934 32,910 ----- ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.................. 435 (160) 1,383 2,846 20,186 Cash and cash equivalents at the beginning of the period........... 36 471 311 311 1,694 ----- ------- ------- ------- -------- Cash and cash equivalents at the end of the period................. $ 471 $ 311 $ 1,694 $ 3,157 $ 21,880 ===== ======= ======= ======= ======== Supplemental disclosure of cash flow information: Interest paid.................... $ 6 $ 14 $ 57 $ 29 $ 67 ===== ======= ======= ======= ======== Supplemental disclosure of noncash transactions: Conversion of note to Series B Preferred Stock................. $ -- $ -- $ 325 $ 325 $ -- ===== ======= ======= ======= ======== Software purchased under loan agreement....................... $ -- $ -- $ 161 $ 19 $ -- ===== ======= ======= ======= ======== Issuance of stock in exchange for notes .......................... $ -- $ -- $ -- $ -- $ 94 ===== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Note 1--The Company and Summary of Significant Accounting Policies: The Company Fogdog, Inc. (the "Company") is an online retailer of sporting goods. The Company's online retail store, "fogdog.com," offers products, detailed product information and personalized shopping services. During 1997 and 1998, the Company also provided web development services to sporting goods manufacturers, trade associations and retailers. The Company was incorporated in California in October 1994 as Cedro Group, Inc. and in November 1998, changed its name to Fogdog, Inc. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sports Universe, Inc. All significant intercompany accounts have been eliminated. Unaudited interim results The interim consolidated financial statements as of September 30, 1999 and for the nine months ended September 30, 1998 and 1999 are unaudited. In the opinion of management, these interim consolidated financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting only of normal, recurring adjustments necessary for the fair presentation of the results of interim periods. The financial data and other information disclosed in these notes to the consolidated financial statements for the related periods are unaudited. The results of the interim periods are not necessarily indicative of the results to be expected for any future periods. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments The Company's investments are classified as available-for-sale. Unrealized gains or losses have been insignificant for all periods. Merchandise inventory Inventory is stated at the lower of cost or market, determined on a first- in, first-out basis. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally three years, or the remaining lease term. Web development costs Web development costs primarily consist of costs to develop software which enables users to access information on the customer's web site. Web development costs incurred prior to technological feasibility F-7 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) are expensed as incurred and are included in site development expense. The Company defines establishment of the technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility throughout the period of market availability of the web site are capitalized. Costs eligible for capitalization have been insignificant for all periods presented. Intangible assets Purchased intangible assets are presented at cost, net of accumulated amortization, and are amortized using the straight line method over the estimated useful life of the assets. At each balance sheet date, the Company assesses the value of recorded intangible assets for possible impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS 121"), based upon a number of factors including turnover of the acquired workforce and the undiscounted value of expected future operating cash flows. Since inception, the Company has not recorded any provisions for possible impairment of intangible assets. In October 1998, the Company purchased the mailing list, Internet domain name and client database from Sportscape.com for $55,000. The Company is amortizing the balance over a twelve month period. Revenue recognition Merchandise revenue is earned by the Company from the sale of sporting goods through its online retail store. Merchandise revenue is recognized upon the shipment of the merchandise, which occurs only after credit card authorization is obtained. For sales of merchandise, the Company is responsible for establishing prices, processing the orders, and forwarding the information to the manufacturer, distributor or third-party warehouse for shipment. For these transactions, the Company assumes credit risk and is responsible for processing returns. The Company provides for estimated returns at the time of shipment based on historical data. Commission revenue was earned by the Company from catalog partners for transactions processed through the Company's online retail store. Revenue was recognized when the order was transmitted to the catalog partner. In commission sales, the Company processed orders in exchange for a commission on the sale of the vendor's merchandise. At the conclusion of the sale, the Company forwarded the order information to the vendor, which then charged the customer's credit card and shipped the merchandise directly to the customer. In a commission sale transaction, the Company did not take title or possession of the merchandise, and the vendor assumed all the risk of credit card chargebacks. The Company also earned commission revenue from transactions processed on several client sites. Commission revenue from these transactions has been immaterial to date. Revenue from web development services was recognized when the client's site had either been placed on-line or completed to the client's satisfaction, the Company had the right to invoice the customer, collection of the receivable was probable and there were no significant obligations remaining. Advertising costs Advertising costs are expensed as in accordance with Statement of Position 93-7, "Reporting on Advertising Costs." Advertising expense for the years ended December 31, 1996, 1997, 1998 and the nine months ended September 30, 1998 and 1999 were $12,000, $64,000, $541,000, $154,000, and $3.9 milion, respectively. F-8 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Site development costs Site development costs include costs incurred by the Company to develop and enhance the Company's web site. Site development costs are expensed as incurred. Net loss per share Basic net loss per share available to common stockholders is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net loss per share available to common stockholders is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common and potential common equivalent shares outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of Common Stock subject to repurchase rights, incremental shares of Common Stock issuable upon the exercise of stock options and warrants and incremental shares of Common Stock issuable upon conversion of Preferred Stock. For the nine months ended September 30, 1999, net loss per share available to common stockholders includes a charge of $12.9 million to reflect the deemed preferred stock dividend recorded in connection with the Series D Preferred Stock financing. The following table sets forth the computation of basic and diluted net loss per share available to common stockholders for the periods indicated (in thousands, except per share amounts):
Nine Months Year Ended December Ended 31, September 30, ------------------------ ----------------- 1996 1997 1998 1998 1999 ------ ------- ------- ------- -------- (unaudited) Numerator: Net loss...................... $ (469) $(1,045) $(4,120) $(1,883) $(15,136) Deemed Preferred Stock dividend..................... -- -- -- -- (12,918) ------ ------- ------- ------- -------- Net loss available to Common Stockholders................. $ (469) $(1,045) $(4,120) $(1,883) $(28,054) ====== ======= ======= ======= ======== Denominator: Weighted average shares....... 3,631 4,544 4,728 4,691 5,117 Weighted average Common Stock subject to repurchase agreements................... -- -- (405) (300) (472) ------ ------- ------- ------- -------- Denominator for basic and diluted calculation.......... 3,631 4,544 4,323 4,391 4,645 ====== ======= ======= ======= ======== Basic and diluted net loss per share available to common stockholders................. $(0.13) $ (0.23) $ (0.95) $ (0.43) $ (6.04) ====== ======= ======= ======= ========
F-9 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) The following table sets forth the weighted average potential shares of Common Stock that are not included in the diluted net loss per share available to common stockholders calculation above because to do so would be antidilutive for the periods indicated (in thousands):
Nine Months Year Ended Ended December 31, September 30, ---------------- -------------- 1996 1997 1998 1998 1999 ---- ----- ----- ------ ------- (unaudited) Weighted average effect of dilutive securities: Series A Preferred Stock.................. 177 777 1,786 1,786 1,786 Series B Preferred Stock.................. -- -- 3,513 2,509 6,452 Series C Preferred Stock.................. -- -- -- -- 8,097 Series D Preferred Stock.................. -- -- -- -- 78 Warrants to purchase Series A Preferred Stock.................................... -- 1 78 74 89 Warrants to purchase Series C Preferred Stock.................................... -- -- -- -- 196 Warrants to purchase Common Stock......... -- -- -- -- 54 Employee stock options.................... -- 524 810 587 1,601 Common Stock subject to repurchase agreements............................... -- -- 405 300 472 --- ----- ----- ------ ------- 177 1,302 6,592 5,256 18,825 === ===== ===== ====== =======
Income taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced, if necessary, by the amount of any benefits that, based on available evidence, are not expected to be realized. Pro forma net loss per share (unaudited) Pro forma net loss per share for the year ended December 31, 1998 and the nine months ended September 30, 1999 is computed using the weighted average number of common shares outstanding, including the conversion of the Company's Convertible Preferred Stock into shares of the Company's Common Stock effective upon the closing of the Company's initial public offering, as if such conversion occurred at January 1, 1998 or at date of original issuance, if later. The resulting unaudited pro forma adjustment includes an increase in the weighted average shares used to compute basic and diluted net loss per share of 5,299,000 and 16,413,000 for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. The calculation of pro forma diluted net loss per share excludes Common Stock subject to repurchase agreements and incremental Common Stock issuable upon the exercise of stock options and warrants as the effect would be antidilutive. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. During each of the three years ended December 31, 1998, and the nine months ended September 30, 1998 and 1999 the Company has not had any significant adjustments to net loss that are required to be reported in comprehensive income (loss). F-10 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Segment information Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of Enterprise and Related Information." During each of the three years ended December 31, 1998 and the nine months ended September 30, 1998 and 1999 the Company's management focused its business activities on the marketing and sale of sporting goods over the Internet. Since management's primary form of internal reporting is aligned with the marketing and sale of sporting goods, the Company believes it operates in one segment. Revenue from shipments to customers outside of the United States was 0%, 0%, 6%, 0% and 9% for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998, and 1999, respectively. Stock-based compensation The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB 25, unearned compensation is based on the difference, if any, on the date of the grant, between the fair value of the Company's stock and the exercise price. Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards Board Interpretation No. 28 using the multiple-option approach. The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Concentration of risk Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash equivalents, short-term investments and trade accounts receivable. Cash equivalents and short-term investments, primarily composed of investments in money market funds and certificates of deposits, are maintained with two institutions and the composition and maturities are regularly monitored by management. For accounts receivable, the Company maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. Because of their short- term nature, the carrying value of all financial instruments approximate their respective fair value. At December 31, 1997, approximately 47% of accounts receivable represented amounts due from three different customers related to web development revenues. At December 31, 1998, two customers accounted for 21% and 15% of accounts receivable for commission-related revenues. Sales to these customers accounted for approximately 25% of revenues in 1997. At September 30, 1999, no customer represented more than 10% of outstanding accounts receivable. The Company relies on a limited number of product manufacturers and third- party distributors to fulfill a large percentage of products offered on the online retail store. While management believes that alternate suppliers could provide product at comparable terms, the loss of any one manufacturer or distributor could delay shipments and have a material adverse effect on the Company's business, financial position and results of operations. F-11 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Recent accounting pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The adoption of the provisions of SOP 98-1 during the fiscal year beginning January 1, 1999, did not have a material effect on the financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting with Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal quarter ending June 30, 2000. The Company will adopt SFAS 133 in its quarter ending June 30, 2000. The Company has not engaged in hedging activities or invested in derivative instruments. Note 2--Balance Sheet Components (in thousands):
December 31, ------------ September 30, 1997 1998 1999 ----- ----- ------------- (unaudited) Prepaid expenses and other current assets: Prepaid advertising............................ $ -- $ -- $ 709 Other.......................................... 14 132 24 ----- ----- -------- $ 14 $ 132 $ 733 ===== ===== ======== Property and equipment: Computer equipment and software................ $ 230 $ 627 $ 1,447 Office furniture and fixtures.................. 101 134 707 ----- ----- -------- 331 761 2,154 Less: accumulated depreciation.................. (169) (291) (533) ----- ----- -------- $ 162 $ 470 $ 1,621 ===== ===== ======== Other assets: Deferred alliance costs, net (Note 7).......... $ -- $ -- $ 28,535 Deferred offering costs........................ -- -- 735 Deposits....................................... -- -- 196 Other.......................................... -- -- 184 ----- ----- -------- $ -- $ -- $ 29,650 ===== ===== ======== Other current liabilities: Accrued professional fees...................... $ -- $ -- $ 724 Accrued financing fees on Series D financing... -- -- 650 Accrued advertising............................ -- -- 217 Accrued compensation........................... 28 375 582 Other.......................................... 95 48 41 ----- ----- -------- $ 123 $ 423 $ 2,214 ===== ===== ========
F-12 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Note 3--Long-Term Debt (in thousands): Long-term debt consists of the following:
December 31, ------------ September 30, 1997 1998 1999 ----- ----- ------------- (unaudited) Equipment term loan (a).......................... $ -- $ 134 $ 800 Line of credit (b)............................... 237 423 -- Equipment term loan (b).......................... -- 132 77 Software loan (c)................................ -- 103 19 Capital leases................................... 18 3 -- ----- ----- ----- 255 795 896 Current portion of long-term debt................ (252) (606) (554) ----- ----- ----- $ 3 $ 189 $ 342 ===== ===== =====
(a) In September 1998, the Company entered into a loan agreement with a bank which provided borrowings up to $800,000. Borrowings under the agreement bear interest at the prime rate plus one-half percent (8.25% at December 31, 1998 and September 30, 1999) and are payable in equal monthly installments over a twenty-four month period beginning in October 1999. Borrowings for software, furniture, fixtures or telephone equipment are limited to 75% of the invoice amount. The Company must meet certain financial covenants in connection with the loan agreement with which it was in compliance at December 31, 1998. As of September 30, 1999, the Company was in compliance with all of its financial covenants. (b) In December 1997, the Company entered into a loan agreement with a bank which provided for a line of credit and an equipment term loan. Under the line of credit, the Company was permitted to borrow up to $500,000 and was required to keep cash on hand to cover the balance outstanding. At December 31, 1998, the Company had short-term investments of $423,000 collateralized under the agreement. The line of credit bore interest at 8.75%. Interest on the line was payable monthly. The line was paid off and terminated by the Company in September 1999. Under the equipment term loan, the Company can borrow up to $150,000 to be used to purchase capital equipment, furniture, software or other equipment. The term loan bears interest at the prime rate plus one percent (8.75% at December 31, 1998 and September 30, 1999) and is payable in twenty-four equal installments, including interest, commencing on January 28, 1999. The Company must meet certain financial covenants in connection with the loan agreement with which it was in compliance at December 31, 1998 and September 30, 1999. (c) In October 1998, the Company entered into a loan agreement with a software company to purchase software. Borrowings under the agreement bear interest at 7.5% and are payable in equal monthly installments over a twelve month period beginning in October 1998. Under the terms of the loan agreements, the Company is prohibited from paying dividends without approval from the bank. Note 4--Acquisition Effective September 3, 1999, the Company merged with Sports Universe, Inc. ("Sports Universe"). Sports Universe sells equipment and apparel for wakeboarding, waterskiing, inline skating, surfing and skateboarding on the Internet. The merger was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values as of the acquisition date. The total purchase price of approximately $2.1 million consisted of 266,665 shares of Company Common Stock with an estimated fair value of F-13 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) approximately $8.00 per share and other acquisition related expenses of approximately $30,000 primarily of payments for professional fees. The purchase price was allocated to net tangible liabilities assumed of $451,000 and goodwill of $2.6 million. The acquired goodwill will be amortized over its estimated useful life of two years. The results of operations for Sports Universe have been included in the Company's operations as of September 3, 1999. The following table summarizes unaudited consolidated information for the Company and Sports Universe (in thousands except per share amounts), giving effect to this merger as if it had occurred on February 9, 1998 ("inception") by consolidating the results of operations of Sports Universe from inception through the nine months ended September 30, 1999.
Pro Forma -------------------------- Nine Months Year ended Ended December 31, September 30, 1998 1999 ------------ ------------- (unaudited) Net revenues....................................... $ 944 $ 3,062 Net loss available to common stockholders.......... (5,790) (29,092) Basic and diluted net loss per share available to common stockholders............................... $ (1.27) $ (5.96)
Note 5--Commitments and contingencies: Operating leases The Company leases office space under noncancelable operating leases at two locations, expiring in April 2001 and July 2004. Rent expense totaled $44,000, $51,000, $157,000, $106,000 and $299,000 for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999, respectively. The Company sublets one of the spaces for a total of $385,000 through April 2001. Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
Years Ending December 31, ------------------------- 1999............................................................ $ 262 2000............................................................ 1,113 2001............................................................ 1,042 2002............................................................ 1,024 2003............................................................ 1,062 Thereafter...................................................... 633 ------ $5,136 ======
Distributors The Company maintains agreements with independent distributors to provide merchandise. The terms of these agreements are generally one to three years with optional extension periods. Annual minimum payments under these agreements are $344,000. Advertising As of September 30, 1999 the Company had commitments for online and traditional offline advertising of approximately $4.0 million. F-14 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Other The Company has entered into employment agreements with five of its officers which provide for minimum annual salary levels ranging from $110,000 to $280,000, as well as bonuses of up to 20% of the base salary. Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect on the financial position or results of operations or cash flows of the Company. Note 6--Income Taxes: The Company incurred net operating losses for each of the three years ended December 31, 1998 and accordingly, no provision for income taxes has been recorded. The tax benefit is reconciled to the amount computed using the federal statutory rate as follows (in thousands):
Year Ended December 31, --------------------- 1996 1997 1998 ----- ----- ------- Federal statutory benefit............................ $(159) $(355) $(1,400) State taxes, net of federal benefit.................. (28) (63) (247) Future benefits not currently recognized............. 187 418 1,550 Nondeductible compensation........................... -- -- 97 ----- ----- ------- $ -- $ -- $ -- ===== ===== =======
At December 31, 1998, the Company had approximately $4.3 million of federal and $4.7 million of state net operating loss carryforwards available to offset future taxable income which expire at various dates through 2019. Under the Tax Reform Act of 1986, the amount of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Deferred tax assets and liabilities consist of the following (in thousands):
December 31, -------------- 1997 1998 ----- ------- Deferred tax assets: Net operating loss carryforwards........................... $ 604 $ 1,843 Accruals and allowances.................................... 45 354 ----- ------- Net deferred tax assets................................... 649 2,197 Valuation allowance......................................... (649) (2,197) ----- ------- $ -- $ -- ===== =======
The Company has incurred losses for the years ended December 31, 1997 and 1998. Management believes that based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that the Company will not be able to realize its deferred tax assets and thus a full valuation allowance has been recorded at December 31, 1997 and 1998. F-15 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) Note 7--Convertible Preferred Stock: Convertible Preferred Stock ("Preferred Stock") consists of the following (in thousands except per share amounts):
Proceeds Net of Shares Per Share Liquidation Issuance Series Authorized Outstanding Amount Amount Costs ------ ---------- ----------- --------- ----------- -------- A............................................. 2,813 1,786 $0.84 $ 1,502 $ 1,473 B............................................. 9,679 6,453 0.75 4,839 4,780 ------ ------ ------- ------- Balance at December 31, 1998.................... 12,492 8,239 6,341 6,253 C (unaudited)................................. 23,804 11,657 1.54 18,000 17,923 D (unaudited)................................. 5,500 3,529 4.34 15,300 14,600 ------ ------ ------- ------- Balance at September 30, 1999 (unaudited)....... 41,796 23,425 $39,641 $38,776 ====== ====== ======= =======
The Company recorded a preferred stock dividend of $12.9 million to reflect the difference between the issuance price of $4.34 and estimated fair value of the Series D Preferred Stock of $8.00. The holders of Convertible Preferred have various rights and preferences as follows: Dividends Holders of the Series A Preferred Stock are entitled to receive annual dividends of 8% per share, when and if declared by the Board of Directors prior to the declaration of dividends to holders of Common Stock. Holders of Series B Preferred Stock are entitled to receive annual dividends of 8% per share, when and if declared by the Board of Directors prior to the declaration of dividends to holders of Series A Preferred Stock and holders of Common Stock. Holders of Series C Preferred Stock are entitled to receive annual dividends of 8% per share, when and if declared by the Board of Directors prior to the declaration of dividends to holders of Series A Preferred Stock, holders of Series B Preferred Stock and holders of Common Stock. Holders of Series D Preferred Stock are entitled to receive annual dividends of 8% per share, when and if declared by the Board of Directors prior to the declaration of dividends to the holders of Series A Preferred Stock, holders of Series B Preferred Stock, holders of Series C Preferred Stock and holders of Common Stock. Conversion Each share of Series A, Series B, Series C and Series D Preferred Stock is convertible into shares of Common Stock based on a formula which results in a one-for-one exchange ratio at September 30, 1999. This formula is subject to adjustment, as defined, which essentially provides adjustments for holders of the Preferred Stock in the event of stock splits or combinations. Such conversion is automatic upon the earlier of (i) the effective date of a public offering of Common Stock resulting in gross proceeds of at least $10,000,000 and at a price per share of at least $5.77 or (ii) written notice to the corporation of the preferred stockholders' intent to convert into shares of Common Stock. Liquidation In the event of liquidation, holders of the Series A Preferred Stock are entitled to a per share distribution in preference to holders of Common Stock equal to the Series A stated value of $0.8438 plus any declared but unpaid dividends. The holders of Series B Preferred Stock are entitled to a per share distribution preference to F-16 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) holders of Common Stock and Series A Preferred Stock equal to the Series B stated value of $0.75 plus any declared but unpaid dividends. The holders of Series C Preferred Stock are entitled to a per share distribution preference to holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock equal to the Series C stated value of $1.5441 plus any declared but unpaid dividends. The holders of Series D Preferred Stock are entitled to a per share distribution preference to holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock equal to the Series D stated value of $4.34 plus any declared but unpaid dividends. In the event funds are sufficient to make a complete distribution to holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as described above, the remaining assets will be distributed ratably among the holders of Common Stock and Series A Preferred Stock and Series B Preferred Stock and Series C Preferred Stock and Series D Preferred Stock, assuming conversion of all shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock into Common Stock. If distributions to holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as described above would reach an aggregate of $1.688, $1.496, $3.089 and $8.660 per share, respectively, the Common Stock holders would receive the remaining assets. Redemption In connection with the Series B Preferred Stock share issuance, holders of Series A Preferred Stock agreed to waive all mandatorily redeemable features associated with their Preferred Stock. The holders of the Series B, Series C and Series D have no redemption rights. Voting The holders of the Series A Preferred Stock and Series C Preferred Stock, voting as separate classes, are entitled to elect one director, each, to the Board. The holders of the Series B Preferred Stock, voting as a separate class, are entitled to elect two directors to the Board. Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock, voting together as a single class, are entitled to elect two additional directors to the Board. In addition, the holders of the Common Stock, voting together as a class, are entitled to elect two directors. Additionally, except as required by law, the consent of at least 66-2/3% of the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each voting as separate classes are required to (i) amend the articles of incorporation, (ii) establish any class of capital stock with dividend or liquidation preferences senior to those of the Series A shares or Series B shares or Series C shares or (iii) increase the authorized number of Series A Preferred Stock or Series B Preferred Stock or Series C Preferred Stock. Without the consent of the holders of at least a majority of the number of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting together as a single class, the Company cannot effect any liquidation. Warrants for Preferred Stock In connection with the loan agreement entered into in December 1997, the Company issued to the bank a warrant to purchase 29,630 shares of Series A Preferred Stock. The warrant may be exercised at any time between May 1, 1998 and December 24, 2002 at an exercise price of $0.84 per share. The warrant was recorded as a debt discount at its estimated fair value of $8,000. Amortization of the discount was recognized as interest expense over the term of the loan agreement. The warrant automatically converts to a warrant to purchase Common Stock upon the effective date of an initial public offering. F-17 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) In connection with the issuance of convertible promissory notes to certain holders of the Series A Preferred Stock in May 1998 and December 1997, the Company issued warrants to purchase 35,556 shares of Series A Preferred Stock. The warrants may be exercised at any time prior to December 26, 2002 at an exercise price of $0.84 per share. The warrants were recorded as a debt discount at its estimated fair value of $13,000. Amortization of the discount is being recognized as interest expense over the term of the promissory notes. The warrants automatically convert to warrants to purchase Common Stock upon the effective date of an initial public offering. In May 1998 and December 1997, the Company issued warrants to purchase 24,000 shares of Series A Preferred Stock to certain members of the Board of Directors for services. The warrants may be exercised at any time prior to May 22, 2003 and December 26, 2002 at an exercise price of $0.84 per share. The warrants automatically convert to warrants to purchase Common Stock upon the effective date of an initial public offering. The estimated fair value of the warrants was $8,000. The Company has not recorded any expense for the estimated fair value of the warrants because such amounts were insignificant. In September 1999, the Company entered into a two-year strategic agreement with Nike USA, Inc. ("Nike") to distribute Nike products over the Company's web site. In exchange for certain online exclusivity rights, the Company granted Nike a fully-vested warrant to purchase 4,114,349 shares of Series C Preferred Stock at $1.54 per share. The warrant automatically converts to a warrant to purchase Common Stock upon the closing of an initial public offering. The Company will expense the estimated fair value of the warrant of approximately $28.8 million over the term of the distribution agreement as marketing and sales expense. The Company estimated the fair value using the Black-Scholes option model with a per share value of $8.00 for the Series C Preferred Stock. The unamortized balance at September 30, 1999 is included in other assets, net. The Company estimated the fair value of each warrant using the Black-Scholes option pricing model using the following assumptions:
Year Ended Nine Months December 31, Ended ------------ September 30, 1997 1998 1999 ---- ---- ------------- Risk-free interest rate.......................... 6.40% 5.46% 5.11% Expected life (in years)......................... Term Term Term Dividend yield................................... 0% 0% 0% Expected volatility.............................. 50% 50% 90%
Note 8--Common Stock: At December 31, 1997 and 1998, there were 4,547,000 and 4,886,000 shares outstanding, respectively, of Common Stock issued to the founders of the Company, affiliates and other nonrelated parties. At September 30, 1999, there were 6,241,000 shares outstanding of Common Stock. A portion of the shares sold are subject to a right of repurchase by the Company subject to vesting. At December 31, 1997 and 1998 and September 30, 1999, there were approximately 0, 870,000 and 739,000 shares, respectively, subject to repurchase. In September 1997, the Board of Directors approved a two-for-one stock split of the Company's Common Stock and Preferred Stock with a corresponding adjustment to outstanding stock options. All common and preferred share and per share data in the accompanying financial statements have been adjusted retroactively to give effect to the stock split. F-18 FOGDOG, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) During the year ended December 31, 1998, the Company issued 47,413 shares of Common Stock to consultants in exchange for services. In connection with these issuances, the Company recorded expenses of $4,000 based on the fair value of the Common Stock on the date of grant as determined by the Board of Directors. The Board in determining the fair value of the common stock considered, among other things, the relative level of revenues and other operating results, the absence of a public trading market for the Company's securities and the competitive nature of the Company's market. The Company has reserved shares of Common Stock for issuance as follows (in thousands):
September 30, 1999 ------------- (unaudited) Conversion of Series A...................................... 1,786 Conversion of Series B...................................... 6,452 Conversion of Series C...................................... 11,657 Conversion of Series D...................................... 3,529 Common Stock issued......................................... 6,240 Exercise of options under the Equity Incentive Plans........ 8,863 Exercise of warrants issued for Common Stock................ 116 Exercise of warrants issued for Series A Preferred Stock.... 89 Exercise of warrants issued for Series C Preferred Stock.... 4,114 Undesignated................................................ 29,154 ------ 72,000 ======
The above shares do not include shares reserved under the 1999 Stock and ESPP Plan (See Note 10). Warrants for Common Stock In November 1998, the Company issued fully-vested warrants to purchase 146,667 shares of Common Stock to certain investors for services provided. The warrants were exercisable at the option of the holder at any time prior to March 7, 1999 at an exercise price of $0.75 per share. The estimated fair value of the warrants was $2,000. The Company has not recorded any expense for the estimated fair value of the warrants because such amount was insignificant. The warrants were fully exercised in May 1999. In March 1999, the Company issued a fully-vested warrant to purchase 64,762 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 issued fully-vested warrants to purchase 46,667 shares of Common Stock to distributors in exchange for exclusivity rights. The warrants are exercisable at the option of the holders at any time prior to March 31, 2000 at an exercise price of $4.50 per share. The warrants are recorded as marketing and sales expenses at their estimated fair values of $184,000 over the term of their respective distribution agreements. F-19 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) The Company estimated the fair value of each warrant using the Black-Scholes option pricing model using the following assumptions:
Year Ended December Nine Months 31, Ended --------- September 30, 1997 1998 1999 ---- ---- ------------- Risk-free interest rate............................. -- 5.46% 4.88% Expected life (in years)............................ -- Term Term Dividend yield...................................... -- 0% 0% Expected volatility................................. -- 50% 90%
Note 9--Stock Option Plan: In November 1996, the Board of Directors adopted the 1996 Stock Option Plan (the "Plan") providing for the issuance of incentive and nonstatutory stock options to employees, consultants and outside directors of the Company. The Plan was amended in April 1999 to increase the number of shares authorized for issuance to a total of 10,100,274. Options may be granted at an exercise price at the date of grant of not less than the fair market value per share for incentive stock options and not less than 85% of the fair market value per share for nonstatutory stock options, except for options granted to a person owning greater than 10% of the total combined voting power of all classes of stock of the Company, for which the exercise price of the option must be not less than 110% of the fair market value. The fair market value of the Company's Common Stock is determined by the Board of Directors or a committee thereof. Options granted under the Plan generally become exercisable at a rate of 25% after the first year and ratable each month over the next three years and expire no later than five years after the grant date. The following table summarizes information about stock option transactions under the Plan (in thousands, except per share amounts):
Year Ended December 31, Nine Months Ended --------------------------------- September 30, 1997 1998 1999 ---------------- ---------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- -------- --------- (unaudited) Outstanding at beginning of period.............. -- $ -- 1,199 $0.083 2,404 $ 0.083 Granted below fair value.................. -- -- 1,931 0.083 3,427 1.42 Granted at fair value... 1,231 0.083 13 0.083 -- Exercised............... (5) 0.083 (292) 0.083 (940) .25 Canceled................ (27) 0.083 (447) 0.083 (388) .26 ------ ----- -------- Outstanding at end of period................. 1,199 0.083 2,404 0.083 4,503 1.05 ====== ===== ======== Options vested.......... -- 504 825 ====== ===== ======== Weighted average fair value of options granted during the period................. $0.083 $ 0.72 $ 4.71 ====== ====== ========
At September 30, 1999, the Company had 4,360,504 shares available for future grant under the Plan. F-20 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) The following table summarizes the information about stock options outstanding and exercisable as of December 31, 1998 (in thousands, except per share amounts):
Options Outstanding and Exercisable -------------------------------- Weighted Average Remaining Weighted Contractual Average Number Life Exercise Outstanding (in years) Price Exercise Price ----------- ----------- -------- $0.083......................................... 504 2.74 $0.083
The following table summarizes the information about stock options outstanding and exercisable as of September 30, 1999 (in thousands, except per share amounts):
Options Outstanding and Exercisable -------------------------------- Weighted Average Remaining Weighted Contractual Average Number Life Exercise Outstanding (in years) Price Exercise Price ----------- ----------- -------- $0.083......................................... 825 2.41 $0.083
The weighted average remaining contractual life of stock options outstanding at December 31, 1998 and September 30, 1999 was 2.91 and 3.3 years, respectively. Fair value disclosures The Company applies the measurement principles of APB No. 25 in accounting for its stock option plan. Had compensation expense for options granted for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 been determined based on the fair value at the grant date as prescribed by SFAS No. 123, the Company's net loss and net loss per share would have decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
Year Ended Nine Months Ended December 31, September 30, ---------------- ------------------- 1997 1998 1998 1999 ------- ------- -------- --------- (unaudited) Net loss available to common stockholders: As reported.......................... $(1,045) $(4,120) $ (1,883) $ (28,054) ======= ======= ======== ========= Pro forma............................ $(1,048) $(4,018) $ (1,823) $ (27,119) ======= ======= ======== ========= Basic and diluted net loss per share available to common stockholders: As reported.......................... $ (0.23) $ (0.95) $ (0.43) $ (6.04) ======= ======= ======== ========= Pro forma............................ $ (0.23) $ (0.93) $ (0.42) $ (5.84) ======= ======= ======== =========
F-21 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:
Nine Months Ended Year Ended December 31, September 30, ------------------------ -------------------- 1997 1998 1998 1999 ----------- ----------- --------- --------- (unaudited) Risk-free interest rates........ 5.13-5.64% 4.06-5.15% 5.13-5.15% 4.34-5.50% Expected lives (in years)....... 5 5 5 5 Dividend yield.................. 0% 0% 0% 0% Expected volatility............. 0% 0% 0% 0%
Because the determination of fair value of all options granted after such time as the Company becomes a public entity will include an expected volatility factor in addition to the factors described in preceding paragraph, the above results may not be representative of future periods. Unearned stock-based compensation In connection with certain stock option grants, during the year ended December 31, 1998 and the nine months ended September 30, 1999, the Company recognized unearned stock-based compensation totaling $1,221,000 and $10,874,000, respectively, which is being amortized over the vesting periods of the related options, which is generally four years, using the multiple option approach. Amortization expense recognized for the year ended December 31, 1998 and the nine months ended September 30, 1999 totaled approximately $243,000 and $1,582,000, respectively. In determining the fair market value on each grant date, the Company considered among other things, the relative level of revenues and other operating results, the absence of a public trading market for the Company's securities and the competitive nature of the Company's market. Note 10--Related Party Transactions: In December 1997 and May 1998, certain holders of Series A Preferred Stock received from the Company convertible promissory notes in exchange for $325,000. The notes bore interest at 8% per annum. Under the terms, the notes automatically converted into Series B Preferred Stock at the price per share paid by the outside investors. The notes were converted into 386,905 shares of Series B Preferred Stock in June 1998. Note 11--Subsequent Events: Reincorporation In September 1999, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware. As a result of the reincorporation, the Company is authorized to issue 100,000,000 shares of $0.001 par value Common Stock and 5,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The par value of the Preferred Stock and shares of Common Stock and Preferred Stock authorized in the consolidated balance sheet at December 31, 1997 and 1998 and in consolidated statement of stockholders' equity for each of the three years in the period ended December 31, 1998 have been retroactively adjusted to reflect the reincorporation. Stock Split In November 1999, the Company's Board of Directors approved a two for three reverse stock split of the outstanding shares of common and convertible redeemable preferred stock. F-22 FOGDOG, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information for the nine months ended September 30, 1998 and 1999 is unaudited) All share and per share amounts in these consolidated financial statements and notes thereto for all periods presented have been retroactively adjusted to reflect the stock split. Stock option grant (unaudited) During October and November 1999, the Company granted options to purchase 402,373 shares of Common Stock to new employees at a weighted average exercise price of $6.75. In connection with these stock option grants, the Company will recognize $503,000 in unearned stock-based compensation that will be recognized as an expense over the related vesting periods. 1999 Stock Plans (unaudited) In September 1999, the Company's Board of Directors approved the 1999 Stock Incentive Plan (the "1999 Plan"), which will serve as the successor plan to the 1996 Plan. The Board of Directors also approved a 1999 Employee Stock Purchase Plan (the "1999 ESPP"). These plans will become effective immediately prior to the completion of an initial public offering. The common stock reserved for future issuances under these plans will be 18% of the shares of Common Stock outstanding immediately after the initial public offering. Additionally, the share reserve in each plan will automatically increase on the first trading day in January each year, beginning with calendar year 2000, equal to the lesser of (i) the number of shares initially reserved for such increase in each respective plan, (ii) 4.25% and 0.75% of the then outstanding shares for the 1999 Plan and the 1999 ESPP, respectively, or (iii) an amount determined by the Board of Directors. F-23 FOGDOG, INC. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Effective September 3, 1999, Fogdog, Inc. ("Fogdog") merged with Sports Universe, Inc. ("Sports Universe"). Sports Universe sells equipment and apparel for wakeboarding, waterskiing, inline skating, surfing and skateboarding on the Internet. The merger was accounted for using the purchase method of accounting and accordingly the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values at the acquisition date. The total purchase price of approximately $2.1 million consisted of 266,665 shares of Fogdog Common Stock with an estimated fair value of approximately $8.00 per share and other acquisition related expenses of approximately $30,000, consisting primarily of payments for professional fees. The purchase price was allocated to net tangible liabilities assumed of $451,000 and goodwill of $2.6 million. The acquired goodwill will be amortized over its estimated useful life of two years. The following unaudited pro forma consolidated statements of operations gives effect to this merger as if it had occurred on February 9, 1998 ("inception"), by consolidating the results of operations of Sports Universe from inception through December 31, 1998 and the nine months ended September 30, 1999 with the results of operations of Fogdog. The unaudited pro forma consolidated statements of operations are not necessarily indicative of the operating results that would have been achieved had the transaction been in effect as of December 31, 1998 and should not be construed as being representative of future operating results. The historical financial statements of Fogdog and Sports Universe are included elsewhere in this Prospectus and the unaudited pro forma consolidated financial information presented herein should be read in conjunction with those financial statements and related notes. F-24 FOGDOG, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
Nine Months Ended September 30, 1999 --------------------------------------------- Sports Universe, Fogdog, Inc. Inc. Adjustments Pro Forma ------------ --------- ----------- --------- Net revenues.................... $ 2,577 $ 485 $ -- $ 3,062 Cost of revenues................ 2,070 327 -- 2,397 -------- ----- ----- -------- Gross profit.................... 507 158 -- 665 -------- ----- ----- -------- Operating expenses: Marketing and sales........... 10,807 121 -- 10,928 Site development.............. 2,205 -- -- 2,205 General and administrative.... 1,181 214 -- 1,395 Amortization of intangible assets....................... 144 -- 861 (A) 1,005 Amortization of stock-based compensation................. 1,582 -- -- 1,582 -------- ----- ----- -------- Total operating expenses.... 15,919 335 861 17,115 -------- ----- ----- -------- Operating loss.................. (15,412) (177) (861) (16,450) Interest income, net............ 276 -- -- 276 -------- ----- ----- -------- Net loss........................ (15,136) (177) (861) (16,174) Deemed preferred stock dividend....................... (12,918) -- -- (12,918) -------- ----- ----- -------- Net loss available to common stockholders................... $(28,054) $(177) $(861) $(29,092) ======== ===== ===== ======== Pro forma basic and diluted loss per share available to common stockholders (B)............... $ (6.04) $ (5.96) ======== ======== Pro forma basic and diluted weighted average shares used in computation of pro forma net loss per share available to common stockholders............ 4,645 4,885 ======== ========
The accompanying notes are an integral part of these pro forma consolidated financial statements F-25 FOGDOG, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
Year Ended December 31, 1998 ---------------------------------------------- Sports Universe, Fogdog, Inc. Inc. Adjustments Pro Forma ------------ --------- ----------- --------- Net revenues.................... $ 765 $ 179 $ -- $ 944 Cost of revenues................ 275 126 -- 401 ------- ----- ------- ------- Gross profit.................... 490 53 -- 543 ------- ----- ------- ------- Operating expenses: Marketing and sales........... 2,399 261 -- 2,660 Site development.............. 1,318 -- -- 1,318 General and administrative.... 705 278 -- 983 Amortization of intangible assets....................... -- -- 1,184 (A) 1,184 Amortization of stock-based compensation................. 243 -- -- 243 ------- ----- ------- ------- Total operating expenses.... 4,665 539 1,184 6,388 ------- ----- ------- ------- Operating loss.................. (4,175) (486) (1,184) (5,845) Interest income, net............ 29 -- -- 29 Other income.................... 26 -- -- 26 ------- ----- ------- ------- Net loss........................ $(4,120) $(486) $(1,184) $(5,790) ======= ===== ======= ======= Pro forma basic and diluted loss per share (B).................. $ (0.95) $ (1.27) ======= ======= Pro forma basic and diluted weighted average shares used in computation of pro forma net loss per share................. 4,323 4,561 ======= =======
The accompanying notes are an integral part of these pro forma consolidated financial statements F-26 FOGDOG INC. NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following adjustments were applied to Fogdog's historical financial statements and those of Sports Universe to arrive at the pro forma consolidated financial information. (A) To record amortization of acquired goodwill totaling $2,583,000 over the estimated period of benefit of two years. (B) Pro forma basic and diluted net loss per share available to common stockholders of the nine month period ended September 30, 1999 and for the year ended December 31, 1998 was computed using the weighted average number of common and common equivalent shares outstanding. Pro forma common equivalent shares, composed of unvested restricted Common Stock, incremental Common Stock issuable upon the exercise of stock options, warrants, and outstanding Preferred Stock are included in diluted net loss per share to the extent such shares are dilutive. Differences between historical weighted average shares outstanding and pro forma weighted average shares outstanding used to compute net loss per share results form the inclusion of shares issued in conjunction with the acquisition as if such shares were outstanding as of February 9, 1998 (inception of Sports Universe). F-27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Sports Universe, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Sports Universe, Inc. at December 31, 1998 and the results of its operations and its cash flows for the period from February 9, 1998 (inception) to December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California September 8, 1999 F-28 SPORTS UNIVERSE, INC. BALANCE SHEET
December 31, June 30, 1998 1999 ------------ --------- ASSETS (Unaudited) Current assets: Cash................................................. $ 10,000 $ 21,000 Accounts receivable.................................. 9,000 44,000 Inventory............................................ -- 20,000 Other current assets................................. 1,000 1,000 --------- --------- Total current assets............................... 20,000 86,000 Property and equipment, net............................ 83,000 47,000 --------- --------- Total assets..................................... $ 103,000 $ 133,000 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable..................................... $ 43,000 $ 109,000 Accrued liabilities.................................. 166,000 175,000 Capital lease obligations............................ 65,000 48,000 Loan from related parties............................ 312,000 325,000 --------- --------- Total current liabilities.......................... 586,000 657,000 --------- --------- Commitments (Note 5) Stockholders' deficit: Common stock Par value $0.001; 25,000,000 shares authorized; 785,000 and 6,346,000 shares outstanding........... 1,000 6,000 Additional paid-in capital........................... 2,000 19,000 Accumulated deficit.................................. (486,000) (549,000) --------- --------- Total stockholders' deficit........................ (483,000) (524,000) --------- --------- Total liabilities and stockholders' deficit...... $ 103,000 $ 133,000 ========= =========
The accompanying notes are an integral part of these financial statements F-29 SPORTS UNIVERSE, INC. STATEMENT OF OPERATIONS
Period from February Six 9, Months 1998 (inception) Ended through June 30, ----------------------- 1999 -------- December 31, June 30, 1998 1998 ------------ --------- (Unaudited) Net revenues: Product................... $ 142,000 $ 21,000 $225,000 Web design and other...... 37,000 7,000 37,000 ------------ --------- -------- Total net revenues...... 179,000 28,000 262,000 ------------ --------- -------- Cost of revenues: Product................... 122,000 16,000 139,000 Web design and other...... 4,000 1,000 16,000 ------------ --------- -------- Total cost of revenues.. 126,000 17,000 155,000 ------------ --------- -------- Gross profit................ 53,000 11,000 107,000 ------------ --------- -------- Operating expenses: Marketing and sales....... 261,000 179,000 67,000 General and administrative........... 278,000 147,000 103,000 ------------ --------- -------- Total operating expenses............... 539,000 326,000 170,000 ------------ --------- -------- Net loss.................... $ (486,000) $(315,000) $(63,000) ============ ========= ========
The accompanying notes are an integral part of these financial statements F-30 SPORTS UNIVERSE, INC. STATEMENT OF STOCKHOLDERS' DEFICIT
Common Stock Additional ----------------- Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Deficit --------- ------ ---------- ----------- ------------- Issuance of common stock at inception........... 785,000 $1,000 $ 2,000 $ -- $ 3,000 Net loss................ -- -- -- (486,000) (486,000) --------- ------ ------- --------- --------- Balance at December 31, 1998................... 785,000 1,000 2,000 (486,000) (483,000) Issuance of common stock (unaudited)............ 5,611,000 5,000 17,000 -- 22,000 Repurchase of common stock (unaudited)...... (50,000) -- -- -- -- Net loss (unaudited).... -- -- -- (63,000) (63,000) --------- ------ ------- --------- --------- Balance at June 30, 1999 (unaudited)............ 6,346,000 $6,000 $19,000 $(549,000) $(524,000) ========= ====== ======= ========= =========
The accompanying notes are an integral part of these financial statements F-31 SPORTS UNIVERSE, INC. STATEMENT OF CASH FLOWS
Period from February 9, 1998 Six (inception) through Months -------------------------------- Ended December 31, June 30, June 30, 1998 1998 1999 ---------------- -------------- -------- (Unaudited) Cash flows from operating activities: Net loss.......................... $ (486,000) $ (315,000) $(63,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization... 36,000 15,000 24,000 Gain on sale of fixed assets.... -- -- (6,000) Changes in assets and liabilities: Accounts receivable........... (9,000) (5,000) (35,000) Inventory..................... -- -- (20,000) Other current assets.......... (1,000) (1,000) -- Accounts payable.............. 43,000 9,000 88,000 Accrued liabilities........... 166,000 128,000 9,000 -------------- -------------- -------- Net cash used in operating activities................. (251,000) (169,000) (3,000) -------------- -------------- -------- Cash flows from investing activities: Acquisition of property and equipment........................ (49,000) (47,000) -- Proceeds from sale of computer equipment........................ -- -- 18,000 -------------- -------------- -------- Net cash (used in) provided by investing activities.... (49,000) (47,000) 18,000 -------------- -------------- -------- Cash flows from financing activities: Payments on capitalized lease obligations...................... (7,000) (1,000) (17,000) Payments on loans from related parties.......................... (64,000) (41,000) (8,000) Proceeds on loans from related parties.......................... 378,000 277,000 21,000 Issuance of common stock.......... 3,000 2,000 -- -------------- -------------- -------- Net cash provided by (used in) financing activities... 310,000 237,000 (4,000) -------------- -------------- -------- Net increase in cash................ 10,000 21,000 11,000 Cash at beginning of period......... -- -- 10,000 -------------- -------------- -------- Cash at end of period............... $ 10,000 $ 21,000 $ 21,000 ============== ============== ======== Non-cash investing activities: Computer equipment leases......... $ 71,000 $ 71,000 -- Conversion of employee compensation to common stock..... -- -- $ 22,000
The accompanying notes are an integral part of these financial statements F-32 SPORTS UNIVERSE, INC. NOTES TO THE FINANCIAL STATEMENTS (Information for the period from inception through June 30, 1998 and the six months ended June 30, 1999 is unaudited) Note 1--The Company and Summary of Significant Accounting Policies: The Company Sports Universe, Inc. (the "Company"), was incorporated in Delaware on February 9, 1998 ("Inception") for the purpose of selling equipment and apparel for wakeboarding, waterskiing, inline skating, snowboarding, surfing and skateboarding on the Internet. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Revenue recognition The Company's revenues are derived primarily from sales of products over the Internet. Revenues related to product sales are recognized upon shipment by the Company or one of its distribution partners. The Company also derives revenues from Web design, Web hosting, promotion sales and advertising on its web site. The Company recognizes revenue on Web design and Web hosting as the service is provided to the customer and no ongoing obligation exists, and advertising revenue is recognized over the period the advertising is displayed. Restricted cash The Company has cash restricted for use for certain service providers that process customer credit card orders. This cash is used to pay the service providers for amounts not paid for by credit card vendors related to customer orders. As of December 31, 1998 and June 30, 1999 (unaudited), the Company had restricted cash of $3,000 and $7,000, respectively, included in cash. Inventory Inventory is stated at lower of cost or market, cost being determined by the first-in, first-out method. Property and equipment Property and equipment are stated at historical cost. Depreciation is computed using straight-line method over the estimated useful lives of the assets. Computer equipment and office furniture and fixtures are depreciated over three and five years, respectively. For computer equipment under capital leases, the net present value of future lease payments is capitalized at the inception of the lease and amortized over the estimated useful lives of the related asset. From Inception to June 30, 1998 and December 31, 1998 and for the six months ended June 30, 1999 the Company had depreciation and amortization expense of $15,000, $37,000, and $23,000, respectively. The capital leases all have bargain purchase options which allows the Company to purchase the equipment below fair value at the end of the lease. Advertising costs Advertising costs are expensed as incurred in accordance with Statement of Position 93-7, "Reporting on Advertising Costs". Advertising costs from Inception to June 30, 1998 and December 31, 1998 and for the six-month period ended June 30, 1999 (unaudited) were $19,000, $35,000 and $1,000, respectively. F-33 SPORTS UNIVERSE, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Information for the period from inception through June 30, 1998 and the six months ended June 30, 1999 is unaudited) Concentration of risks Financial instruments that potentially subject the Company to a concentration of credit risk are cash and accounts receivable. Cash is deposited with a high quality financial institution. The Company's accounts receivable are derived from revenue earned from customers located in the United States and are dominated in U.S. dollars. Accounts receivable balances are typically settled through customer credit cards and, as a result, the majority of accounts receivable are collected upon processing of credit card transactions. No customer accounts for more than 10% of the revenues or accounts receivable as of June 30, 1999 or December 31, 1998. The Company has a limited number of distribution partners one of which fills a material portion of Company's customer orders. The Company has a distribution agreement with this distribution partner. The loss of this distribution partner could have material adverse effect on Company's statement of operations. Fair value of financial instruments The Company's financial instruments, including cash, accounts receivables, accounts payable, accrued expenses and related party loans, have carrying amounts which approximate fair value due to relatively short maturity of these instruments. Interim financial information The accompanying balance sheet as of June 30, 1999 and the statements of operations and of cash flows for the six-month period ended June 30, 1999 and from Inception to June 30, 1998 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The financial data and other information disclosed in these notes to financial statements related to these periods is unaudited. The results for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. Note 2--Balance Sheet Components:
December 31, June 30, 1998 1999 ------------ ----------- (Unaudited) Property and equipment: Computer equipment...... $ 39,000 $ 39,000 Computer equipment under a capital lease........ 71,000 36,000 Furniture and office equipment.............. 10,000 10,000 -------- -------- 120,000 85,000 Less: accumulated depreciation and amortization........... (37,000) (38,000) -------- -------- $ 83,000 $ 47,000 ======== ======== Accrued expenses: Web design.............. $ 62,000 $ 56,000 Advertising expenses.... 33,000 19,000 Legal expenses.......... 47,000 52,000 Payroll expense......... -- 19,000 Rent.................... 21,000 25,000 Other................... 3,000 4,000 -------- -------- $166,000 $175,000 ======== ========
F-34 SPORTS UNIVERSE, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Information for the period from inception through June 30, 1998 and the six months ended June 30, 1999 is unaudited) Note 3--Related Party Transactions: The Company had loans from two of its key employees totaling $240,000 and $237,000 as of June 30, 1999 and December 31, 1998, respectively. These borrowings relate to certain operating expenses which were paid by the employee and cash infusions made which were made to the Company. These related party loans do not have a stated maturity and are non-interest bearing. The Company also had convertible debt with certain investors in the amount of $85,000 and $75,000 as of June 30, 1999 and December 31, 1998, respectively. The note holder has the option to convert the debt into common stock or to be paid in cash one year after issuance of the note. The note automatically converts to common shares if the Company receives financing at a rate based upon the fair value of the common stock at the date of conversion, as defined in the agreement. The notes carried an annual interest rate of 10%. Note 4--Income Taxes: The Company incurred a net operating loss for the period from Inception to December 31, 1998 and accordingly, no provision for income taxes has been recorded. The tax benefit is reconciled to the amount computed using the federal statutory rate as follows:
From Inception to December 31, 1998 ----------------- Federal statutory benefit.................................. $(157,000) State taxes, net of federal benefit........................ (28,000) Future benefits not currently recognized................... 185,000 --------- $ -- =========
At December 31, 1998, the Company had approximately $461,000 of federal and $462,000 of state net operating loss carryforwards available to offset future taxable income which expire at various dates through 2013. Under the Tax Reform Act of 1986, the amount of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Note 5--Commitments: Rent expense under non-cancelable operating lease agreements for the six- month period ended June 30, 1999 and from Inception to June 30, 1998 and December 31, 1998 were $7,000, $22,000 and $47,000, respectively. Future minimum lease payments related to office facilities and computer equipment under non-cancelable operating and capital leases are $44,000 for 1999, $19,000 for 2000 and $4,000 for 2001. There are no minimum lease payments due after March 2001. Note 6--Common Stock: The Company's Articles of Incorporation, as amended, authorize the Company to issue common stock, $.001 par value. For the six-months ended June 30, 1999, the Company issued 6,346,000 shares of Common F-35 SPORTS UNIVERSE, INC. NOTES TO THE FINANCIAL STATEMENTS--(Continued) (Information for the period from inception through June 30, 1998 and the six months ended June 30, 1999 is unaudited) Stock to both employees and non-related parties, respectively. A portion of these shares, issued to employees are subject to a right of repurchase by the Company, which lapses generally over a one-year period. At June 30, 1999, there were 735,000 shares subject to repurchase. Note 7--Subsequent Events: On September 3, 1999 the Company merged with Fogdog Acquisition Corp., a wholly owned subsidiary of Fogdog, Inc. F-36 The inside backcover of the prospectus includes: The following text placed in the center of the page and the Fogdog Sports logo below the text: THE DOG KNOWS SPORTS [Fogdog Sports Logo] Circling the text described above and the Fogdog Sports logo are the following, clockwise starting with the top of the page in the center: [PICTURE OF SOCCER CLEAT EXPERT ADVICE PAGE] The word "EXPERTISE" appears above the picture of the soccer cleat expert advice page. [PICTURE OF RUNNING SHOE SELECTION PAGE] The word "SELECTION" appears above the picture of the running shoe selection page. [PICTURE OF BULLETIN BOARD IN THE OUTDOOR COMMUNITY PAGE] The word "COMMUNITY" appears above the picture of the bulletin board in the outdoor community page. [CLOSE-UP PICTURE OF A JACKET] The words "DETAILED IMAGERY" appear above the close-up picture of a jacket. [PICTURE OF PRODUCT INFORMATION FOR SOCCER CLEAT PAGE] The words "PRODUCT INFORMATION" appear above the picture of the product information for soccer cleat page. [PICTURE OF COMPARISON CHART FOR CLIMBING FOOTWEAR PAGE] The words "COMPARISON CHARTS" appear above the picture of the comparison chart for climbing footwear page. [PICTURE OF FOGDOG FETCH BASEBALL AND SOFTBALL BAT CONFIGURATOR PAGE] The word "CONFIGURATOR" appears above the picture of the Fogdog Fetch baseball and softball configurator page. [PICTURE OF CALLAWAY GOLF BRAND PAGE] The words "TOP BRANDS" appear above the picture of the Callaway Golf brand page, which includes the Callaway logo. The back cover of the prospectus contains Fogdog Sports logo. [LOGO OF FOG DOG SPORTS] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discounts payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee. SEC Registration Fee............................................. $ 19,182 NASD Filing Fee.................................................. 7,400 Nasdaq National Market Listing Fee............................... 75,000 Printing and Engraving Expenses.................................. 275,000 Legal Fees and Expenses.......................................... 650,000 Accounting Fees and Expenses..................................... 350,000 Blue Sky Fees and Expenses....................................... 10,000 Transfer Agent Fees.............................................. 15,000 Miscellaneous.................................................... 98,418 ---------- Total.......................................................... $1,500,000 ==========
Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit the indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VII, Section 6 of our bylaws provides for mandatory indemnification of our directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Our certificate of incorporation provides that, subject to Delaware law, our directors will not be personally liable for monetary damages for breach of the directors' fiduciary duty as directors to Fogdog Sports and its stockholders. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the company or our stockholders for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We have entered into indemnification agreements with our officers and directors, a form of which will be filed with the Securities and Exchange Commission as an exhibit to our registration statement on Form S-1 (No. 333- 87819). The indemnification agreements provide our officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section 7 of the underwriting agreement contained in exhibit 1.1 hereto, indemnifying our officers and directors against certain liabilities, and section 1.11 of the Third Amended and Restated Registration Rights Agreement contained in exhibit 4.2 hereto, indemnifying the parties thereto, including controlling stockholders, against liabilities. II-1 Item 15. Recent Sales of Unregistered Securities During the past three years, the registrant has issued unregistered securities to a limited number of persons as described below. All share numbers and per share prices have been adjusted to reflect a two for three reverse stock split to be effective immediately prior to the consummation of this offering. (a) Since inception, the registrant has issued an aggregate of 1,133,333 shares of its common stock to Brett M. Allsop in exchange for services rendered in connection with the organization of the company and valued at approximately $30,000. (b) Since inception, the registrant has issued an aggregate of 1,133,333 shares of its common stock to Robert S. Chea in exchange for services rendered in connection with the organization of the company and valued at approximately $30,000. (c) Since inception, the registrant has issued an aggregate of 1,133,333 shares of its common stock to Andrew Y. Chen in exchange for services rendered in connection with the organization of the company and valued at approximately $30,000. (d) Since inception, the registrant has issued and sold an aggregate of 200,000 shares of its common stock to Michael Allsop for an aggregate consideration of $10,000. (e) Since inception, the registrant has issued and sold an aggregate of 200,000 shares of its common stock to James Allsop for an aggregate consideration of $10,000. (f) Since inception, the registrant has issued and sold an aggregate of 200,000 shares of its common stock to Jon Allsop for an aggregate consideration of $10,000. (g) Since inception, the registrant has issued and sold an aggregate of 210,528 shares of its common stock to Marcy E. von Lossberg in exchange for services rendered to the company during her first year of employment pursuant to the terms of her employment agreement entered in July 1995. See "Transactions and Relationships with Related Parties--Agreements with Officers and Directors." (h) Since inception, the registrant has issued and sold an aggregate of 221,164 shares of its common stock to Robert Maxfield for an aggregate consideration of $18,661. (i) Since inception, the registrant has issued and sold an aggregate of 110,581 shares of its common stock to Frederick M. Gibbons for an aggregate consideration of $9,330. (j) In September 1996, the registrant issued and sold 1,155,554 shares of its Series A preferred stock to Novus Ventures, L.P., the Robert Maxfield Separate Property Trust, William Romans and Frederick Gibbons for an aggregate purchase price of $974,999. (k) In May 1997, the registrant issued and sold 622,224 shares of its Series A preferred stock to Marianne Allsop, Richard K. Morse, Lazy A Land Company LLC, Jamey Allsop, Skye Allsop and BSJR, Inc. for an aggregate purchase price of $525,001. (l) In October 1997, the registrant issued and sold 8,400 shares of its Series A preferred stock to Enterprise Law Group for an aggregate purchase price of $7,088. (m) In December 1997, the registrant issued to Imperial Bank warrants to purchase 29,630 shares of its Series A preferred stock at an exercise price of $0.84375 per share. (n) In December 1997, the registrant issued to Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of its Series A preferred stock at an exercise price of $0.84375 per share, 17,778 of which shares were exercised in November 1999 by Novus Ventures, L.P., and convertible promissory notes in aggregate principal amount of $162,500 accruing interest at a rate of 8% per annum. (o) In May 1998, the registrant issued to Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons warrants to purchase an aggregate of 29,778 shares of its Series A preferred stock at an exercise price of $0.84375 per share, 17,778 of which shares were exercised in November 1999 by Novus Ventures, L.P., and convertible promissory notes in aggregate principal amount of $162,500 accruing interest at a rate of 8% per annum. II-2 (p) In June 1998, Novus Ventures, L.P., Robert Maxfield and Frederick Gibbons converted the principal of the convertible promissory notes, a total of $325,000, into an aggregate of 434,622 shares of the registrant's Series B preferred stock. (q) In June 1998, the registrant issued and sold 6,017,844 shares of its Series B preferred stock to entities affiliated with Whitney Equity Partners and entities affiliated with Draper Fisher (now Draper Fisher Jurvetson Management) for an aggregate purchase price of $4,500,000, which included $75,000 of cancellation of indebtedness. (r) In August 1998, the registrant issued and sold 47,413 shares of its common stock to A&R Partners, Inc. in exchange for past services valued at $3,912. (s) In November 1998, the registrant issued to Sequoia Partners warrants to purchase 146,666 shares of its common stock at an exercise price of $0.75 per share. In February 1999, Sequoia Partners exercised such warrants for 29,333 shares in the name of Patricia M. Baehr Residual Trust, 44,000 shares in the name of Borenstein Family Trust, and 73,333 shares in the name of Makena Partners, L.P. for an aggregate purchase price of $110,000. (t) In March 1999, the registrant issued to iTurf, Inc. warrants to purchase 64,762 shares of its common stock at an aggregate exercise price of $100,000. (u) In March and April 1999, the registrant issued and sold 11,657,277 shares of its Series C preferred stock to Novus Ventures, L.P., entities affiliated with Vertex Technologies, Glynn Investment Co., LLC, Intel Corporation, entities affiliated with Venrock Associates, entities affiliated with Draper Fisher Jurvetson, entities affiliated with Whitney Equity Partners, entities affiliated with Sprout Group L.P., entities affiliated with DLJ Capital Corp., entities affiliated with Marquette Venture Partners and approximately fifteen other investors for an aggregate purchase price of $18,000,000. (v) In May 1999, the registrant issued to distribution partners warrants to purchase 4,166 shares of its common stock at an exercise price of $4.50 per share. (w) In August 1999, in connection with the acquisition of Sports Universe, Inc., the registrant issued 266,665 shares of its common stock in exchange for all outstanding shares of Sports Universe, Inc.'s capital stock. (x) In September 1999, the registrant issued to Nike USA, Inc. a warrant to purchase 4,114,349 shares of its Series C preferred stock at an exercise price of $1.54 per share. (y) In September 1999, prior to the filing of the Registration Statement, the registrant issued and sold 3,529,410 shares of its Series D preferred stock to entities affiliated with Draper Fisher Jurvetson, entities affiliated with Whitney Equity Partners, entities affiliated with Venrock Associates, entities affiliated with Sprout Group L.P., entities affiliated with Marquette Venture Partners, Vertex Technology Fund (II) Ltd., entities affiliated with Worldview Technology Partners, Boston Millennia Partners, L.P., entities affiliated with Lycos Ventures, Hikari Tsushin, Inc., Aman Ventures L.L.C., Peder Smedvig Capital Ventures III and two other investors for an aggregate purchase price of $15,300,000. (z) In September 1999, the registrant issued to Fromuth Tennis, Inc., one of the registrant's suppliers, warrants to purchase 33,333 shares of its common stock at an exercise price of $4.50 per share. (aa) In September 1999, the registrant issued to a distribution partner a warrant to purchase 13,333 shares of its common stock at an exercise price of $4.50 per share. (bb) Since its inception, the registrant has granted stock options to its employees, directors and consultants under its 1996 Amended and Restated Stock Option Plan, exercisable for up to an aggregate of 6,602,154 shares of its common stock, with exercise prices ranging from $0.0825 to $4.50. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients in II-3 each transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules The exhibits listed in the exhibit Index are filed as part of this registration statement. (a) Exhibits
Exhibit Number Description of Document ------- ----------------------- 1.1** Form of Underwriting Agreement. 2.1** Agreement and Plan of Reorganization, dated August 13, 1999, by and among the registrant, Fogdog Acquisition Corp., Sports Universe, Inc. and certain principal stockholders of Sports Universe, Inc. 3.1** Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.2** Amended and Restated Bylaws, to be effective upon consummation of this offering. 3.3 Amended and Restated Articles of Incorporation, as filed with the California Secretary of State on September 17, 1999 in connection with the registrant's Series D preferred stock financing. 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. 4.5** Series C Preferred Stock Purchase Agreement, dated March 3, 1999, by and among the registrant and the parties who are signatories thereto. 4.6** Series C Preferred Stock Purchase Agreement, dated April 16, 1999, by and among the registrant and the parties who are signatories thereto. 4.7** Series D Preferred Stock Purchase Agreement, dated September 23, 1999, by and among the registrant and the parties who are signatories thereto. 5.1** Opinion of Brobeck, Phleger & Harrison LLP, counsel for the registrant, with respect to the common stock being registered. 10.1** Registrant's Amended and Restated 1996 Stock Option Plan. 10.2** Registrant's 1999 Stock Incentive Plan. 10.3** Registrant's 1999 Employee Stock Purchase Plan. 10.4** Form of registrant's Directors and Officers' Indemnification Agreement. 10.5+** Agreement, dated June 30, 1999, by and between the registrant and America Online Inc. 10.6** Amended and Restated Loan Agreement, dated September 16, 1998, by and between the registrant and Imperial Bank. 10.7** Sublease, dated July 14, 1999, by and between the registrant and Ampex Corporation. 10.8** Letter Agreement, dated December 9, 1997, by and between the registrant and Robin Smith. 10.9** Amended and Restated Employment Agreement, effective September 17, 1999, by and between the registrant and Timothy Harrington. 10.10** Employment Agreement, dated June 12, 1998, by and between the registrant and Robert Chea. 10.11** Amended and Restated Employment Agreement, dated April 5, 1999, by and between the registrant and Brett Allsop.
II-4
Exhibit Number Description of Document ------- ----------------------- 10.12** Letter Agreement, dated August 23, 1999, by and between the registrant and Timothy Joyce. 10.13+ Order Fulfillment Services Agreement, dated September 17, 1999, by and between the registrant and Keystone Fulfillment, Inc. 10.14+ Letter Agreement dated September 17, 1999, by and between the registrant and Nike USA, Inc. 10.15 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. 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 23.3** Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 24.1** Power of Attorney. 27.1** Financial Data Schedule for Sports Universe, Inc. (In EDGAR format only) 27.2** Financial Data Schedule for Fogdog, Inc. (In EDGAR format only)
- -------- *To be filed by amendment **Previously filed +Confidential Treatment Requested (b) Financial Statement Schedule None Item 17. Undertakings We hereby undertake to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, indemnification agreements entered into between the company and our officers and directors, the underwriting agreement, or otherwise, we have been advised that in the opinion of the commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by any of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Redwood City, State of California, on this 7th day of December, 1999. /s/ Timothy P. Harrington By: _________________________________ Timothy P. Harrington Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the persons whose signatures appear below, which persons have signed such registration statement in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Timothy P. Harrington Chief Executive Officer December 7, 1999 _______________________________ (Principal Executive Timothy P. Harrington Officer) and Director * President, International December 7, 1999 _______________________________ Division and Chairman of Brett M. Allsop the Board /s/ Marcy E. von Lossberg Chief Financial Officer December 7, 1999 _______________________________ (Principal Accounting Marcy E. von Lossberg Officer) * Director December 7, 1999 _______________________________ Frederick M. Gibbons * Director December 7, 1999 _______________________________ Peter J. Huff * Director December 7, 1999 _______________________________ Robert R. Maxfield * Director December 7, 1999 _______________________________ Warren J. Packard * Director December 7, 1999 _______________________________ Ralph T. Parks * Director December 7, 1999 _______________________________ Ray A. Rothrock * Director December 7, 1999 _______________________________ Lloyd D. Ruth
/s/ Marcy E. von Lossberg *By: _________________________________ Marcy E. von Lossberg, Attorney-in-fact
II-6 EXHIBIT INDEX
Exhibit Number Description of Document ------- ----------------------- 1.1** Form of Underwriting Agreement. 2.1** Agreement and Plan of Reorganization, dated August 13, 1999, by and among the registrant, Fogdog Acquisition Corp., Sports Universe, Inc. and certain principal stockholders of Sports Universe, Inc. 3.1** Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.2** Amended and Restated Bylaws, to be effective upon consummation of this offering. 3.3 Amended and Restated Articles of Incorporation, as filed with the California Secretary of State on September 17, 1999 in connection with the registrant's Series D preferred stock financing. 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. 4.5** Series C Preferred Stock Purchase Agreement, dated March 3, 1999, by and among the registrant and the parties who are signatories thereto. 4.6** Series C Preferred Stock Purchase Agreement, dated April 16, 1999, by and among the registrant and the parties who are signatories thereto. 4.7** Series D Preferred Stock Purchase Agreement, dated September 23, 1999, by and among the registrant and the parties who are signatories thereto. 5.1** Opinion of Brobeck, Phleger & Harrison LLP, counsel for the registrant, with respect to the common stock being registered. 10.1** Registrant's Amended and Restated 1996 Stock Option Plan. 10.2** Registrant's 1999 Stock Incentive Plan. 10.3** Registrant's 1999 Employee Stock Purchase Plan. 10.4** Form of registrant's Directors and Officers' Indemnification Agreement. 10.5+** Agreement, dated June 30, 1999, by and between the registrant and America Online Inc. 10.6** Amended and Restated Loan Agreement, dated September 16, 1998, by and between the registrant and Imperial Bank. 10.7** Sublease, dated July 14, 1999, by and between the registrant and Ampex Corporation. 10.8** Letter Agreement, dated December 9, 1997, by and between the registrant and Robin Smith. 10.9** Amended and Restated Employment Agreement, effective September 17, 1999, by and between the registrant and Timothy Harrington. 10.10** Employment Agreement, dated June 12, 1998, by and between the registrant and Robert Chea. 10.11** Amended and Restated Employment Agreement, dated April 5, 1999, by and between the registrant and Brett Allsop. 10.12** Letter Agreement, dated August 23, 1999, by and between the registrant and Timothy Joyce. 10.13+ Order Fulfillment Services Agreement, dated September 17, 1999, by and between the registrant and Keystone Fulfillment, Inc. 10.14+ Letter Agreement dated September 17, 1999, by and between the registrant and Nike USA, Inc. 10.15 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. 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 23.3** Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 24.1** Power of Attorney.
Exhibit Number Description of Document ------- ----------------------- 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)
- -------- *To be filed by amendment **Previously filed +Confidential Treatment Requested EX-3.3 2 AM. & RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.3 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FOGDOG, INC. Timothy P. Harrington and Warren T. Lazarow certify that: A. They are the Chief Executive Officer and Assistant Secretary, respectively, of Fogdog, Inc., a California corporation (the "corporation"). B. The Articles of Incorporation (the "Articles") of this corporation are amended and restated to read in full as follows: ARTICLE 1 NAME: The name of this corporation is Fogdog, Inc. ARTICLE 2 PURPOSE. The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE 3 This corporation is authorized to issue two classes of shares to be designated respectively common stock, no par value, and preferred stock, no par value. The total number of shares of common stock this corporation shall have authority to issue is Seventy-Two Million (72,000,000) and the total number of shares of preferred stock this corporation shall have authority to issue is Forty-One Million Seven Hundred Ninety-Six Thousand Two Hundred Eighty-Two (41,796,282). Of the total number of shares of Preferred Stock authorized, two million eight hundred thirteen thousand forty-six (2,813,046) shares shall be designated Series A Convertible Preferred Stock ("Series A Preferred Stock"), nine million six hundred seventy-eight thousand seven hundred (9,678,700) shares shall be designated Series B Convertible Preferred Stock ("Series B Preferred Stock"), Twenty-Three Million Eight Hundred Four Thousand Five Hundred Thirty- Six (23,804,536) shares shall be designated Series C Convertible Preferred Stock ("Series C Preferred Stock") and Five Million Five Hundred Thousand (5,500,000) shares shall be designated Series D Convertible Preferred Stock ("Series D Preferred Stock"). ARTICLE 4 The rights, preferences, privileges and restrictions granted to or imposed upon the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock shall be as set forth in this Article 4. Certain Definitions. Unless the context otherwise requires, the terms defined in this Article 4 shall have, for all purposes of the amended and restated articles of incorporation, the meanings herein specified. Board of Directors. The term "Board of Directors" shall mean the ------------------ Board of Directors of this corporation and, to the extent permitted by law, any committee of such Board of Directors authorized to exercise the powers of such Board of Directors. Closing Price. The term "Closing Price" for any day shall mean the ------------- last reported sale price of the Common Stock, or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices for such day, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if it is not listed or admitted to trading on any national securities exchange, but is traded in the over-the-counter market, the closing sale price of the Common Stock or, in case no sale is publicly reported, the average of the closing bid and asked quotations for the Common Stock on the National Association of Securities Dealer's Automated Quotation System ("NASDAQ"), or any comparable system or, if the Common Stock is not listed on NASDAQ or a comparable system, the closing sale price of the Common Stock or, in case no sale is publicly reported, the fair market value per share of Common Stock as determined on a reasonable basis and in good faith by the Board of Directors. Common Stock. The term "Common Stock" shall mean all shares now or ------------ hereafter authorized of any class of common stock of this corporation and any other shares of this corporation, however designated, which have the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of this corporation without limit as to per share amount. Series A Conversion Rate. The term "Series A Conversion Rate" shall ------------------------ mean the rate used to determine the number of shares of Common Stock deliverable upon conversion of a share of Series A Preferred Stock and shall equal the Series A Stated Value, plus all declared and unpaid dividends thereon (if any) divided by the Series A Conversion Price. The initial Series A Conversion Price shall be $.5625 per share (as adjusted for any stock split, dividend, combination, reclassification and the like), subject to adjustment in accordance with the provisions of paragraph 4 ("Conversion Rights") below. Whenever the Series A Conversion Price is adjusted pursuant to the Conversion Rights, the Series A Conversion Rate shall be recalculated. Series B Conversion Rate. The term "Series B Conversion Rate" shall ------------------------ mean the rate used to determine the number of shares of Common Stock deliverable upon conversion of a share of Series B Preferred Stock and shall equal the Series B Stated Value, plus declared and unpaid dividends thereon (if any) divided by the Series B Conversion Price. The initial Series B 2 Conversion Price shall be $.4985 per share (as adjusted for any stock split, dividend, combination, reclassification and the like), subject to adjustment in accordance with the provisions of paragraph 4 below. Whenever the Series B Conversion Price is adjusted pursuant to the Conversion Rights, the Series B Conversion Rate shall be recalculated. Series C Conversion Rate. The term "Series C Conversion Rate" shall ------------------------ mean the rate used to determine the number of shares of Common Stock deliverable upon conversion of a share of Series C Preferred Stock and shall equal the Series C Stated Value, plus declared and unpaid dividends thereon (if any) divided by the Series C Conversion Price. The initial Series C Conversion Price shall be $1.0294 per share (as adjusted for any stock split, dividend, combination, reclassification and the like), subject to adjustment in accordance with the provisions of paragraph 4 below. Whenever the Series C Conversion Price is adjusted pursuant to the Conversion Rights, the Series C Conversion Rate shall be recalculated. Series D Conversion Rate. The term "Series D Conversion Rate" shall ------------------------ mean the rate used to determine the number of shares of Common Stock deliverable upon conversion of a share of Series D Preferred Stock and shall equal the Series D Stated Value, plus declared and unpaid dividends thereon (if any) divided by the Series D Conversion Price. The initial Series D Conversion Price shall be $2.8865 per share (as adjusted for any stock split, dividend, combination, reclassification and the like), subject to adjustment in accordance with the provisions of paragraph 4 below. Whenever the Series D Conversion Price is adjusted pursuant to the Conversion Rights, the Series D Conversion Rate shall be recalculated. Series A Issue Date. The term "Series A Issue Date" shall mean the ------------------- date after any shares of the Series C Preferred Stock are first issued by this corporation. Series B Issue Date. The term "Series B Issue Date" shall mean the ------------------- date after any shares of the Series C Preferred Stock are first issued by this corporation. Series C Issue Date. The term "Series C Issue Date" shall mean the ------------------- date after any shares of the Series C Preferred Stock are first issued by this corporation. Series D Issue Date. The term "Series D Issue Date" shall mean the ------------------- date after any shares of the Series D Preferred Stock are first issued by this corporation. Series A Stated Value. The term "Series A Stated Value" shall mean --------------------- $.5625 per share (as adjusted for any stock split, dividend, combination, reclassification and the like) of Series A Preferred Stock. Series B Stated Value. The term "Series B Stated Value" shall mean --------------------- $.4985 per share (as adjusted for any stock split, dividend, combination, reclassification and the like) of Series B Preferred Stock. Series C Stated Value. The term "Series C Stated Value" shall mean --------------------- $1.0294 per share (as adjusted for any stock split, dividend, combination, reclassification and the like) of Series C Preferred Stock. 3 Series D Stated Value. The term "Series D Stated Value" shall mean --------------------- $2.8865 per share (as adjusted for any stock split, dividend, combination, reclassification and the like) of Series D Preferred Stock. 1. Ranking. (a) The Series A Preferred Stock shall, with respect to rights on liquidation, winding up, and dissolution, whether voluntary or involuntary, rank senior to all series and classes of the Common Stock of the corporation. All securities of the corporation to which the Series A Preferred Stock ranks senior, including the Common Stock, are collectively referred to herein as the "Series A Junior Securities"; all securities of the corporation with which the Series A Preferred Stock ranks on a parity are collectively referred to herein as the "Series A Parity Securities"; and all securities of the corporation to which the Series A Preferred Stock ranks junior, including the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock, are collectively referred to herein as the "Series A Senior Securities". Subject to the voting rights set forth herein, the Series A Preferred Stock shall be subject to the creation of Series A Junior Securities, Series A Parity Securities and Series A Senior Securities. (b) The Series B Preferred Stock shall, with respect to rights on liquidation, winding up, and dissolution, whether voluntary or involuntary, rank senior to the Series A Preferred Stock and all series and classes of the Common Stock of the corporation. All securities of the corporation to which the Series B Preferred Stock ranks senior, including the Series A Preferred Stock and the Common Stock, are collectively referred to herein as the "Series B Junior Securities"; all securities of the corporation with which the Series B Preferred Stock ranks on a parity are collectively referred to herein as the "Series B Parity Securities"; and all securities of the corporation to which the Series B Preferred Stock ranks junior, including the Series C Preferred Stock and Series D Preferred Stock, are collectively referred to herein as the "Series B Senior Securities". Subject to the voting rights set forth herein, the Series B Preferred Stock shall be subject to the creation of Series B Junior Securities, Series B Parity Securities and Series B Senior Securities. (c) The Series C Preferred Stock shall, with respect to rights on liquidation, winding up, and dissolution, whether voluntary or involuntary, rank senior to the Series A Preferred Stock, Series B Preferred Stock and all series and classes of the Common Stock of the corporation. All securities of the corporation to which the Series C Preferred Stock ranks senior, including the Series A Preferred Stock, Series B Preferred Stock and the Common Stock, are collectively referred to herein as the "Series C Junior Securities"; all securities of the corporation with which the Series C Preferred Stock ranks on a parity are collectively referred to herein as the "Series C Parity Securities"; and all securities of the corporation to which the Series C Preferred Stock ranks junior, including the Series D Preferred Stock, are collectively referred to herein as the "Series C Senior Securities". Subject to the voting rights set forth herein, the Series C Preferred Stock shall be subject to the creation of Series C Junior Securities, Series C Parity Securities and Series C Senior Securities. (d) The Series D Preferred Stock shall, with respect to rights on liquidation, winding up, and dissolution, whether voluntary or involuntary, rank senior to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and to all 4 series and classes of the Common Stock of the corporation. Unless specifically designated as senior to, or junior to, the Series D Preferred Stock with respect to rights on liquidation, winding up or dissolution, all other series of preferred shares hereinafter authorized or outstanding shall be on a parity with the Series D Preferred Stock with respect to such rights. All securities of the corporation to which the Series D Preferred Stock ranks senior, including the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Common Stock, are collectively referred to herein as the "Series D Junior Securities"; all securities of the corporation with which the Series D Preferred Stock ranks on a parity are collectively referred to herein as the "Series D Parity Securities"; and all securities of the corporation to which the Series D Preferred Stock ranks junior are collectively referred to herein as the "Series D Senior Securities". Subject to the voting rights set forth herein, the Series D Preferred Stock shall be subject to the creation of Series D Junior Securities, Series D Parity Securities and Series D Senior Securities. 2. Dividends. (a) (i) The holders of shares of Series D Preferred Stock shall be entitled to receive, dividends, out of any assets legally available therefore, when, as and if declared by the Board of Directors of the corporation, prior and in preferences to any declaration or payment of any dividend (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) on the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and the Common Stock, at the rate of 8% per annum (from and after the dates of issuances) of the Series D Stated Value (as adjusted for any stock split, dividend, combination, reclassification and the like), after the Series D Issue Date. (ii) The holders of shares of Series C Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefore, when, as and if declared by the Board of Directors of the corporation, prior and in preferences to any declaration or payment of any dividend (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) on the Series A Preferred Stock, Series B Preferred Stock and the Common Stock, at the rate of 8% per annum (from and after the dates of issuances) of the Series C Stated Value (as adjusted for any stock split, dividend, combination, reclassification and the like), after the Series D Issue Date. (iii) The holders of shares of Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefore, when, as and if declared by the Board of Directors of the corporation, prior and in preferences to any declaration or payment of any dividend (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) on the Series A Preferred Stock and the Common Stock, at the rate of 8% per annum (from and after the dates of issuances) of the Series B Stated Value (as adjusted for any stock split, dividend, combination, reclassification and the like), after the Series D Issue Date. 5 (iv) The holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefore, when, as and if declared by the Board of Directors of the corporation, prior and in preferences to any declaration or payment of any dividend (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) on the Common Stock, at the rate of 8% per annum (from and after the dates of issuances) of the Series A Stated Value (as adjusted for any stock split, dividend, combination, reclassification and the like), after the Series D Issue Date. (v) Such dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock shall not be cumulative. If the amount available for distribution shall be insufficient to fulfill the provisions of this Section 4(2) of these Amended and Restated Articles of Incorporation, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled to participate pro rata in such available amount for distribution based on the number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock then held by each holder, subject to the preferences set forth herein. (b) So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall be outstanding, no dividend, whether in cash or property, shall be paid or declared, nor shall any other distribution be made, on any Series A Junior Security, Series B Junior Security, Series C Junior Security or Series D Junior Security, nor shall any shares of any Series A Junior Security, Series B Junior Security, Series C Junior Security or Series D Junior Security be purchased, redeemed, or otherwise acquired for value by the corporation (except for acquisition of Common Stock by the corporation pursuant to agreements which permit the corporation to repurchase such shares upon termination of services to the corporation or in exercise of the corporation's right of first refusal upon a proposed transfer) until all dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (if any) shall have been paid or declared or set apart. In the event dividends (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) are paid on any share of Common Stock, an additional dividend (payable other than in Common Stock or other securities convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation) shall be paid with respect to all outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock in an amount equal per share (on an as-if converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock. The provisions of this paragraph 2(b) shall not, however, apply to (i) the acquisition of shares of any Series A Junior Security, Series B Junior Security, Series C Junior Security or Series D Junior Security in exchange for shares of any other Series A Junior Security, Series B Junior Security, Series C Junior Security or Series D Junior Security, (ii) any repurchase or redemption of any outstanding securities of the corporation that is approved by the corporation's Board of Directors or (iii) a redemption pursuant to paragraph 6 hereof. 6 3. Distributions Upon Liquidation, Dissolution or Winding Up. (a) In the event of any "Liquidation" (as defined below) of the affairs of the corporation, the holders of shares of Series D Preferred Stock then outstanding shall be entitled to be paid out of the assets of the corporation available for distribution to its shareholders, whether such assets are capital or surplus, and whether or not any dividends are declared, an amount equal to the Series D Stated Value, plus any and all accrued but unpaid dividends, if any (collectively, the "Series D Liquidation Preference"), for each share of Series D Preferred Stock outstanding, before any payment shall be made or any assets distributed to any holder of Series D Junior Securities. If the assets are insufficient to make all of the payments referred to in this paragraph, the holders of the Series D Preferred Stock shall be entitled to distribute the amount available for distribution to the holders of the Series D Preferred Stock based on the number of shares of Series D Preferred Stock held by each such holder. (b) After payment or distribution of the Series D Liquidation Preference and amounts to holders of Series D Senior Securities, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the corporation then available for distribution to its shareholders, whether such assets are capital or surplus, and whether or not any dividends are declared, an amount equal to the Series C Stated Value, plus any and all accrued but unpaid dividends, if any (collectively, the "Series C Liquidation Preference"), for each share of Series C Preferred Stock outstanding, before any payment shall be made or any assets distributed to any holder of Series C Junior Securities. If the assets are insufficient to make all of the payments referred to in this paragraph, the holders of the Series C Preferred Stock shall be entitled to distribute the amount available for distribution to the holders of the Series C Preferred Stock based on the number of shares of Series C Preferred Stock held by each such holder. (c) After payment or distribution of the Series D Liquidation Preference and amounts to holders of Series D Senior Securities and the payment or distribution of the Series C Liquidation Preference and amounts to the holders of Series C Senior Securities, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the corporation then available for distribution to its shareholders, whether such assets are capital or surplus, and whether or not any dividends are declared, an amount equal to the Series B Stated Value, plus any and all accrued but unpaid dividends, if any (collectively, the "Series B Liquidation Preference"), for each share of Series B Preferred Stock outstanding, before any payment shall be made or any assets distributed to any holder of Series B Junior Securities. If the assets are insufficient to make all of the payments referred to in this paragraph, the holders of the Series B Preferred Stock shall be entitled to distribute the amount available for distribution to the holders of the Series B Preferred Stock based on the number of shares of Series B Preferred Stock held by each such holder. (d) After payment or distribution of the Series D Liquidation Preference and amounts to holders of Series D Senior Securities, payment or distribution of the Series C Liquidation Preference and amounts to holders of Series C Senior Securities and the payment or distribution of the Series B Liquidation Preference and amounts to holders of Series B Senior Securities, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the corporation available for distribution to its 7 shareholders, whether such assets are capital or surplus, and whether or not any dividends are declared, an amount equal to the Series A Stated Value, plus any and all accrued but unpaid dividends, if any (collectively, the "Series A Liquidation Preference") for each share of Series A Preferred Stock outstanding, before any payment shall be made or any assets distributed to any holder of Series A Junior Securities but after payment or distribution of all amounts to holders of Series A Senior Securities. If the assets are insufficient to make all of the payments referred to in this paragraph, the holders of the Series A Preferred Stock shall be entitled to distribute the amount available for distribution to the holders of the Series A Preferred Stock based on the number of shares of Series A Preferred Stock held by each such holder. (e) After the payment of the full Series D Liquidation Preference, Series C Liquidation Preference, Series B Liquidation Preference, the Series A Liquidation Preference, and any amounts to holders of Series D Senior Securities, Series C Senior Securities, Series B Senior Securities and Series A Senior Securities, as set forth in the preceding paragraphs, the assets of the Company legally available for distribution, if any, shall be distributed ratably and on a parity basis to the holders of the Common Stock and to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred on an as-if-converted to Common Stock basis until such time as the holders of Series D Preferred Stock have received an aggregate amount per share of Series D Preferred Stock equal to $5.773 (as adjusted for any stock split, dividend, combination, reclassification and the like), the holders of Series C Preferred Stock have received an aggregate amount per share of Series C Preferred Stock equal to $2.0588 (as adjusted for any stock split, dividend, combination, reclassification and the like), the holders of Series B Preferred Stock have received an aggregate amount per share of Series B Preferred Stock equal to $.997 (as adjusted for any stock split, dividend, combination, reclassification and the like) and the holders of Series A Preferred Stock have received an aggregate amount per share of Series A Preferred Stock equal to $1.125 (as adjusted for any stock split, dividend, combination, reclassification and the like) in the aggregate pursuant to paragraphs 3(a), 3(b), 3(c), 3(d) and 3(e). After such aggregate total payments have been made to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock, the Common Stock shall participate in all of the remaining assets of the corporation. (f) For purposes of this Article 4, a "Liquidation" shall be defined to be any liquidation, dissolution or winding up of the affairs of the corporation, including the sale, lease, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the corporation or the consolidation or merger of the corporation with one or more other corporations or other entity or person, or any corporate reorganization, in which shareholders of the corporation immediately prior to such consolidation, merger or reorganization, own less than 50% of the corporation's voting power immediately after such consolidation, merger or reorganization. (g) Any securities or other non-cash consideration to be delivered to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock upon any Liquidation in accordance with the terms hereof shall be valued as follows: 8 (i) If traded on a nationally recognized securities exchange or inter-dealer quotation system, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the 30-day period ending three (3) business days prior to the closing; (ii) If traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the closing; and (iii) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the corporation, including the vote of a majority of the directors elected by the holders of the Series A Preferred Stock and Series B Preferred Stock. 4. Conversion Rights. (a) A holder of shares of Series A Preferred Stock may convert such shares into shares of Common Stock at the Series A Conversion Rate, a holder of shares of Series B Preferred Stock may convert such shares into shares of Common Stock at the Series B Conversion Rate, a holder of shares of Series C Preferred Stock may convert such shares into shares of Common Stock at the Series C Conversion Rate and a holder of shares of Series D Preferred Stock may convert such shares into shares of Common Stock at the Series D Conversion Rate, as the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate and Series D Conversion Rate may have been adjusted, at any time. No fractional shares of Common Stock shall be issued upon any conversion, but in lieu thereof, this corporation shall, at its option, either (i) pay therefor in cash an amount equal to the applicable fraction of the Closing Price on the last trading date prior to the Conversion Date (as defined in paragraph 4(b) below) or (ii) make such arrangements as the Board of Directors may approve to enable the holder of the fractional share of Common Stock to sell such fractional share of Common Stock or to buy an additional fractional share of Common Stock sufficient to make a full share of Common Stock. (b) In order to convert shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock into shares of Common Stock, a holder shall surrender the certificate or certificates evidencing the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock to be converted, duly endorsed, at the office of the corporation, shall notify the corporation at such office of his election to convert shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock and of the number of such shares which he wishes to convert, shall state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and shall pay any transfer or similar tax if required. In the event that a holder fails to notify this corporation of the number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock which he wishes to convert, he shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. The date on which the holder satisfies the last of such requirements is herein referred to as the "Conversion Date". Promptly after the Conversion Date, this corporation shall issue and deliver a certificate 9 for the number of full shares of Common Stock issuable upon the conversion, either cash for any remaining fractional share of Common Stock or order forms entitling the holder thereof to sell such fractional share of Common Stock or to purchase an additional fractional share of Common Stock necessary to make a full share of Common Stock, as provided in paragraph 4(a), a new certificate representing the unconverted portion, if any, of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock represented by the certificate or certificates surrendered for conversion and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the Conversion Date) declared and unpaid dividends (if any) on the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock being converted. The person in whose name the certificate is registered shall be treated as a shareholder of record of Common Stock as of the Conversion Date. (c) In case this corporation shall at any time after the Series D Issue Date (i) pay a dividend in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, (iii) combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock or other securities by reclassification of the Common Stock, the Series A Conversion Price and Series A Conversion Rate, the Series B Conversion Price and the Series B Conversion Rate, the Series C Conversion Price and the Series C Conversion Rate and the Series D Conversion Price and the Series D Conversion Rate in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that each holder of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock converted after such time shall be entitled to receive the aggregate number and kind of shares of Common Stock or other securities of this corporation which, if such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock had been converted immediately prior to such time, he would have owned upon such conversion and distribution, subdivision, combination or reclassification. Such adjustment shall be made successfully whenever any event listed above shall occur. (d) In case this corporation shall fix a record date for the making of a distribution to all holders of shares of Common Stock of assets or evidences of its indebtedness or securities (other than cash dividends or cash distributions payable out of funds legally available therefor or dividends payable in shares of Common Stock or distributions referred to in paragraph 4(c)), the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price, to be in effect after such record date shall be determined by multiplying the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price, respectively, in effect immediately prior to such record date by a fraction, of which the numerator shall be the current market price (as defined in paragraph 4(f) below) per share of Common Stock five business days prior to such record date, less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness or securities so to be distributed applicable to one share of Common Stock and of which the denominator shall be such current market price per share of Common Stock. Such adjustments shall be made successively 10 whenever such a record date is fixed. In the event that such distribution is not so made, the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price shall be that which would then be in effect if such record date had not been fixed. (e) If the corporation issues or sells, or in accordance with this paragraph 4(e) is deemed to have issued or sold, any Common Stock or securities exercisable for or convertible into Common Stock, other than Excluded Stock (as defined herein), without consideration or for a consideration per share, after the Series D Issue Date (i) with respect to the Series A Conversion Price, less than the Series A Conversion Price in effect immediately prior to the issuance of such Common Stock or securities exercisable for or convertible into Common Stock; (ii) with respect to the Series B Conversion Price, less than the Series B Conversion Price in effect prior to the issuance of such Common Stock or securities exercisable for or convertible into Common Stock; (iii) with respect to the Series C Conversion Price, less than the Series C Conversion Price in effect prior to the issuance of such Common Stock or securities exercisable for or convertible into Common Stock (a "Series C Dilutive Issuance"); or (iv) with respect to the Series D Conversion Price, less than the Series D Conversion Price in effect prior to the issuance of such Common Stock or securities exercisable for or convertible into Common Stock, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and/or the Series D Conversion Price, as applicable, in effect immediately prior to each such issue or sale shall be adjusted (but not increased except as provided in the last sentence of subparagraphs 4(d) or 4(e)(3)(D)) to equal the price computed (to the nearest whole cent) by dividing (1) the sum of (i) the result obtained by multiplying (x) the number of shares of Common Stock of the corporation outstanding or issuable upon the exercise, exchange or conversion of options to purchase or rights to subscribe for Common Stock, securities convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, in each case, outstanding immediately prior to such issue or sale by (y) the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as applicable, in effect immediately prior to such issue or sale and (ii) the consideration, if any, received by the corporation upon such issue or sale by (2) the sum of the number of shares of Common Stock of the corporation outstanding or issuable upon the exercise, exchange or conversion of options to purchase or rights to subscribe for Common Stock, securities convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, in each case, outstanding, immediately prior to such issue or sale plus the number of shares of Common Stock so issued or sold (or the number of shares of Common Stock issuable upon exercise or conversion of the other securities so issued or sold); provided, however, that if the corporation makes a Series C Dilutive Issuance at any time, or from time to time, after the Series C Issue Date in an institutional or equivalent round of equity financing for consideration per share of $.70 (as adjusted for any stock split, dividend, combination, reclassification and the like) or greater, the Series C Conversion Price shall be immediately adjusted to equal the per share consideration received by the corporation in such Series C Dilutive Issuance (in lieu of such amount, the method of determination set forth earlier in this sentence). As used herein, "Excluded Stock" shall mean (i) direct or indirect shares issued or issuable upon the exercise of any options, warrants or other securities issued by the corporation which are outstanding as of the Series D Issue Date, (ii) up to 6,235,856 shares of Series C Preferred Stock issuable upon the 11 exercise of a warrant or warrants, and the Common Stock issuable upon the conversion of such Series C Preferred Stock, (iii) shares issued or issuable as a dividend or distribution on the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, (iv) shares issued or issuable for which adjustment of the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price has been made pursuant to paragraph 4(c), (v) shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock at any time outstanding, (vi) shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock or (vii) shares of Common Stock issuable upon the exercise of options or as stock issuances which are granted or issued to management, service providers, employees or consultants of the corporation or any subsidiary, or warrants issued or issuable to lenders or lessors after the Series D Issue Date, provided that the issuance of such options, stock issuances or warrants shall require the approval of at least a majority of the Board of Directors of the corporation. For the purposes of any adjustment of the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price pursuant to this paragraph 4(e), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors in good faith, irrespective of any accounting treatment. (3) In the case of the issuance, at any time after the Series D Issue Date, of (i) options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exercisable or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions 12 (1) and (2) above), if any, received by the corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the corporation for any such securities and related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (1) and (2) above) plus a maximum purchase price provided in such options or rights for such convertible or exchangeable securities covered thereby; (C) upon any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and/or Series D Conversion Price, as applicable, shall forthwith be readjusted to such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as would have been obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Series A Conversion Price, the Series 13 B Conversion Price, the Series C Conversion Price and/or the Series D Conversion Price, as applicable, shall forthwith be readjusted to such Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price, as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. (f) For the purpose of any computation pursuant to paragraph 4(d), the current market price per share of Common Stock on any date shall be deemed to be the average of the Closing Prices for thirty (30) consecutive trading days commencing five (5) trading days before the date in question if the corporation's Common Stock is publicly traded, and if not publicly traded, in good faith by the Board of Directors of the corporation. (g) No adjustment in the Series A Conversion Rate or Series A Conversion Price, Series B Conversion Rate or Series B Conversion Price or Series C Conversion Rate, Series C Conversion Price or the Series D Conversion Rate or Series D Conversion Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate, as applicable. Any adjustments which are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 4 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. The Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate and Series D Conversion Rate shall not be adjusted downward except in the event of a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock or in the event of a readjustment of the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate pursuant to the last sentence of paragraph 4(d) or 4(e)(3)(D). (h) Except as provided in this paragraph 4, no adjustment in the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate shall be made because this corporation issues, in exchange for cash, property or services, Common Stock or any securities convertible into or exchangeable for Common Stock, or securities carrying the right to purchase Common Stock or such convertible or exchangeable securities. (i) Whenever the Conversion Rate is adjusted after the Series D Issue Date, this corporation shall promptly mail to holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock a notice of the 14 adjustment which briefly states the facts requiring the adjustment and the manner of computing it. The notice shall be conclusive evidence that such adjustment is required. (j) If this corporation proposes to (i) take any action which would require an adjustment in the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion Price pursuant to paragraph 4(d), or clause (iv) of paragraph 4(c); (ii) consolidate or merge with or into or transfer all or substantially all of its assets to, another corporation; or (iii) take any action which would result in the dissolution, liquidation or winding up of this corporation, a holder of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock may desire to convert such shares into shares of Common Stock prior to the record date for or the effective date of the transaction so that it may receive the rights, warrants, securities or assets which a holder of shares of Common Stock on that date may receive. Therefore, this corporation shall mail to the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock a notice stating the proposed record or effective date, as the case may be, for any such proposed action. The corporation shall mail the notice not later than the time such record date is required to be announced pursuant to the applicable rule of the principal securities exchange upon which the corporation's securities are listed, or if the corporation's securities are not listed on any such exchange no later than ten (10) days prior to such proposed record date or effective date, as the case may be. Failure to mail the notice or any defect therein shall not affect the validity of any transaction referred to in clause (i), (ii) or (iii) of this paragraph 4(j). (k) In case of a merger or consolidation which reclassifies or changes the shares of Common Stock of this corporation or in case of the consolidation or merger of this corporation with or into another corporation or corporations or the transfer of all or substantially all of the assets of this corporation to another corporation or corporations, each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock which shall thereafter remain outstanding shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon conversion of such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock would have been entitled upon such reclassification, consolidation, merger or transfer, and appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock. In case of any such merger or consolidation, the resulting or surviving corporation (if not this corporation) shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such stock or other securities or property as the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock received by the holders in place 15 thereof, shall be entitled to receive pursuant to the provision hereof, and to make provisions for the protection of the conversion right as provided above. If this paragraph (k) applies, paragraph 4(c) shall not apply. If the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock becomes convertible solely into cash, no adjustment need be made thereafter, and interest shall not accrue on such cash. (l) In any case in which this paragraph 4 shall require that an adjustment as a result of any event becomes effective from and after a record date, this corporation may elect to defer until the occurrence of such event (i) the issuance to the holder of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issued upon such conversion over and above the shares issuable on the basis of adjustment and (ii) the payment, if any, to such holder of an amount of cash in lieu of a fractional share of Common Stock; provided, however, that this corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional share of Common Stock or such payment, if any, in lieu of such fractional share. (m) Any determination which the Board of Directors must make pursuant to paragraph 4 is conclusive. The Board of Directors shall have the exclusive power and authority (acting in good faith) to resolve any ambiguity in this paragraph 4. (n) Reservation of Stock Issuable Upon Conversion. The --------------------------------------------- corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (o) Payment of Taxes. The corporation will pay all taxes (other ---------------- than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock so converted were registered. (p) No Dilution or Impairment. This corporation shall not amend ------------------------- this paragraph 4 or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or take any other voluntary action, for the purpose of 16 avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock against dilution or other impairment. (q) Notices. Any notice required by the provisions of this ------- paragraph 4 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the corporation. 5. Mandatory Conversion. (a) All shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be automatically converted into shares of Common Stock at the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate, as applicable, on the date (the "Mandatory Conversion Date") upon the earlier to occur of the following: (i) with respect to the mandatory conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, concurrent with the closing of a public offering of Common Stock made pursuant to an effective registration statement under the Securities Act of 1933, as amended, which offering has aggregate gross proceeds of at least $10,000,000 to the corporation and at a price per share of Common Stock at least equal to $5.773 (as adjusted for any stock split, dividend, combination, reclassification and the like), (ii) with respect to the mandatory conversion of all of the Series A Preferred Stock, holders of at least a majority of the then outstanding shares of Series A Preferred Stock shall have provided written notice to the corporation of its intent to convert into shares of Common Stock, (iii) with respect to the mandatory conversion of all of the Series B Preferred Stock, holders of a majority of the then outstanding shares of Series B Preferred Stock shall have provided written notice to the Corporation of its intent to convert into shares of Common Stock, (iv) with respect to the mandatory conversion of all of the Series C Preferred Stock, holders of a majority of the then outstanding shares of Series C Preferred Stock shall have provided written notice to the Corporation of its intent to convert into shares of Common Stock, or (v) with respect to the mandatory conversion of all of the Series D Preferred Stock, holders of a majority of the then outstanding shares of Series D Preferred Stock shall have provided written notice to the Corporation of its intent to convert into shares of Common Stock. No fractional shares of Common Stock shall be issued upon any conversion, but in lieu thereof, the corporation shall, at its option, either (x) pay therefor in cash an amount equal to the applicable fraction of the Closing Price on the last trading date prior to the Mandatory Conversion Date or (y) make such arrangements as the Board of Directors may approve to enable the holder of the fractional share of Common Stock to sell such fractional share of Common Stock or to buy an additional fractional share of Common Stock sufficient to make a full share of Common Stock. 17 (b) As of the Mandatory Conversion Date applicable to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, each outstanding share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, as applicable, shall no longer be deemed outstanding and, without any action on the part of the holder thereof or the corporation, shall be converted into and shall constitute such number of shares of Common Stock as shall be determined by the Series A Conversion Rate, Series B Conversion Rate, Series C Conversion Rate or Series D Conversion Rate, as applicable, in effect on such date. (c) Notice of any mandatory conversion shall be mailed not more than 30 days following the Mandatory Conversion Date to the holders of record of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock that shall have been converted into shares of Common Stock, at their respective addressees as the same appear upon the books of this corporation or supplied by them to this corporation for the purpose of such notice; but no failure to mail such notice to particular shareholders or any defect therein or in the mailing thereof shall affect the validity of the mandatory conversion of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock. The corporation shall include with such notice either cash for any remaining fractional share of Common Stock or order forms entitling the holder thereof to sell such fractional share of Common Stock or to purchase an additional fractional Common Stock necessary to make a full share of Common Stock and cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors at the Mandatory Conversion Date), all declared any unpaid dividends (if any) on the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock being converted. In order to receive a certificate evidencing the shares of Common Stock issued upon mandatory conversion, a holder shall surrender the certificate or certificates evidencing the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock that shall have been converted, duly endorsed, at the office of the corporation, shall state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and shall pay any transfer or similar tax if required. Promptly after the surrender of such certificate, this corporation shall issue and deliver a certificate for the number of full shares of Common Stock issuable upon such mandatory conversion. The person in whose name the certificate is registered shall be treated as a shareholder of record of Common Stock as of the Mandatory Conversion Date. (d) Any determination which the Board of Directors must make pursuant to paragraph 5 is conclusive. The Board of Directors shall have the sole power and authority (acting in good faith) to resolve any ambiguity in this paragraph 5. 6. Redemption Rights. (a) Except in connection with a public offering of the corporation's securities, upon a Liquidation, the Company shall redeem on the date of the Liquidation event, all (but not less than all) of the shares of Series A Preferred Stock, Series B Preferred Stock Series C Preferred Stock and Series D Preferred Stock at their respective Series A Liquidation Preference, Series B Liquidation Preference, Series C Liquidation Preference and Series D 18 Liquidation Preference, plus all other amounts as set forth in and qualified by, paragraph 3(e) herein. Such redemption amounts shall be payable in cash or in the same form of consideration as is paid to the holders of Common Stock in such Liquidation. The provisions of this paragraph 6(a) shall not in any way limit the right of the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock to elect to convert their shares into shares of Common Stock pursuant to paragraph 4 prior to or in connection with any Liquidation. (b) On or after such redemption date, each holder of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock to be redeemed shall surrender such holder's certificates representing such shares to the corporation in the manner and at the place designated by the corporation, and thereupon the redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event fewer than all of the shares represented by such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such redemption date, unless there shall have been a default in payment of the redemption price or the corporation is unable to pay the redemption price due to not having sufficient legally available funds, all rights of the holders of such shares as holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock (except the right to receive the redemption price without interest upon surrender of their certificates), shall cease and terminate with respect to such shares, provided that in the event that shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock are not redeemed due to a default in payment by the corporation or because the corporation does not have sufficient legally available funds, such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock shall remain outstanding and shall be entitled to all of the rights and preferences provided herein. 7. Voting Rights. (a) Except as otherwise provided by law or these Amended and Restated Articles of Incorporation of the corporation, the holders of Series A Preferred Stock shall have the following voting rights: (i) Without the consent of the holders of at least 66-2/3% of the number of shares of Series A Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series A Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws of the corporation, shall not be changed so as to alter in an adverse manner the designations, preferences and relative, participating, optional or other special rights, or the qualifications, limitations or restrictions relating to, the Series A Preferred Stock; and (ii) Without the consent of the holders of at least 66-2/3% of the number of shares of Series A Preferred Stock at the time then outstanding either in writing or by vote at a meeting called for that purpose at which the holders of such Series A Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws of the corporation shall not be changed: (i) to establish any class of capital stock ranking senior to the 19 Series A Preferred Stock; or (ii) to increase the authorized number of shares of Series A Preferred Stock. (b) Except as otherwise provided by law or these Amended and Restated Articles of Incorporation of the corporation, the holders of Series B Preferred Stock shall have the following voting rights: (i) Without the consent of the holders of at least 66-2/3% of the number of shares of Series B Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series B Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws of the corporation shall not be changed so as to alter in an adverse manner the designations, preferences and relative, participating, optional or other special rights, or the qualifications, limitations or restrictions relating to, the Series B Preferred Stock; and (ii) Without the consent of the holders of at least a 66-2/3% of the number of shares of Series B Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series B Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws shall not be changed: (i) to establish any class of capital stock ranking senior to the Series B Preferred Stock; or (ii) to increase the authorized number of shares of Series B Preferred Stock. (c) Except as otherwise provided by law or these Amended and Restated Articles of Incorporation of the corporation, the holders of Series C Preferred Stock shall have the following voting rights: (i) Without the consent of the holders of at least 66-2/3% of the number of shares of Series C Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series C Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws of the corporation shall not be changed so as to alter in an adverse manner the designations, preferences and relative, participating, optional or other special rights, or the qualifications, limitations or restrictions relating to, the Series C Preferred Stock; and (ii) Without the consent of the holders of at least a 66-2/3% of the number of shares of Series C Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series C Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws shall not be changed: (i) to establish any class of capital stock ranking senior to the Series C Preferred Stock; or (ii) to increase the authorized number of shares of Series C Preferred Stock. (d) Except as otherwise provided by law or these Amended and Restated Articles of Incorporation of the corporation, the holders of Series D Preferred Stock shall have the following voting rights: (i) Without the consent of the holders of at least 66-2/3% of the number of shares of Series D Preferred Stock at the time then outstanding, either in writing or 20 by vote at a meeting called for that purpose at which the holders of such Series D Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws of the corporation shall not be changed so as to alter in an adverse manner the designations, preferences and relative, participating, optional or other special rights, or the qualifications, limitations or restrictions relating to, the Series D Preferred Stock; and (ii) Without the consent of the holders of at least a 66-2/3% of the number of shares of Series D Preferred Stock at the time then outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of such Series D Preferred Stock shall vote as a class, these Amended and Restated Articles of Incorporation or Bylaws shall not be changed: (i) to establish any class of capital stock ranking senior to the Series D Preferred Stock; or (ii) to increase the authorized number of shares of Series D Preferred Stock; For the purposes of paragraphs 7(a), (b), (c) and (d), "ranking senior" shall mean having a prior right to dividends, redemption or the distribution of assets in liquidation. (e) Without the consent of the holders of at least a majority of the number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as a single class and not as a separate series, either in writing or by vote as a class, the corporation shall not effect any Liquidation. (f) Except as provided in paragraph 7(a), 7(b), 7(c), 7(d) or 7(e) above or by written agreement, or except as provided by law, the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Common Stock shall vote together as a single class on any matter with respect to which the Common Stock is entitled to vote pursuant to applicable California law or these Amended and Restated Articles of Incorporation. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled to the number of votes per share equal to the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, as applicable. 8. Preemptive Rights. The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall not have any preemptive rights except as set forth in any written agreement. ARTICLE 5 VOTING RIGHTS. Each share of common stock shall have one vote on all matters on which shareholders are entitled to vote under the California Corporations Code and these Articles, and, except as otherwise provided by law or by these Articles, shares of any other class shall have no voting rights. 21 ARTICLE 6 1. DIRECTORS' LIMITED LIABILITY. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. 2. INDEMNIFICATION OF AGENTS. The corporation is authorized to provide indemnification of its agents (as such term is defined in Section 317 of the California Corporations Code), whether by bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification expressly permitted by Section 317 of the California Corporations Code for breach of duty to the corporation and its shareholders, subject only to the applicable limits upon such indemnification set forth in Section 204(a)(11) of the California Corporations Code. If, after the effective date of these Amended and Restated Articles of Incorporation, California law is amended in a manner which permits a corporation to limit the monetary or other liability of its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or other persons, in any such case to a greater extent than is permitted on such effective date, the references in these Amended and Restated Articles of Incorporation, to "California law" shall to that extent be deemed to refer to California law as so amended. 3. Any repeal or modification of this Article 6 shall only be prospective and shall not affect the rights under this Article 6 in effect at the time of the alleged occurrence of any action or omission to give rise to liability. ARTICLE 7 BOARD OF DIRECTORS. The Board of Directors shall be elected as follows: (i) holders of the outstanding shares of Series A Preferred Stock, voting as a separate class, shall be entitled to elect one (1) director of the corporation at each meeting or pursuant to consent of the corporation's shareholders for the election of directors, and to remove from office such director and fill any vacancy caused by the resignation, death or removal of such director, so long as at least fifty percent (50%) of the authorized Series A Preferred Stock shall be outstanding, (ii) holders of the outstanding Series B Preferred Stock shall be entitled to elect up to two (2) directors of the corporation at each meeting or pursuant to consent of the corporation's shareholders for the election of directors, and to remove from office such directors (or either of them) and fill any vacancy caused by the resignation, death or removal of such directors (or either of them), in each case so long as at least fifty percent (50%) of the authorized Series B Preferred Stock shall be outstanding, (iii) holders of the outstanding shares of Series C Preferred Stock, voting as a separate class, shall be entitled to elect one (1) director of the corporation at each meeting or pursuant to consent of the corporation's shareholders for the election of directors, and to remove from office such director and fill any vacancy caused by the resignation, death or removal of such director, so long as at least fifty percent (50%) of the authorized Series C Preferred Stock shall be outstanding, (iv) holders of the outstanding shares of Common Stock, voting as a separate class, shall be entitled to elect up to two (2) directors of the corporation at each meeting or pursuant to consent of the corporation's shareholders for the election of directors, and to remove from office such directors (or either of them) and fill any vacancy 22 caused by the resignation, death or removal of such directors (or either of them), and (v) holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock, voting together as a single class, shall be entitled to vote together with respect to the election of up to four (4) additional directors of the corporation, at each meeting or pursuant to each consent of the corporation's shareholders for the election of directors, and to remove from office such directors (or either of them) and fill any vacancy called by the resignation, death or removal of such directors (or either of them). ARTICLE 8 BYLAWS. The board of directors of this corporation shall have the power to adopt, amend or repeal the Bylaws of this corporation, subject to the powers of the shareholders to amend or repeal such bylaws." C. The foregoing amendment and restatement of the Restated Articles of Incorporation has been duly approved by the board of directors. D. The foregoing amendment and restatement of the Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and 903 of the California Corporations Code. The total number of outstanding shares of Common Stock of the corporation is 8,741,956, the total number of outstanding shares of Series A Preferred Stock is 2,679,268, the total number of outstanding shares of Series B Preferred Stock is 9,678,700 and the total number of outstanding shares of Series C Preferred Stock is 17,568,680. The number of shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than a majority of the outstanding shares of Common Stock, more than two-thirds of the outstanding shares of Series A Preferred Stock, more than two- thirds of the outstanding shares of Series B Preferred Stock and more than two- thirds of the outstanding shares of Series C Preferred Stock, each voting separately as a class. 23 We further declare under penalty of perjury that the matters set forth in the foregoing are true and correct of our own knowledge. Executed at Redwood City, California, this 16th day of September, 1999. /s/ Timothy P. Harrington ------------------------- Timothy P. Harrington, Chief Executive Officer /s/ Warren T. Lazarow ------------------------- Warren T. Lazarow, Assistant Secretary 24 EX-4.1 3 FORM OF STOCK CERTIFICATE EXHIBIT 4.1 [LOGO OF FOGDOG SPORTS APPEARS HERE] NUMBER SHARES INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS OF THE STATE OF DELAWARE CUSIP 344167 10 1 This certifies that is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF FOGDOG, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ Robert S. Cheq FOGDOG, INC. /s/ Timothy J. Joyce SECRETARY CORPORATE SEAL PRESIDENT COUNTERSIGNED AND REGISTERED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY (Jersey City, NJ) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______Custodian_____________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as tenants Act________________ in common (State) UNIF TRF MIN ACT - _______ Custodian (until age ___) (Cust) __________ under Uniform Transfers (Minor) to Minors Act ____________ (State)
Additional abbreviations may also be used though not in the above list. For Value Received, _____________ hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE - ----------------- - ----------------- __________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- - --------------------------------------------------------------------Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_______________________________ X ________________________________________________ X ________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By_____________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCK- BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15). EX-10.13 4 FULFILLMENT SERVICES AGREEMENT EXHIBIT 10.13 ORDER FULFILLMENT SERVICES AGREEMENT ORDER FULFILLMENT SERVICES AGREEMENT (this "Agreement") dated as of the seventeenth day of September 1999, by and between Keystone Fulfillment, Inc. ("Keystone"), a Delaware corporation with a principal place of business located at 101 Kindig Lane, Hanover, Pennsylvania, and Fogdog, Inc. ("Fogdog,"), a California corporation with a principal place of business located at 500 Broadway, Redwood City, California. W I T N E S S E T H: WHEREAS, Keystone and its affiliates are engaged in the business of direct response marketing to consumers; WHEREAS, Fogdog is engaged in the business of the direct marketing of sporting goods (the "Fogdog Merchandise") and proposes to continue to conduct for the Term (as defined below) of this Agreement to market Fogdog Merchandise to consumers through its website(s) (the "Fogdog Business"); WHEREAS, Fogdog proposes that Keystone provide fulfillment and other services respecting the Fogdog Business; and WHEREAS, subject to the terms and conditions herein contained, Keystone desires to provide such services as set forth herein; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter made by the parties hereto, Fogdog and Keystone agree as follows: 1. Appointment: Acceptance. Subject to the terms and conditions set forth in ------------------------ this Agreement, Fogdog hereby appoints Keystone to coordinate and/or perform the services described herein for the Term. Keystone hereby accepts such appointment and agrees to coordinate and/or perform such services as provided herein for the Term. 2. Fulfillment Services. Keystone will provide or coordinate fulfillment -------------------- services to Fogdog in connection with the Fogdog, Business such services being described, and to be performed in accordance with the Performance Standards and Statement of Work set forth, in Exhibit C. Fees for these --------- services are to be billed to and paid by Fogdog in accordance with the fee schedule set forth in Exhibit A attached hereto and made a part hereof. --------- In addition, Keystone shall arrange and be responsible for payment of all costs for the procurement of insurance in an amount sufficient to cover the replacement cost of Fogdog Merchandise in the possession of Keystone at its facility. Except for shipping work performed by third-party carriers, Keystone shall remain liable for all work it outsources under this Agreement. 3. Certain Fogdog Obligations. Fogdog will: -------------------------- CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. a. pay Keystone per the fee schedule attached as Exhibit A for, and --------- reimburse Keystone for all reimbursable expenses as described and at the rates indicated in Exhibit A which are incurred by Keystone in connection with, all services performed by Keystone on Fogdog's behalf; b. arrange for delivery of Fogdog Merchandise to Keystone's facility, in accordance with the standard vendor compliance procedures set forth in Exhibit B attached hereto and made a part hereof, as the same may be --------- modified from time to time by the parties; c. [*] d. pay for all costs of stationery and packaging and other supplies required in connection with the Fogdog Business, such items to be billed by Keystone in accordance with Exhibit A; --------- e. arrange and pay for the disposition of any overstocks remaining unsold at the end of the Term of this Agreement, including payment of all costs of customs duties, transportation and insurance after the Term of this Agreement; and f. provide Keystone on or prior to the execution and delivery of this Agreement with a duly executed original Pennsylvania resale certificate and sales tax exemption certificate. 4. Reporting: Invoice; Right to Suspend Services for Nonpayment. [*] ------------------------------------------------------------- Keystone will provide to Fogdog a detailed statement and invoice respecting services provided by Keystone and amounts due to Keystone as provided in Exhibit A and within [*] following conclusion of the Term. Failure to --------- present a timely invoice, however, shall not affect Fogdog's obligation to pay any amount due under this Agreement. Invoiced amounts shall be payable as set forth on Exhibit A. Amounts not paid when due shall be subject to a --------- late-payment fee of [*] or, if such rate exceeds the highest rate permitted by applicable law, the highest rate so permitted. If Fogdog fails to pay in full when due any invoice rendered by Keystone, except for amounts regarding disputed items as to which Keystone has received notification, Keystone may notify Fogdog of such failure and, if such failure is not remedied within [*] after receipt of such notice, Keystone may, without incurring any liability, suspend some or all services being provided to Fogdog until Fogdog cures such default. Such remedy shall be cumulative and not exclusive of any other remedies provided by law. 5. Representations and Warranties. ------------------------------ a. Each Party represents and warrants to the other: that it has full power and authority to enter into this Agreement and to undertake its obligations pursuant hereto; that this Agreement constitutes a valid and binding agreement of such party, enforceable in accordance with its terms (except as enforceability may be limited by creditors' rights laws and equitable remedies); that the execution, 2 [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. delivery and performance of this Agreement do not and will not conflict with or result in a breach of or constitute a default under any provision of the charter or by-laws of such party, or give rise to any default under any material contractual obligation of such party or violate any provisions of any law, rule, regulation, order, writ, judgment, injunction, statute, decree, determination or award having applicability to such party or any of its affiliates or its or their properties; and that it is duly qualified or licensed in all jurisdictions wherein the nature of the business conducted by it or the character or location of its properties makes such qualification or licensing necessary, except where the failure so to be qualified or licensed would not, if left unremedied, impair the other party's ability to perform its respective obligations under this Agreement. b. Fogdog represents and warrants to Keystone that in the conduct of the Fogdog Business as it pertains to any and all Fogdog Merchandise, and other items supplied by Fogdog or one of its vendors, Keystone handles, comes into contact with, or has possession of: Fogdog is the absolute owner of all its patents, trademarks, service marks, trademark and service mark applications, trade names, copyrights, trade secrets and other intellectual property used in its business and/or to be used in the Fogdog Business, or has, to its knowledge, and will use its best efforts to continue to have during the Term of this Agreement, all necessary authority of the corporations, partnerships and individuals whose products and services will be offered for sale in the Fogdog Business to use their patents, trademarks, service marks, trade names, trademark and service mark registrations, copyrights, trade secrets and other intellectual property for all purposes of conducting the Fogdog Business. Fogdog's Business, as it pertains to any and all Fogdog Merchandise, and other items supplied by Fogdog or one of its vendors, Keystone handles, comes into contact with, or has possession of, as conducted or as currently proposed to be conducted does not and will not, to Fogdog's knowledge after due inquiry, cause Fogdog to infringe or violate any patents, trademarks, service marks, trade names, copyrights, licenses, trade secrets or other proprietary or intellectual property rights (including, without limitation, rights of privacy and publicity) of any other person or entity. 6. Vendor. Fogdog will be the vendor of Fogdog Merchandise to Fogdog Business ------ customers. Fogdog will be responsible for any required sales tax registrations, filings and remittances. Fogdog shall provide Keystone with a schedule of all jurisdictions for which Keystone is to bill Fogdog's customers for sales and use tax pursuant to section 2(f) of this Agreement. For each jurisdiction listed, such schedule shall indicate whether the non- merchandise components (e.g. delivery charges, insurance, etc.) of Fogdog's customer billing shall be included in the tax base for calculating sales and use tax. Fogdog shall provide Keystone with a product matrix schedule, by SKU number and jurisdiction, indicating each jurisdiction in which the sales price of such SKU number shall be wholly or partially exempt from sales and use tax. For any SKU number partially exempt from sales and use tax, the limits of such exemption shall be indicated. All products not appearing on the product matrix schedule shall be included in the tax base in all jurisdictions for which Fogdog has requested Keystone to bill sales and use tax. The schedules to be provided by Fogdog in accordance with this section shall be 3 provided to Keystone no later than thirty (30) days prior to the commencement of order processing pursuant to section 2(a) of this Agreement. Pursuant to Section 2(f) of this Agreement, Keystone shall bill Fogdog's customers for sales and use taxes for Pennsylvania and such other jurisdictions appearing on Fogdog's schedule of jurisdictions for which Keystone is to bill Fogdog's customers for sales and use tax. Sales and use taxes shall be billed at the current rate, as reported by Vertex or such other third-party national sales tax rate directory as may be used by Keystone, for the date on which orders to Fogdog's customers are received. Keystone makes no representations or warranties as to the accuracy of the information provided by Vertex or any other third-party national sales tax directory. Keystone shall amend the schedule listing the jurisdictions, products and/or other amounts billed to Fogdog's customers for which it bills sales and use taxes within thirty (30) days of receipt of a written request for an amendment from Fogdog. Keystone shall not be held responsible for the collection of sales and use taxes that are unpaid by Fogdog's customers nor for any failure to bill the proper sales and use taxes provided Keystone has complied with the provisions of this section. 7. Compliance with Laws. In performing its obligations under this Agreement, -------------------- each party shall comply with all applicable federal, state and local laws, rules, regulations and orders. 8. Confidentiality. The parties (including their officers, directors, --------------- shareholders, affiliates, agents, employees, consultants, other representatives, successors, and assigns) agree that all confidential or proprietary information (the "Confidential Information"), including, without limitation, customer names, addresses and other related data and pricing, fulfillment and other operational information, received by each as a result of the project contemplated hereby, shall be maintained in strictest confidence, shall not be disclosed to anyone other than employees or agents of the respective parties whose duties require access to such information, and shall be used solely by the parties to carry out this Agreement and the transactions contemplated thereby. Keystone specifically agrees not to use for its own Purposes, or to provide to a third party, any customer or mailing lists of Fogdog that comes into its possession without the prior written consent of Fogdog,. The parties further agree that any public statements made by either party concerning this Agreement or the transactions contemplated herein, unless required by law, shall require the prior written approval of the other party. In addition, should either party be required to disclose the Confidential Information or any part of it to the Securities and Exchange Commission, the par-ties agree to cooperate with each to obtain confidential treatment of such information. 9. Effectiveness and Termination. ----------------------------- a. This Agreement shall be effective as of the date first set forth above and shall continue in full force and effect through October 1, 2001 ("the Term"), unless earlier terminated by either party upon: [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4 (1) if not cured within thirty (30) days following written notice thereof, the failure of the other party to comply substantially with any material provision of this Agreement, including but not limited to: (a) Section 2 payment obligations and Exhibit A; (b) Section 4; (c) Section 5; (d) Section 12; (e) Exhibit C: Merchandise Receipt Performance Standards; (f) Exhibit C: Collate, Printing, Picking, Packing and Shipping Performance Standards for Regular Orders; (g) Exhibit C: Inventory Shrinkage; and (h) Exhibit C: Priority Order Processing. (2) the commencement of any voluntary or involuntary bankruptcy, insolvency, reorganization, readjustment of debt, dissolution (except by way of merger or consolidation), liquidation of debt, or other insolvency proceeding by or against the other party; (3) the suspension or termination of the other party's business or the appointment of a receiver, trustee, or similar officer to take charge of a substantial part of the other party's assets; (4) the other party admitting in writing its inability to pay its debts when due; or (5) one hundred eighty (180) days' prior written notice given to the other party. Fogdog will pay all reasonable expenses associated with moving inventory out of Keystone's facilities should Keystone terminate this Agreement pursuant to this Section 9. b. Upon termination of this Agreement, if Fogdog has failed to pay any undisputed amounts due hereunder, Keystone shall have a lien against any remaining Fogdog Merchandise until payment by Fogdog of all undisputed outstanding amounts, subject to the provisions of the Uniform Commercial Code or other relevant law. Such remedy shall be cumulative and in addition to any other remedies Keystone may have in law or equity. 10. Automatic Renewal of Agreement. This Agreement shall be automatically ------------------------------ renewed for successive two (2) year periods after the Term (each also a "Term") unless either party provides the other party with written notice at least one hundred twenty (120) days before the end of the then current Term that such party does not want to renew this Agreement. 11. No-Hire. Each party agrees that, during and for a period of two (2) years ------- after the Term, or, if this Agreement is earlier terminated, then for the period when the Agreement is in effect and thereafter for a period of two (2) years from the date of the Agreement's [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5 termination, neither it nor any of its affiliates or associates, directly or indirectly, will solicit with a view toward hiring any of the current officers, employees, consultants, or other representatives of the other (as officer, employee, consultant or otherwise) without obtaining the prior written consent of the other party. 12. Indemnification; Limitation on Liability. Fogdog shall indemnify, defend ---------------------------------------- and hold harmless Keystone, its officers, directors, shareholders, affiliates, agents, employees, consultants, other representatives, successors and assigns from and against any and all actions, losses, liabilities, costs, damages, claims, demands, judgments and expenses of any kind (including, without limitation, attorneys' and experts' fees, costs and expenses) (collectively, "Claims"), arising out of or incident to this Agreement, including, without limitation, Claims (a) arising out of the sale, distribution, possession or use of Fogdog Merchandise; or (b) relating to infringement by Fogdog of any patents, copyrights, trademarks, trade names, service marks, trademark or service mark registrations or expropriation of ideas, trade secrets, or other intellectual property or proprietary rights, including, without limitation, rights of privacy or publicity, as such infringement relates to any and all Fogdog Merchandise, and other items supplied by Fogdog or one of its vendors, Keystone handles, comes into contact with, or has possession of; or (c) arising out of or incident to any breach of this Agreement or any violation of law (including, without limitation, export and customs laws, rules, regulations and orders) by Fogdog or a Fogdog affiliate, associate, agent, broker, vendor or representative to the extent liability is actually incurred by Keystone; or (d) respecting sales or use taxes arising in connection with this Agreement, including, without limitation, any such tax which is or may become due in respect to customers' purchases of Fogdog Merchandise, the provision of services hereunder by Keystone, or federal, state or local income or other taxes levied on Fogdog. Keystone shall indemnify, defend and hold harmless Fogdog, its officers, directors, shareholders, affiliates, agents, employees, consultants, other representatives, successors and assigns from and against any and all Claims brought against it (a) by or on account of any third party arising out of or incident to the gross negligence or willful misconduct of Keystone; or (b) arising out of or incident to any breach of this Agreement or any violation of law (including, without limitation, export and customs laws, rules, regulations and orders) by Keystone or a Keystone affiliate, associate, agent, broker, vendor or representative to the extent liability is actually incurred by Fogdog. Except in regard to infringements of intellectual property rights as they pertain to any and all Fogdog Merchandise, and other items supplied by Fogdog or one of its vendors, Keystone handles, comes into contact with, or has possession of, each party's liability for damages under this Agreement, whether in contract, in tort or otherwise, shall not exceed in the aggregate the amount paid for the services provided by Keystone hereunder. Subject to the provisions of Section 19 respecting injunctive remedies for breach of the confidentiality and no-hire provisions hereof, monetary damages shall be each party's exclusive remedy against the other or any of the other's officers, directors, shareholders, affiliates, agents, employees, consultants, other representatives, successors and assigns. The procedure for indemnification regarding third party Claims shall be as follows: (a) The party seeking indemnification (the "Indemnified Party") will give prompt written notice to the other party (the "Indemnifying Party") of any Claim which it discovers or of which it receives notice, stating the nature, basis, and (to the extent known) amount thereof; provided, however, that failure to give prompt notice shall not jeopardize the right of the Indemnified Party to indemnification unless such failure shall have materially prejudiced the ability of the Indemnifying Party to defend such Claim. (b) The Indemnifying Party shall be entitled, at its own expense, to participate in the defense of such Claim and, if (1) the Claim seeks solely monetary damages; (2) the Indemnifying Party confirms, in writing, its obligations hereunder to indemnify and hold harmless the Indemnified Party with respect to such Claim in its entirety; and (3) the Indemnifying Party shall have made provision which, in the reasonable judgment of the Indemnified Party, is adequate to satisfy any adverse judgment as a result of its indemnification obligation with respect to such Claim, then the Indemnifying Party shall be entitled to assume and control such defense with counsel chosen by it and approved by the Indemnified Party, which approval shall not be unreasonably withheld. The Indemnified Party shall be entitled to participate therein after such assumption at its own expense. Upon assuming such defense, the Indemnifying Party shall have full rights to dispose of such Claim and enter into any monetary compromise or settlement which is dispositive of the matters involved, provided that such settlement is paid in full and will not have any direct or indirect adverse effect upon the Indemnified Party. (c) With respect to any Claim as to which (1) the Indemnifying Party does not have the right to assume the defense, or (2) the Indemnifying Party does not exercise its right to assume the defense, the Indemnified Party shall assume and control the defense of such Claim with counsel chosen by it and approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall be entitled to participate in the defense of such Claim at its own expense. The Indemnifying Party shall be obligated to pay the reasonable attorneys' fees and expenses and other costs relating to such defense. The Indemnified Party shall have full rights to dispose of such Claim and enter into any monetary compromise or settlement which is dispositive of the matters involved, provided that it shall act reasonably and in good faith in doing so. (d) Both the Indemnifying Party and the Indemnified Party shall cooperate fully with each other in connection with the defense, compromise, or settlement of any Claim including, without limitation, by making available to each other all pertinent information and witness within a party's control. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 13. Force Majeure; No Consequential Damages. In the event that either party --------------------------------------- shall be unable to perform under this Agreement because of circumstances constituting a force majeure, including, without limitation, acts of God, accident, fire, flood, explosion, the elements, strikes, embargo, sabotage, acts of war or of military authorities, civil disturbances, transportation stoppages, acts or omissions of carriers, inability to secure fuel, failures of electrical supply or communications services, acts of computer hackers, or other causes beyond its control, such party shall not be deemed to be in breach of this Agreement or liable to the other for failure to perform hereunder. None of the foregoing, however, shall excuse any failure of either party to pay money as and when due hereunder. In no case shall either party be liable to the other for any consequential, incidental or indirect losses or damages of any kind arising out of or in any way connected with this Agreement, even if such party has been advised of the possibility of such losses or damages. 7 [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 14. Binding Effect, No Assignment. This Agreement shall be binding upon and ----------------------------- inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned or otherwise transferred by either party without the written consent of the other party, except that either party shall be permitted to assign this Agreement to any party under common control with it or to a successor in interest by way of merger, acquisition or other lawful succession without such consent unless such successor is a direct competitor of the other party. Any purported assignment or other transfer in violation of this section shall be null and void. 15. Independent Contractors: No Third-Party Rights. Nothing contained in this ----------------------------------------------- agreement shall be construed to give either party the power to direct or control the day-to-day activities of the other. The parties are, and in all respects of their relationship to one another and their respective performances hereunder shall be, independent contractors, and neither this Agreement nor anything herein contained shall be deemed or construed to constitute the parties as partners, joint venturers, principal and agent, co-owners or otherwise as participants in a joint or common undertaking. 16. Modification; No Waiver; Severability. No modification or waiver of any ------------------------------------- provision of this Agreement shall be effective unless and only to the extent expressed in a mutually executed agreement. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. Should any provision of this Agreement be determined to be void, invalid or otherwise unenforceable by any court of competent jurisdiction, such determination shall not affect the remaining provisions hereof, which shall remain in full force and effect. 17. Governing Law; Jurisdiction. This Agreement shall be governed by and --------------------------- construed under the laws of the State of Pennsylvania, without regard to such state's conflict of laws rules. THE PARTIES HEREBY AGREE TO SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL OR STATE COURTS LOCATED IN THE STATE OF PENNSYLVANIA, AND HEREBY WAIVE ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN AND ANY RIGHT TO TRIAL BY JURY. 18. Notices. Except as otherwise provided in this Agreement, notices required ------- to be given pursuant to this Agreement will be effective upon receipt (or upon rejection of receipt) when hand-delivered in writing, sent by prepaid express delivery courier, sent by first class certified mail, return receipt requested, with postage fully prepaid, or sent by facsimile followed by a confirmation letter of such delivery method, to the parties at the respective addresses and numbers below: 8 [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (a) if to Keystone: Keystone Fulfillment, Inc. 5022 Hollins Road Roanoke, VA Attention: Gary Firebaugh Vice President Telephone: 540-561-7746 Facsimile: 540-561-7755 With a copy to: Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 Attention: General Counsel Telephone: 201-272-3484 Facsimile: 201-272-3495 (b) if to Fogdog: Fogdog, Inc. 500 Broadway Redwood City, CA 94063 Attention: Mohan Komanduri Director of Logistics Telephone: 650-980-2577 Facsimile: 650-980-2600 with a copy to: Fogdog, Inc. 500 Broadway Redwood City, CA 94063 Attention: Pat McGovern General Counsel Telephone: 650-980-2546 Facsimile: 650-980-2608 19. Survival; Injunctive Relief; Remedies Cumulative. The confidentiality and ------------------------------------------------ no-hire provisions hereof shall survive the expiration or earlier termination of this Agreement and the consummation or termination of the transactions contemplated hereby. The parties agree that the remedy at law for any breach of such provisions would be inadequate; that the injured party shall be entitled to seek injunctive relief in addition to any other remedy to which it may be entitled. Notwithstanding the expiration or earlier termination of this 9 Agreement neither party hereto shall be released from any liability or obligation hereunder (whether in the nature of indemnification or otherwise) which has already accrued as of the time of such expiration or termination or which thereafter might accrue in respect of any act or omission of such party prior to such expiration or termination. The remedies provided herein are cumulative and not exclusive of any other remedies that a party may have in law or equity. 20. Entire Agreement; Counterparts. With respect to the matters contemplated ------------------------------ herein, this Agreement constitutes the entire understanding between the parties and supersedes all prior oral and written communications, negotiations, understandings and agreements between such parties in relation to the subject matter hereof. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute the same agreement. 21. Number and Gender. Whenever appropriate in this Agreement, terms in the ----------------- singular number shall include the plural (and vice versa) and each gender form shall include all others. 22. Headings. Section headings contained in this Agreement are for reference -------- purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 23. Drafting. This Agreement shall be treated as an agreement that was jointly -------- drafted by all parties signing it and shall not be read against any particular drafter of the Agreement or any provision therein. 24. Attorneys' Fees and Litigation Expenses. In the event that any legal --------------------------------------- proceeding concerning the validity, enforcement or interpretation of the provisions of this Agreement is instituted, the prevailing party in such proceeding shall be entitled to recover its reasonable attorneys' fees and other litigation expenses incurred in such proceeding, in addition to any other relief to which it may be entitled, from the losing party. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. KEYSTONE FULFILLMENT, INC. By: /s/ Gary A. Firebaugh ----------------------------------- Name: Gary A. Firebaugh Title: Vice President, Marketing FOGDOG, INC. By: /s/ Timothy Harrington ----------------------------------- Name: Timothy Harrington --------------------------------- Title: CEO -------------------------------- 10 Exhibit A Schedule of Fees [*] 11 [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Orders/month [*] [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12
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[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15 Exhibit B Standard Vendor Compliance Procedures Packaging Vendors are expected to deliver merchandise in prepackaged units exactly as they are to be sold to the customer. All items require packaging that will protect them during distribution, storage, handling and shipping. There are four package formats that are acceptable to Keystone: Polybags -------- Non-fragile items can be packaged in individual, fully vented polybags labeled with the Fogdog item number. Multiple items of the same item number may be packed into a master carton. Polybags are appropriate for small items which will not easily break during handling and for textile items. Boxes ----- Items may be packaged in a retail box made from kraft board or corrugated boxes. This may be appropriate for non-fragile items or where there is sufficient inner protection to prevent damage from shock or vibration. If the product is exposed, or the item may fall out of the package during conveyance, a polybag, shrink film or over-box must be used. These items must be delivered in a master carton. Protective Packaging -------------------- Items which can easily break must have protection sufficient to withstand the normal distribution handling and shipping environment. Ship-Alone Packaging --------------------- Items that are greater than 23 inches in length or weigh more than 30 pounds must be packaged in mailable containers. These items will be sent directly to the customer and will not be over-boxed. Master Cartons -------------- Items less than 23 inches in length or less than 30 pounds should be in master cartons. The master carton size should not exceed 36"L x 26"W x 20"H, nor exceed 50 pounds. Each master carton must contain only one Fogdog item number. Labeling Individual Unit Label --------------------- 16 Each individual selling unit must have an identification label. The label must show the Fogdog item number and the country of origin. This does not necessarily need to be externally marked. Master Carton Labeling ---------------------- Each master carton must have the following information clearly marked or labeled on the outside of the carton: . Fogdog . Fogdog Item Number . Purchase Order Number . Color . Quantity . Case Number ___ of ____ . Made in: . Destination Shipping Requirements Advance Shipping Notification (ASN) ----------------------------------- All inbound shipments must be scheduled through the Traffic Department using an ASN. This must be faxed to the Traffic Department at (717) 633- 3202 at least 3 days before shipping. The Traffic Department will return the form within 24 hours with a Request Number. Questions about ASNs should be directed to the Traffic Coordinator at (717) 633-3276. Loading the Truck ----------------- The truck must be loaded by purchase order and then by item number within that purchase order. Packing List ------------ A detailed packing list must accompany each shipment and should be attached to the last container/pallet loaded in the trailer. There should be one packing list for each purchase order shipped. Routing Guide For inbound shipments arriving at Keystone with collect freight terms, the carriers shown in this routing guide should be used. Other carriers may be used if agreed to in writing by Keystone before shipments are originated. Shipments weighing under 125 pounds: ----------------------------------- Use RPS. Call (800) 762-3725 for instructions or supplies 17 Shipments weighing between 125 pounds and 4,999 pounds and occupying less ------------------------------------------------------------------------- than 1/3 of a 48 foot trailer: ----------------------------- Use the carrier shown in the chart following this section. Shipments weighing between 5,000 pounds or more and/or occupying more than -------------------------------------------------------------------------- 1/3 of a 48 foot trailer: ------------------------ Call the Traffic Coordinator at (717) 633-3276 to schedule merchandise pickup. Items not complying with the requirements contained in this Exhibit may be prepped or re-worked by Keystone at the expense of Fogdog at the sole discretion of Keystone. 18 Shipments weighing between 125 pounds and 4,999 pounds and occupying less ------------------------------------------------------------------------- than 1/3 of a 48 foot trailer should be shipped by the carrier shown for ------------------------------------------------------------------------ the origin state in this table: ------------------------------ State Carrier - ----- ------- AL Roadway NM Roadway AR Roadway NV Roadway AZ Roadway NY Overnite CA Roadway OH Roadway CO Roadway OR Roadway CT Overnite PA Overnite DC Overnite RI Overnite DE Overnite SC Overnite FL Roadway SD Roadway GA Roadway TN Roadway IA Roadway TX Roadway ID Roadway UT Roadway IL Roadway VA Overnite IN Roadway VT Roadway KS Roadway WA Roadway KY Roadway WI Roadway LA Roadway WV Overnite MA Overnite WY Roadway MD Overnite ME Overnite MI Roadway MN Roadway MO Roadway MS Roadway MT Roadway NC Overnite ND Roadway NE Roadway NH Overnite NJ Overnite 19 Exhibit C Keystone Services, Performance Standards, and Statement of Work OVERALL SCOPE Fogdog will receive orders via the Internet. Fogdog will authorize credit cards and transmit orders to Keystone Fulfillment, Inc. (KFI). KFI will pick, pack and ship the orders. KFI will prepare and send to Fogdog a file for shipped orders, including delivery-tracking information. Fogdog will bill the credit cards and resolve declines and charge backs from the bank. KFI will transmit the inventory snapshot and inventory transaction files to Fogdog at least once per day. Fogdog will transmit to KFI item numbers, purchase orders and vendor information. KFI will update Fogdog with an order status file at least twice per work day (actual frequency to be agreed upon by KFI and Fogdog). Interfaces and System Setup Work will begin on September 15, 1999 to develop system interfaces and setup an account on the KFI system. Programming will be performed by Fogdog so files sent to KFI comply with the formats contained in Exhibit G of this agreement for purchase order, item, vendor and order files. KFI will perform programming so files sent to Fogdog meet the formats contained in Exhibit G of this agreement for order status and inventory status. Shipment of products to Fogdog customers will begin no later than October 11, 1999. Information Set Up Fogdog will transfer to KFI item, purchase order, and vendor files. Forecasting Fogdog will make every attempt to provide a daily forecast for receipts, shipments, gift box units and gift wrapping units, within [*] of actual numbers in order for KFI to meet standards. Fogdog will have this forecast to KFI by 5 PM Eastern Standard Time on each Monday for the week beginning three weeks later. If actuals fall outside of the [*] KFI will not be bound to the performance standards contained in this agreement but will do everything within reason to meet these standards. If actuals are over [*] of the forecast, the account executive will call for an operational overview with both KFI and Fogdog representatives. The purpose of this overview will be to determine the best short-term operational plan to work out of the backlog situation. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 20 If actuals fall below [*] of the forecast, Fogdog will pay KFI the equivalent of the charge for receiving, shipping, gift boxing, and gift wrapping, [*] of the forecasted orders or units respectively. Merchandise Receipt Fogdog's vendors will follow vendor compliance guidelines contained in this Agreement, including providing KFI with advance shipping notification. KFI will receive and enter into inventory all items meeting purchase order requirements and not requiring prep within one business day. KFI will provide a 10% basic inspection at the piece level for product identification and count verification. Receipts requiring sortation into one sku per carton, will be available for sale 2 business days after arrival at KFI's facility. Multi-sku receipts with inner packs that will withstand the rigors of material handling within the warehouse will be available for sale one business day after arrival at KFI's facility. For item(s) not meeting purchase order requirements, a problem order manual log will be generated and contact made to Fogdog to resolve incoming problems within one business day. At Fogdog's request, KFI will provide kitting services. Quality Inspection Any merchandise requiring additional quality control and/or prep work must be approved by Fogdog in advance of work performed. Merchandise Storage Fogdog's inventory will be stored solely in KFI's Kindig Lane facility, unless Fogdog authorizes Keystone in writing to store Fogdog's inventory off-site, and will be segregated from other active and reserve Keystone inventory. Merchandise will be stored in a clean, climate controlled space that offers reasonable protection from temperature and water damage and includes functioning sprinklers. In addition, for items identified by Fogdog as "high value", a secure storage area with limited access will be used. Order Origination Customers will place orders through the Internet. The inventory snapshot and transaction files will be transmitted once per day by KFI to Fogdog and will be used to calculate availability at the time of order. Fogdog will authorize the order, check for frauds, and create a file with the customer's name, address, product number, and quantity. KFI will initiate a file transfer to its system at least twice per work day (actual frequency to be agreed upon by KFI and Fogdog) [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 21 KFI will, at a frequency to be agreed upon by KFI and Fogdog, but not less than twice each work day, transmit files to Fogdog to update inventory and order status information, including cancellations. COLLATE PRINTING, PICKING, PACKING, AND SHIPPING Regular Orders All items available for picking (excluding back orders) are released on a collate to the distribution center for shipping at the conclusion of the order run. [*] of all in stock, non-damaged non-problem orders transmitted to KFI prior to the midday order processing run, up to [*] of the Fogdog forecast mentioned above, will be shipped on the same day. If less than [*] of all in stock, non-damaged, non-problem orders transmitted to KFI prior to the midday order processing run, up to [*] of the Fogdog forecast mentioned above, are not shipped the same day, KFI will upgrade its shipping services, and bear the costs of such upgrades, to bring the orders up to the [*] level as follows: 1) UPS Ground to UPS 3-day select; 2) UPS 3-day select to UPS 2nd day air; 3) UPS 2nd day air to UPS next day air; 4) USPS parcel post to USPS Priority Mail; 5) USPS Priority Mail to USPS Express Mail Service. 100% of the orders carried over will be shipped by the end of the next business day. (During high volume periods, as determined by Keystone in its sole discretion, Keystone will use reasonable efforts to implement weekend and evening schedules to maintain this standard.) QUALITY ASSURANCE On a weekly basis, outbound order accuracy and order presentation will be at minimum [*]. If outbound order accuracy is at or above [*] at the order level for a given week, Fogdog and KFI will share equally the cost of return postage and shipping charges for replacement items required to correct the outbound order accuracy errors. If outbound order accuracy is below [*], the parties shall share equally the cost of return postage and shipping charges for replacement items required to correct the first [*] and thereafter KFI will bear the entire cost of return postage and shipping charges for replacement items required to correct the outbound order accuracy errors. Outbound order accuracy is measured by the following criteria: (1) correct item(s) in the package; (2) presence of gift boxing and/or gift wrapping per Fogdog instructions; and (3) sufficient dunnage to protect item(s) during shipping. Order presentation is defined as correct inserts, labeling and/or other package appearance work per Fogdog instructions. Distribution Distribution will receive the collates (packing slips) at the conclusion of each order run. KFI will pick, pack and ship the order, using a label bearing Fogdog's name and logo as specified by Fogdog, together with the return address specified by Fogdog. Products will [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 22 be shipped using Fogdog's designated carrier(s). Orders shipped via UPS will ship under a Fogdog designated UPS Shipper Number and account. The completed shipment record and tracking information will be transmitted to Fogdog via the order status file. Fogdog will bill the customer and credit Fogdog's bank account. Credit Card Processing and Charge Backs After the order is shipped, KFI will send the shipment confirmation file to Fogdog. Fogdog will process the billing of the credit cards. Returns Customer returns, including credit card credits, will be processed by Fogdog at its facility. Items to be returned to inventory will be sent by Fogdog to KFI and processed as new receipts. Order Cancellations Fogdog will cancel orders in its system if the file has not been transferred to KFI. Once orders have been transferred to KFI, orders can be canceled before they are released to the Distribution Center. If orders have progressed beyond the cancellation point, Fogdog can contact the account executive and reasonable efforts will be made by KFI to manually track down the orders in the warehouse. KFI will notify Fogdog whether or not KFI was able to locate and cancel the orders. Inventory Shrinkage KFI will be responsible for inventory accuracy at these levels: . [*] in aggregate as determined by physical inventory . [*] in aggregate on 12 week cycle counts after adjustments made for active recounts If there is shrinkage above these levels, KFI will pay the cost to replace those goods. Priority Order Processing All priority orders, up to a maximum of [*] per day, received by KFI prior to 3:00 p.m. Eastern Standard Time will be shipped that same day. Reports The reports referred to in Exhibit E of this agreement will be available to Fogdog at daily, weekly and/or monthly frequencies as requested in writing by Fogdog. Inventory KFI will conduct cycle counting of the reserve storage for a complete turnover every 12 weeks. An annual physical inventory is also available with two months' written notice. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 23 Return to Vendor and other Inventory Handling KFI will destock and return to Fogdog, its vendor(s) or other Fogdog designated parties, as the case may be, any rejected or overstock Fogdog Merchandise at Fogdog's discretion and at Fogdog's expense. Keystone Inserts KFI will not include any inserts relating to KFI in any order without the prior written consent of Fogdog. Certain Definitions: "Business day," for all purposes of Keystone Standards and the Direct Marketing Services Agreement to which this is attached, shall mean Monday through Friday except any day that is a United States national holiday. 24 Exhibit D Keystone Account Executive Job Description Reports To: Vice President Operations of Keystone SUMMARY Provides and leverages service to Fogdog for the purpose of meeting contractual obligations and generating additional business by performing the following duties. ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned. . Develops strong working relationships with companies doing business with Fogdog. . Provides required reports for Fogdog as specified in this Agreement. . Works with companies doing business with Fogdog to identify and communicate marketing projections related to orders, receipts, returns or other data that will affect service levels to customer service and fulfillment management teams. . Monitors and communicates attainment of contractual performance standards to Fogdog's customer service and fulfillment operations, making recommendations for improvements as necessary. . Provides Fogdog with information and advice on the best methods to use to improve throughput and cost. . Works with all operating divisions to set up new Fogdog accounts. . Schedules meetings and tours for companies doing or potentially doing business with Fogdog. . Conducts off-line or on-line research to resolve customer problems. . Assures compliance with pertinent laws and regulations. . Position will require hours outside of normal schedule and may involve periodic overnight travel. . Insures that staff has required resources and equipment to perform their duties. SUPERVISORY RESPONSIBILITIES: The Account Executive will directly supervise 1 to 2 Assistant Account Executives. The Account Executive will carry out supervisory responsibilities in accordance with Keystone's policies and applicable laws. 25 Responsibilities include interviewing, hiring, and training employees; planning, assigning and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems. QUALIFICATIONS: To perform this job successfully, the Account Executive must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions. EDUCATION and/or EXPERIENCE: Associate's Degree (A.A.) or equivalent from two-year college or technical school; or six months to one year related experience and/or training; or equivalent combination of education and experience. LANGUAGE SKILLS: Ability to read, analyze, and interpret general business periodicals, professional journals, technical procedures, or governmental regulations. Ability to write reports, business correspondence and procedure manuals. Ability to effectively present information and respond to questions from groups of managers, Fogdog representatives, customers, and the general public. MATHEMATICAL SKILLS: Ability to add, subtract, multiply, and divide in all units of measure, using whole numbers, common fractions, and decimals. Ability to compute rate, ratio, and percentages and to draw and interpret bar graphs. REASONING ABILITY: Ability to define problems, collect data, establish facts, and draw valid conclusions. Ability to interpret an extensive variety of technical instructions in mathematical or diagram form and deal with several abstract and concrete variables. Ability to manage multiple projects and priorities. COMPUTER KNOWLEDGE: Experience with Microsoft Office Suite products including Word, Exchange and Excel. Ability to create business correspondence in Word and Exchange. Ability to create spreadsheets in Excel using simple calculations and equations. Knowledge of PowerPoint is a plus. Experience in MACS, Lawson, PowerPoint or other software common to Keystone/Hanover Direct is a plus. PHYSICAL DEMANDS: The physical demands described here are representative of those that must be met by the Account Executive to successfully perform the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions. While performing the duties of this job, the Account Executive is regularly required to sit and talk and/or listen. The Account Executive frequently is required to stand; use hands to finger, handle, or feel; and reach with hands and arms. The Account Executive is occasionally required to walk and stoop, kneel, crouch or crawl. The Account Executive must occasionally lift and/or move up to 25 pounds. 26 Exhibit E Standard System Reporting Listing Actual Offer Page Analysis -------------------------- Daily Demand ------------ Daily Return ------------ Inventory Value Report ---------------------- Items by Location ----------------- Key History Analysis -------------------- Key History II -------------- Order Fill Rate Analysis ------------------------ Out of Stock Report ------------------- Product Forecast Report ----------------------- Product Return By Date Range ---------------------------- Product Sales By Source ----------------------- Purchase Order Analysis ----------------------- Receiving Recap --------------- Sales By How Paid Date ---------------------- Shipped Sales By Catalog ------------------------ Shipped Sales By Division ------------------------- Summary Backorder Report ------------------------ Ticket Receiving ---------------- Where It Is ------------ 27 Exhibit F 1994 Q4 and Year 2000 Order Volume and SKU Projections The following information reflects Fogdog's projected SKU and order volumes for product fulfilled through Keystone. SKU and order information for October 1999 through December 1999: - ---------------------------------------------------------------- Average daily orders: [*] by December 1999 Peak daily orders: [*] (first week of December) SKU's: [*] (Approximate breakdown: 30% apparel, 30% footwear, 30% large hardgoods, and 10% small accessories) SKU and order information for the year 2000: Annual order volume: [*] SKU's : growing to [*] [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 28 EX-10.14 5 NIKE LETTER AGREEMENT EXHIBIT 10.14 September 17, 1999 Tim Harrington Fogdog, Inc. 500 Broadway Redwood City, California 94063 Re: Term Sheet --- ---------- Dear Tim: The attached Term Sheet memorialize the principal terms and conditions of a series of transactions in which (i) NIKE USA, Inc., an Oregon corporation ("NIKE USA") will open Fogdog, Inc., a California corporation ("Fogdog"), as a NIKE USA retail account; (ii) Bauer NIKE Hockey USA, Inc., a Vermont corporation ("BNH-USA") will open Fogdog as a BNH-USA retail account; (iii) NIKE Team Sports, Inc., a California corporation ("NTS"), will open Fogdog as an NTS retail account; (iv) NIKE.com, a division of NIKE Retail Services, Inc., an Oregon corporation ("NIKE.com"), will agree to sell to Fogdog, out of NIKE.com's inventory of available products, products necessary to fill retail orders received by Fogdog; (v) Fogdog will issue to NIKE USA a warrant to purchase 6,171,524 shares of Fogdog's Series C Preferred Stock; and (vi) NIKE USA, Fogdog and Fogdog's principal investors will agree on certain rights and restrictions applicable to NIKE USA's equity investment in Fogdog. By executing this letter, each of the undersigned acknowledges and agrees that the attached Term Sheet constitutes the binding agreement of such party with respect to the transactions described above and that NIKE USA's equity investment shall occur pursuant to such agreement. Each of the parties further acknowledges and agrees that the parties contemplate replacing this "short-form" agreement with a series of additional definitive long-form agreements as soon as practicable. Notwithstanding the foregoing, until such time as such definitive long-form agreements are entered into between the parties, the attached Term Sheet shall continue to constitute the binding agreement of the parties. Each party will be responsible for its own fees and costs in negotiating and entering into this transaction. If you agree to the terms set forth in the attached Term Sheet, please sign a copy of this letter in the space indicated below and return it to me. We can then have our attorneys prepare drafts of the definitive long form agreements. CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Sincerely, NIKE USA, INC. By: /s/ Philip H. Knight ________________________ Philip H. Knight, CEO The undersigned parties agree with the terms and conditions set forth above and on the attached Term Sheet: FOGDOG, INC. By: /s/ Tim Harrington _______________________ Tim Harrington, CEO BAUER NIKE HOCKEY USA, INC. By: /s/ Philip H. Knight ___________________________________ Philip H. Knight, Attorney-in-Fact NIKE TEAM SPORTS, INC. By: /s/ Philip H. Knight ___________________________________ Philip H. Knight, CEO NIKE RETAIL SERVICES, INC. By: /s/ Philip H. Knight ___________________________________ Philip H. Knight, CEO FOGDOG PREFERRED STOCKHOLDERS: VENROCK ASSOCIATES II, L.P. By: [signature illegible] ________________________________ Name: Title: General Partner DRAPER FISHER ASSOCIATES FUND IV, L.P. By: [signature illegible] ________________________________ Name: Title: J.H. WHITNEY III, L.P. By: J.H. Whitney Equity Partners III, L.L.C. Its General Partner By: /s/ Michael Brooks _________________________________ Michael Brooks Managing Member SPROUT CAPITAL VIII, L.P. By: DLJ Capital Corp. Its: Managing General Partner /s/ Alexander Rosen ____________________________________ By: Alexander Rosen Its: Attorney In Fact FOGDOG COMMON STOCKHOLDERS: BRETT M. ALLSOP AND AMY K. ALLSOP, TRUSTEES OF THE BRETT AND AMY ALLSOP FAMILY 1999 TRUST. By: /s/ Brett M. Allsop _______________________________ Name: Brett M. Allsop Title: Trustee By: /s/ Amy K. Allsop _______________________________ Name: Amy K. Allsop Title: Trustee ROBERT S. CHEA /s/ Robert S. Chea __________________________________ ANDREW Y. CHEN /s/ Andrew Y. Chen __________________________________ TERM SHEET 1. Agreement by NIKE USA to open Fogdog, Inc. as a NIKE USA Retail Account. ----------------------------------------------------------------------- 1.1 Account Application. NIKE USA and Fogdog agree, which agreement shall ------------------- be memorialized in greater detail pursuant to an Account Application and Agreement on NIKE USA's standard form (the "Account Application"), that NIKE USA will open Fogdog as a NIKE USA retail account. The Account Application will govern all purchases and sales of NIKE products from NIKE USA, except to the extent the Account Application is amended by the Web Sales Agreement referred to in Section 1.2 of this Term Sheet. The Account Application shall indicate that Fogdog is authorized to sell NIKE products only through Fogdog's retail web site (i.e., Fogdog.com) and other sites described in Section 1.2.2 of this Term Sheet, and only to consumers with shipping addresses in the United States or U.S. military installations where NIKE USA sells products (including APO/FPO). Any sales by Fogdog from any other physical location or web site or any direct or indirect sales or transshipments to another retailer, distributor or broker is strictly forbidden by the Account Application and shall be considered a material breach. Fogdog shall be authorized in the Account Application to purchase the full line of generally available NIKE products, including footwear, apparel, equipment, accessories, ACG, Brand Jordan, golf, specialty categories, etc. 1.2 Web Sales Agreement. NIKE USA and Fogdog agree, which agreement shall ------------------- be memorialized in greater detail pursuant to a Web Sales Agreement (the "Web Sales Agreement"), to the following terms and conditions: 1.2.1 Relationship to Account Application and Other Documents ------------------------------------------------------- . In the event of any direct conflict or inconsistency between the Account Application and the Web Sales Agreement, the Web Sales Agreement will govern. 1.2.2 Grant of Right -------------- . During the term of the Web Sales Agreement, as determined in accordance with Section 1.2.16 of this Term Sheet, Fogdog will have the right to market and sell NIKE USA products only on Fogdog.com, or other web sites that are (i) hosted on file servers owned or leased and operated by Fogdog and (ii) --- operated under Fogdog's trademarks and trade name, whether or not "co- branded" with the trademarks or trade names of other entities, and are not (iii) "co-branded" with the trademarks or trade names of ----------- manufacturers of sports and fitness or "athleisure" products, retailers who derive a substantial portion of their revenues from the sale of such products, or any other entity who holds itself out as such a manufacturer or retailer or is perceived by a significant portion of the public to be such a manufacturer or retailer. Notwithstanding the foregoing, Fogdog shall retain the right to purchase banner advertising on World Wide Web Portals and other URLs that link to Fogdog.com. . Fogdog's rights and duties shall not be assigned or delegated or transferred by operation of law without NIKE USA's prior written consent, which may be granted or withheld at NIKE USA's sole discretion; provided, however, that NIKE USA will not unreasonably withhold its consent to an assignment of rights and delegation of duties to a wholly owned subsidiary of Fogdog that may be incorporated to operate a Fogdog web site of the type described in this Section 1.2.2; and provided further that NIKE USA hereby consents to the proposed re-incorporation of Fogdog in Delaware, as long as the successor corporation succeeds to all of the rights and obligations of Fogdog hereunder. . Fogdog does not have the right to sell product purchased from NIKE for the account of third parties. . Fogdog is prohibited from selling products to consumers with shipping addresses outside of the United States, except consumers at U.S. military installations where NIKE USA sells products (including APO/FPO). NIKE USA agrees to consider amending the Account Application and Web Sales Agreement to permit sales to parties outside of the United States, but any such expansion shall be at NIKE USA's sole discretion based on all relevant factors, including but not limited to applicable regulatory requirements, NIKE USA's obligations to third parties, consistency with NIKE USA affiliates' practices and policies in international markets, and the potential for disruption of relationships with existing customers of NIKE USA's affiliates. Notwithstanding the foregoing, NIKE USA agrees to amend the Account Application and Web Sales Agreement to permit sales to consumers outside of the United States in any country in which NIKE.com is allowed to sell, except to the extent such sales would cause or constitute a violation of any agreement with a third party. To the extent sales outside the United States would require the approval of any NIKE USA affiliate, NIKE USA shall be obligated to secure such approval on terms and conditions no less favorable to Fogdog than the terms and conditions set forth in this Term Sheet, the Account Application and the Web Sales Agreement. 1.2.3 Exclusivity ----------- . Fogdog agrees to use NIKE USA and its affiliates as the exclusive suppliers of NIKE brand products to Fogdog. . For a period commencing on the date hereof and ending on 3/31/2000, NIKE USA shall not open, and shall prevent its affiliates from opening, any "new internet-only account," which shall be defined as any retailer that sells only on the World Wide Web and does not fall within one of the following exceptions: (i) any entity which is an affiliate, as defined in Section 7.1 of this Term Sheet, of a current or future NIKE USA account that derives the majority of its revenue from traditional "brick and mortar" retail stores (for example, a special purpose web operating subsidiary of an existing NIKE customer); or (ii) any entity which serves as the e-commerce or web sales outsourcing provider for a current or future NIKE USA account that derives the majority of its revenue from traditional "brick and mortar" retail stores. In addition, for a period commencing on the date hereof and ending on [*] NIKE USA shall not invest, and shall prevent its affiliates from investing, in the securities of any entity of the type described in exception (ii) of the preceding sentence. The foregoing exceptions are intended to ensure that NIKE USA does not have an obligation to Fogdog to restrict the opportunities of its core customer base to sell NIKE products over the World Wide Web (any such restrictions shall be made unilaterally by NIKE USA after considering all relevant business and legal considerations). NIKE acknowledges that the foregoing exception for affiliates of current or future NIKE USA accounts is not intended to cover "spinoffs" whose outstanding securities are publicly traded or owned by venture capital firms or other financial investors. Sales by NIKE USA or its affiliates to such spinoffs on or before 3/31/2000 would constitute a breach of this Term Sheet and the definitive Web Sales Agreement. . Fogdog acknowledges that NIKE USA's affiliate, NIKE.com, will continue to buy goods from NIKE USA for sale on the World Wide Web, and that nothing in the Web Sales Agreement or the definitive agreements limits the ability of any NIKE USA affiliate (or any NIKE USA account with a web sales presence) to sell on the web in direct competition with Fogdog. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. . Fogdog may sell its securities to competitors of NIKE USA; provided that any such sale of securities representing a greater voting interest than that originally purchased by NIKE shall be considered a breach of the agreement and have the consequences described in Section 1.2. 16. 1.2.4 Ownership and use of the NIKE Trademarks ---------------------------------------- . Nothing in this agreement or any other agreement between the parties does or will affect NIKE's ownership of the NIKE trademarks. Similarly, nothing in this agreement or any other agreement between the parties does or will affect Fogdog's ownership of the Fogdog trademarks. NIKE USA acknowledges that by opening Fogdog as a NIKE USA account NIKE USA is granting Fogdog an implied license to advertise NIKE products subject to the provisions of this Term Sheet and the definitive agreements. 1.2.5 Pricing ------- . Based on consideration of the projected volumes of Fogdog's purchases, Fogdog's willingness to bear a portion of NIKE's costs of rapidly making product available to Fogdog for the Holiday '99 season, and other cost-related considerations unique to the e-commerce environment, NIKE USA will extend to Fogdog pricing terms in accordance with the strategic discount package described below in this Section 1.2.5. As indicated below, Fogdog will also be eligible to participate in all of the programs associated with similarly situated retailers (Co-op, [*], etc) on a negotiated basis. Under present NIKE USA assumptions and operating procedures, NIKE USA will be able to offer Fogdog a discount between [*] and [*] of NIKE USA's list prices, the precise percentage to be negotiated based on [*]. Fogdog acknowledges that Nike USA's pricing policies are currently under review and that the foregoing discount range may change as new policies are implemented. However, NIKE USA is hereby bound to offer Fogdog terms that are substantially equivalent to those enjoyed by other [*] who currently receive discounts between [*] and [*]. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.2.6 Co-op [*] --------- . Purchase of NIKE USA products will result in Co-op accruals of [*] Co-op funds available in Fogdog's co-op account may be used by Fogdog in accordance with the rules generally applicable to NIKE USA's co-op program. [*] will be available in amounts ranging from [*] of sales to Fogdog, the precise percentage to be determined by NIKE [*] in accordance with the criteria usually applied in administering its [*] budget. 1.2.7 Special Make-Ups ---------------- . Special make-ups are defined as footwear styles (combinations of materials, colors, features, etc.) which are developed by NIKE USA and its affiliates for sale to a single retailer. Special make-ups may share features, colors, etc. with products generally available in NIKE's line of products, or special make-ups for other customers, but they are different enough to be objectively perceived as unique by the average footwear consumer. . Fogdog has the right to receive exclusive special make-ups provided Fogdog meets the order eligibility criteria usually applied by NIKE USA for such products. Such criteria include, for example, the nature of the special make-up (e.g., unique color combination vs. unique outsole with special tooling requirements), production capacity, order volumes, etc. . Fogdog acknowledges that NIKE may engage in special make-up projects with various retailers who order extraordinary volumes, are willing to fund development costs, or are otherwise willing to contribute to NIKE's product creation process. These projects may result in features or technologies that are not eligible for incorporation into special make-ups that Fogdog may desire to order. One example is tuned air technology. 1.2.8 Early Releases -------------- . Early releases are defined as products intended to be included in NIKE USA's generally available line of products but which are released to a select retailer or group of retailers at least [*] prior to general availability. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. . Under present NIKE USA assumptions and operating procedures, Fogdog is eligible to receive, on a non-exclusive basis, [*] NIKE reserves the right to consider such factors as category emphasis in determining which early releases will be available to Fogdog. 1.2.9 Special Promotional Programs. ---------------------------- . Fogdog is allowed to purchase substantially all products available to NIKE.com in connection with NIKE.com's special promotional programs. Examples include special limited edition letterman's jackets, golf gift packs, etc. This does not include special make-ups or early releases or products that are made to order by NIKE USA for NIKE.com's customers. 1.2.10 Assistance with Web Site [*] ---------------------------- . Without cost to Fogdog (except as reflected in Section 4.5), NIKE USA will provide as much assistance as possible, given NIKE's internal resource constraints and obligations to third parties, to provide [*] to Fogdog, including product and other images, the provision of samples for image development, etc. . Without cost to Fogdog (except as reflected in Section 4.5), NIKE USA will allow Fogdog to use NIKE's conversion charts for footwear sizing and the NIKE apparel sizing program as such charts are released within the NIKE USA organization. . NIKE USA shall own all right, title and interest in and to any content provided or created by NIKE USA, but Fogdog will have a license to use such content on Fogdog.com in connection with the marketing and sale of NIKE brand products. 1.2.11 Specialty Footwear ------------------ . Fogdog has the right to return for a full price refund (i.e., NIKE USA's list price less the discount applicable to Fogdog),[*] of the aggregate purchase price in any selling season of product in NIKE's "specialty footwear" categories (the precise percentage [*] [*] to be determined by Fogdog in its sole discretion). Any such returns must be received by NIKE USA [*] after the date of receipt by Fogdog. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.2.12 Dedicated Sales and Service Team. -------------------------------- . Without cost to Fogdog (except as reflected in Section 4.5), Fogdog will initially have priority access to a team of 3-5 individuals including a strategic account manager, customer service representative, footwear account executive and apparel/equipment account executive. As Fogdog's volumes grow, these will become dedicated resources (again, at no additional cost to Fogdog) if necessary to ensure that Fogdog receives excellent service. . Within 72 hours after execution of this Term Sheet by Fogdog, this team will commence showing NIKE USA's product line to Fogdog, working with Fogdog on a merchandizing and order strategy, and doing everything reasonably possible to obtain an agreed upon selection of available NIKE products for the Holiday '99 season. . Without cost to Fogdog (except as reflected in Section 4.5), NIKE USA's "EKINs" will be available to Fogdog on a priority basis to train Fogdog's customer service and site content people regarding the technical and performance aspects of NIKE products. 1.2.13 [*] . Fogdog will use its best efforts, consistent with its privacy obligations to its customers, to provide NIKE USA with [*] provided that any such information must be reasonably material in terms of the uses permitted by the last paragraph of this Section 1.2.13. . Fogdog will use its best efforts and act as soon as reasonably possible to amend its privacy policy to include a feature where prospective customers have the opportunity to electronically "opt-in" to have their information provided to NIKE USA and its affiliates. . Fogdog will act as soon as reasonably possible to ask its existing customers who have engaged in past transactions with Fogdog or registered with Fogdog whether they would consent to the provision of their customer and transaction information to NIKE USA and its affiliates. This could be in connection [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. with an announcement of the new relationship between NIKE and Fogdog. . NIKE USA shall not, and shall not allow its affiliates to, directly or indirectly use Fogdog's customer data to solicit Fogdog's customers (for example, by advertising the availability of product on NIKE.com or at another retailer's store or web site), but may use such data for brand enhancement purposes (for example, announcing appearances by NIKE-affiliated athletes or providing information about NIKE sponsored events, provided that such brand enhancing activities do not direct potential purchasers to a named retailer or retail location). 1.2.14 Approval of Advertising and Advertising on Fogdog.com. ----------------------------------------------------- . NIKE USA will have the right of reasonable prior approval of marketing efforts, including advertising and web site design, that involves display of the NIKE marks or assets generally associated with the brand (e.g., use of athletes associated with NIKE). Such right of reasonable prior approval shall not require Fogdog to submit marketing proposals, designs or concepts that are substantially similar to proposals, designs or concepts that have been previously approved. All advertising involving athlete images must be submitted for approval at least 10 days prior to use, and NIKE USA reserves the right to delay or prohibit Fogdog's use of such images to the extent necessary to fulfill NIKE USA's contractual obligations to third parties. . Fogdog will comply with all trademark usage guidelines promulgated by NIKE from time to time. . Fogdog will use commercially reasonably efforts to advertise the availability of closeout or reduced price inventory at an auction page or other location within Fogdog's web site that is separate from the location of Fogdog's other advertising for NIKE products. . In the event Fogdog grants the right to third parties to advertise (whether through banner advertising or otherwise) on Fogdog.com, NIKE shall be afforded [*] of or advertiser on Fogdog.com. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.2.15 Confidentiality/Publicity ------------------------- . Unless otherwise mutually agreed upon by the parties as to the timing and content of any public announcement or press release, each of the parties agrees to keep the terms of this Term Sheet and the definitive agreements and all other information exchanged by the parties confidential, subject to the usual exceptions for disclosures required by statute, rule or regulation or other applicable law (for example, the federal and state securities laws). NIKE acknowledges that Fogdog will be required by applicable law to disclose the terms of this Term Sheet and, if applicable, the definitive agreements, to potential investors in connection with Fogdog's contemplated private placement of Series D Preferred Stock. Fogdog agrees to make such disclosures only to individuals who agree to keep such information confidential in accordance with NIKE USA's standard form of Confidentiality Agreement. . Fogdog will apply to the S.E.C. for and use its best efforts to obtain confidential treatment for the terms of this Term Sheet and the agreements embodied herein and the definitive agreements on the grounds that they contain confidential pricing information. NIKE USA will identify in writing prior to the initial filing of Fogdog's preliminary registration statement on Form S-1 all of the terms that NIKE USA believes should be covered by the request for confidential treatment. 1.2.16 Term and Termination -------------------- . The Web Sales Agreement will have an initial term that will commence on the date hereof and end on [*]. . On or after the end of the initial term, if Fogdog's aggregate actual purchases of NIKE products from [*] do not exceed [*] of Fogdog's aggregate projections for the [*] quarter comparison period, NIKE may at any time terminate the Web Sales Agreement. NIKE USA will give notice of its election to terminate at least 60 days before the termination date. In such event, NIKE would honor reasonable orders received prior to such election. Fogdog's purchase projections, which the parties acknowledge are aspirational and are to be used solely for purposes of the termination provision, are as follows: [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [*] . At the end of the initial term, if Fogdog's aggregate actual purchases of NIKE products from calendar [*] do exceed [*] of Fogdog's aggregate projections for the [*] quarter comparison period, NIKE will not have the right to terminate the Web Sales Agreement and the term shall extend for an additional two year extension term ending 12/31/03. . On or after the end of the two year renewal term, if Fogdog's aggregate actual purchases of NIKE products from calendar [*] do not exceed [*] of Fogdog's aggregate projections for the [*] quarter comparison period, NIKE may at any time terminate the Web Sales Agreement. NIKE USA will give notice of its election to terminate at least 60 days before the termination date. In such event, NIKE would honor reasonable orders received prior to such election. Fogdog's purchase projections, which the parties acknowledge are aspirational and are to be used solely for purposes of the termination provision, are as follows: [*] . At the end of the two year renewal term, if Fogdog's aggregate actual purchases of NIKE products from calendar [*] do exceed [*] of Fogdog's aggregate projections for the [*] quarter comparison period, and if it is reasonable for the parties to project annual purchases for the next four quarters to exceed [*] (based on futures orders, etc.), NIKE will not have the right to terminate the Web Sales Agreement and the term shall extend for an additional one year renewal term ending 12/31/04. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. . The definitive Web Sales Agreement will contain the usual provisions for immediate early termination in the event of bankruptcy, insolvency, etc. . The definitive Web Sales Agreement will contain provisions for early termination in the event of material breach by either party and failure to cure within 30 days. Certain breaches will be defined as material and incurable and give rise to a right of immediate termination, including violation of intellectual property rights, breach of confidentiality, and failure to comply with the express prohibitions in the Account Application (transshipping, etc.). A sale of stock representing 50 percent or more of the voting power of Fogdog's outstanding voting securities or a sale of stock to a competitor of NIKE USA representing a larger voting interest than that originally purchased by NIKE USA will be considered to be a material, incurable breach by Fogdog and give rise to an immediate right of termination, but shall not result in liability to NIKE USA or any affiliate for money damages. Subject to the preceding sentence, in the event of a breach of this agreement either party may seek whatever remedies are available under applicable law. . Either party has the right to terminate the Web Sales Agreement without cause at any time upon 90 days notice to the other; provided that if NIKE makes such an election without cause before 12/31/01 (i.e., except in accordance with exercise of NIKE USA's non-renewal option referred to above), it shall pay an early termination fee of [*] to Fogdog. . As used in this Term Sheet, the term "cause" shall mean a [*]. . In the event of non-renewal or early termination without cause, NIKE will honor all orders received prior to delivery of notice of termination. Termination for cause shall result in cancellation of all outstanding orders. . In the event of termination, non-renewal or expiration of the Web Sales Agreement, either party will have the right to terminate the Account Application. Similarly, in the event of termination of the Account Application either party will have the right to terminate the Web Sales Agreement. Termination [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of the Account Application by NIKE without cause during the initial term (i.e., except in accordance with exercise of NIKE USA's non- renewal option referred to above) will result in an obligation to pay the [*] referred to above in connection with termination of the Web Sales Agreement. . Upon termination each party will return all confidential and/or proprietary information of the other, including but not limited to product images, sizing charts, product descriptions, etc. 1.2.17 Other Provisions ---------------- . The definitive Web Sales Agreement will have other provisions customary in an agreement of this nature. 2. Agreement by BNH-USA to open Fogdog, Inc. as a BNH-USA Retail Account. --------------------------------------------------------------------- BNH-USA agrees, which agreement shall be memorialized in greater detail pursuant to an account application agreement and Web Sales Agreement on terms and conditions substantially equivalent to those set forth above with respect to NIKE USA, to open Fogdog as an account. BNH-USA purchases shall count in determining application of the non-renewal option in the NIKE-USA Web Sales Agreement and vice versa. However, certain of the promises that relate specifically to NIKE USA's footwear products and sales programs (Coop, MDF, special make-ups, etc.) may not apply or may apply differently in the context of BNH-USA's product lines and programs. In such event, Fogdog will be eligible to participate in all programs available to BNH-USA retailers who are similarly situated in terms of the [*]. If BNH-USA does not maintain Co-op or MDF programs that are substantially similar to NIKE USA's programs, Fogdog may elect to have its purchases of BNH-USA products treated as purchases of NIKE USA products for purposes of calculating benefits under such programs. 3. Agreement by NTS to open Fogdog, Inc. as an NTS Retail Account. -------------------------------------------------------------- NTS agrees, which agreement shall be memorialized in greater detail pursuant to an account application agreement and Web Sales Agreement on terms and conditions substantially equivalent to those set forth above with respect to NIKE USA, to open Fogdog as an account. NTS purchases shall count in determining application of the non-renewal option in the NIKE-USA Web Sales Agreement and vice versa. However, certain of the promises that relate specifically to NIKE USA's footwear products and sales programs (Coop, [*], special make-ups, etc.) may not apply or may apply differently in the context of NTS's product lines and programs. In such event, Fogdog will be eligible to participate in all programs available to NTS retailers who are similarly situated in terms of the [*]. If NTS does not maintain Co-op or MDF programs that are substantially similar to NIKE USA's programs, Fogdog may [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. elect to have its purchases of NTS products treated as purchases of NIKE USA products for purposes of calculating benefits under such programs. 4. Agreement under which NIKE.com Will Agree to Sell to Fogdog. ----------------------------------------------------------- NIKE.com agrees to sell to Fogdog products available in NIKE.com's inventory of products available for retail sale pursuant to the following terms and conditions: 4.1 During the term of the Web Sales Agreement between NIKE USA and Fogdog, Fogdog will be entitled to place orders from time to time in its discretion, but only for product available in NIKE.com's existing inventory, and only for shipment to retail consumers in the U.S. (or APO/FPO) who placed corresponding orders with Fogdog. Fogdog will not have access to products that are made to order by NIKE USA for NIKE.com's customers. 4.2 Coordination Regarding Product Availability. ------------------------------------------- 4.2.1 The parties will work together in good faith to ensure adequate information flow regarding orders and product availability so that orders placed by Fogdog's customers are fulfilled promptly. 4.2.2 Fogdog shall have the right to order from NIKE.com up to [*] of NIKE brand product for a given calendar year, subject to product availability and NIKE.com's right to reasonably allocate product mix. 4.2.3 Fogdog will not have the right to buy special make-ups or early releases that NIKE.com receives from NIKE USA unless NIKE.com agrees otherwise. Subject to availability, Fogdog will be able to order substantially all special promotional products that NIKE.com receives. 4.3 Pricing. ------- 4.3.1 All products to be purchased by Fogdog shall be discounted to a price that is equal to the [*] except that in no event will NIKE.com be obligated to sell a product to Fogdog for less than it paid for that product. 4.3.2 NIKE.com will be entitled to charge Fogdog, [*] associated with FogDog's orders. 4.4 Assistance with Content; Access to Data; Confidentiality. Assistance --------------------------------------------------------- with content, access to data, and confidentiality are to be made or given on terms and conditions that are substantially similar to those outlined above for NIKE USA. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.5 Payments to Defray NIKE.com's Costs. In consideration of the pricing ----------------------------------- concessions by NIKE.com and NIKE USA, the start-up costs to be incurred by NIKE.com and NIKE USA in providing content-related assistance, and NIKE.com's and NIKE USA's start-up systems, communication, transportation and service costs, Fogdog will make an initial cash payment of [*] to NIKE.com upon execution of this Agreement and a second payment of [*] upon the earlier of 7 days after the closing of Fogdog's initial public offering ("IPO") or [*]. In addition, NIKE.com and Fogdog shall negotiate in good faith regarding compensation to NIKE.com for its ongoing (i.e., post start-up) efforts to assist Fogdog with image transfers, product training, ordering tasks, and fulfillment efforts. In no event shall NIKE.com seek to charge Fogdog for assistance that NIKE.com provides without charge to other accounts. 4.6 Term and Termination. The agreement will commence on the date hereof -------------------- and will continue until termination of the agreement between NIKE USA and Fogdog. 4.7 Other Provisions. The definitive agreement will have other provisions ---------------- customary in an agreement of this nature. 5. Agreements Relating to NIKE USA's Purchase of a Warrant for Fogdog ------------------------------------------------------------------ Preferred Stock. ---------------- 5.1 Warrant Agreement. NIKE USA and Fogdog agree, which agreement shall ------------------ be memorialized in greater detail pursuant to a definitive Warrant Agreement, that NIKE USA will purchase a warrant to purchase shares of Fogdog's Series C Preferred Stock. This agreement is on the following terms and conditions: 5.1.1 Price of Warrant ---------------- . NIKE USA will pay $1.00 for the warrant. 5.1.2 Reps and Warranties ------------------- . The definitive Warrant Agreement will include customary issuer representations and warranties (e.g., the warrant is duly authorized and validly issued; the preferred stock issuable upon exercise has been reserved and will, upon issuance and payment, be duly exercised and validly issued; etc.) and standard investor representations and warranties of NIKE USA. 5.1.3 Right of Participation. ---------------------- . NIKE USA will be offered the opportunity to maintain its ownership interest in Fogdog on all subsequent preferred stock financing rounds prior to Fogdog's IPO, except the contemplated offering of Fogdog's Series D Preferred Stock. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5.1.4 Right of First Refusal ---------------------- . Prior to the IPO, Fogdog will have a right of first refusal on transfer of Fogdog securities by NIKE USA to any third party except an affiliate of NIKE USA. 5.1.5 Market Standoff Provision ------------------------- . NIKE USA agrees to a market stand off as to sales of Fogdog securities owned by NIKE USA for a three-year period following the IPO. NIKE USA's shares shall be released from the standoff obligation over the three year period as follows: [*] of the shares shall be released from the restriction on the first anniversary date of the IPO; [*] of the shares shall be released from the restriction on the second anniversary date of the IPO; and the remaining [*] of the shares shall be released from the restriction on the third anniversary date of the IPO. NIKE will sign Credit Suisse First Boston's form of lockup agreement. NIKE USA's standoff obligation will terminate in connection with a sale of all or substantially all of the assets of Fogdog or the sale by Fogdog's shareholders of interests representing more than [*] of the total voting power of Fogdog's outstanding voting securities to one party or one or more related parties (i.e, sales by Fogdog's shareholders in a public offering will not terminate the standoff obligation). 5.1.6 Standstill Provision -------------------- . NIKE USA agrees to a standstill prohibiting NIKE USA or any affiliate after the IPO from purchasing additional shares of Fogdog from any third party without the prior written consent of Fogdog. 5.1.7 Restriction on Transfer to Competitors -------------------------------------- . NIKE USA will also agree not to sell its Fogdog securities to a competitor of Fogdog (which competitors are to be defined in the definitive agreement), except in connection with a sale of Fogdog which is approved by the shareholders in accordance with Fogdog's articles of incorporation. This provision shall not restrict sales to NIKE affiliates that may compete with Fogdog, or sales in the open market. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5.1.8 Access to Financial Information. ------------------------------- . During the period prior to the IPO, NIKE USA will have access to Fogdog's financial information and business plans to the same extent as existing Fogdog investors with board seats. 5.2 Warrant. ------- 5.2.1 Vesting ------- . The warrant will be exercisable in full on the issue date. 5.2.2 Exercise Price -------------- . The warrant will have an exercise price of $1.0294 per share of Series C Preferred Stock. 5.2.3 Number of Shares of Series C Preferred Stock -------------------------------------------- . The number of shares of Series C Preferred Stock issuable upon exercise of the warrant shall be 6,171,524. . The number of shares issuable upon exercise of the warrant, and the exercise price per share, shall be adjusted to reflect stock dividends, stock splits, reverse stock splits, etc. involving the Series C Preferred Stock. 5.2.4 Rights and Preferences of Series C Preferred Stock -------------------------------------------------- . The rights, preferences and privileges of the Series C Preferred Stock issuable upon exercise of the warrant will be the same as the rights, preferences and privileges of the Series C Preferred Stock that is currently outstanding, including, without limitation, antidilution rights and rights upon registration, liquidation, conversion, redemption and preemption. 5.2.5 Automatic Conversion -------------------- . The warrant to purchase Series C Preferred Stock, if unexercised at the time of the IPO, will convert into a warrant to purchase Common Stock upon the conversion of the Series C Preferred Stock into Common Stock at the IPO. 5.2.6 Net Exercise Right ------------------ . The warrant will contain a "net exercise" provision pursuant to which NIKE USA can pay the exercise price with underlying shares and tack its holding period for Rule 144 purposes. 6. Agreements between NIKE USA, Fogdog and Fogdog's Principal Investors -------------------------------------------------------------------- Regarding Rights and Restrictions Applicable to NIKE USA's Equity Investment in - ------------------------------------------------------------------------------- Fogdog. - ------ 6.1 Registration Rights Agreement. NIKE USA and Fogdog agree that the ----------------------------- shares of Common Stock underlying the warrant are "Registrable Securities" under the provisions of Fogdog's existing Registration Rights Agreement . In addition, NIKE USA shall have the right, pursuant to an amendment to the Registration Rights Agreement, to have one separate demand registration right for its Fogdog securities which, if such right were to be exercised, would allow NIKE USA to register and sell its Fogdog securities within the time frames of its standoff agreement referred to above (i.e., [*], [*] and [*] at the end of years one, two and three, respectively). NIKE USA will waive its right to such demand registration right upon receipt of an opinion of counsel, in a form reasonably acceptable to NIKE USA, concluding that NIKE USA would be able to sell within the time frames of its standoff agreement in compliance with Rule 144 under the Securities Act of 1933, as amended. 6.2 Shareholders Agreement. Fogdog and its investors agree to enter into a ---------------------- Shareholders Agreement with NIKE USA containing at least the following terms and conditions: 6.2.1 Co-Sale Obligation. If more than [*] ------------------ of Fogdog (excluding NIKE USA) agree to sell Fogdog or at least a majority of its stock or assets to a third party, NIKE USA or any transferee of NIKE USA's stock will agree to sell its shares in such sale. 6.2.2 Voting Agreement. As long as NIKE USA holds its warrant to ---------------- purchase shares of Series C Preferred Stock, the Series C Preferred Stock, or all of the underlying shares of Fogdog Common Stock, NIKE USA will be entitled to a seat on the Board of Directors of Fogdog or, at NIKE's election, to have an observation right for one individual to have all of the rights and privileges of a board member, except the right to vote. The identity of such board or observer designee shall be at NIKE USA's discretion. This right will expire upon Fogdog's IPO. 7. Miscellaneous Provisions. ------------------------- 7.1 Definition of "affiliate." The term "affiliate, " as used in this ------------------------ letter, means any entity controlling, controlled by, or under common control with a named entity, where "control" means the power to vote, or direct the voting of, more than 50 percent of [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. the voting interests in the entity. Fogdog acknowledges and agrees that nothing in this Term Sheet or the definitive agreements will give Fogdog a right to sell products manufactured by NIKE USA's affiliates Cole Haan and NIKE IHM, Inc. 7.2 Choice of Law. This Term Sheet and the definitive agreements ------------- reflecting the agreements in Sections 1-4 shall be governed by and construed in accordance with the laws of the state of Oregon, without regard to the choice of law principles applied in the courts of such state. The agreements reflected in Sections 5 and 6 shall be governed by and construed in accordance with the laws of the state of California, without regard to the choice of law principles applied in the courts of such state. 7.3 Rules of Construction. The parties agree that this Term Sheet is the --------------------- product of negotiation and that no party will be deemed to be the drafter thereof. In this Term Sheet, unless the context otherwise requires: headings are inserted for convenience only and will be ignored in construing any matter; references to the singular include the plural and vice versa; references to "persons" include corporations, firms and any other entity; reference to a section, clause or schedule is a reference to such in this Term Sheet unless otherwise stated; 7.4 Amendment; Waiver. No term of this Term Sheet shall be amended, ------------------ supplemented, waived or modified except in a written document signed by each of the parties. No delay or omission in the exercise of any right or remedy shall be deemed a waiver of any right or remedy. No waiver shall constitute a waiver of any other provision, breach, right or remedy, nor shall any waiver constitute a continuing waiver. 7.5 Severability. Should any part of this Term Sheet for any reason be ------------- declared by any court of competent jurisdiction to be invalid, such decision shall not effect the validity of any remaining portion, which remaining portion shall continue in full force and effect as if this Term Sheet had been executed with the invalid portion hereof eliminated, it being the intention of the parties that they would have executed the remaining portion of this Term Sheet without including any such part, parts or portions which may for any reason be hereafter declared invalid. 7.6 Successors and Assigns. This Term Sheet shall be binding upon and ----------------------- inure to the benefit of the parties and their respective permitted successors and assigns. 7.7 Entire Agreement. This Term Sheet constitutes the entire agreement ---------------- between the parties with respect to the subject matter of this Term Sheet and supersedes all prior or contemporaneous agreements, promises or representations, written or oral. No party is relying upon any representations or promises other than those set forth herein. 7.8 Execution by Counterpart. This Term Sheet may be executed by ------------------------ facsimile and in one or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. EX-10.15 6 EMPLOYMENT AGREEMENT - GARRETT EXHIBIT 10.15 November 1, 1999 Mark Garrett 19664 Charters Avenue Saratoga, CA 95070 Dear Mark, We are pleased to offer you employment with Fogdog, Inc. (hereinafter "Fogdog") as VP Finance, with a start date of November 15th, 1999. The transition to Chief Financial Officer will be completed by the next quarterly earning date. The terms and commitments of your employment with Fogdog are as follows: 1. You will be employed to work full time and exclusively for the Company. 2. Salary. Base salary of $20,000 per month, which is equal to $240,000 per ------- year. 3. Bonus. You will have the opportunity to earn a bonus in addition to your ------ base salary. Performance targets to earn the bonus are as attached to this agreement. The target for the bonus is 20% of your salary with the opportunity to earn more through performance accelerators. You must be employed by Fogdog at the time the bonus is payable to be eligible to receive the bonus. 4. Stock Options. Subject to approval by the Board of Directors of Fogdog, we ------------- are pleased to offer you participation within Fogdog's stock option plan at a level of 465,000 common ISO shares. Options are vested over four years, with 58,125 options vesting at the end of the first six months and monthly vesting in equal increments of 9,687 options thereafter. The exercise price will be at FMV as determined by the Board of Directors after your start date. Current FMV is $4.50 per share. In the event of an acquisition (Corporate Transaction) of the company during the first twelve months of employment, twelve months' of options, to the extent outstanding at that time but not otherwise fully exercisable, shall automatically accelerate. No such acceleration shall occur if i) the options are assumed by any successor corporation or ii) such acceleration would impact any pooling of interest. In event ii) the accelerated option would be replaced with a cash incentive which preserves the spread existing on the unvested option at the time of the Corporate Transaction (excess of fair market value of such option over the aggregate exercise price payable). 5. Health Benefits. For the duration of employment, you shall be entitled to --------------- participate in the Company's health insurance, life insurance and disability insurance plans to the extent permitted by law, that may from time to time be adopted by the Board. 6. 401(k). For the duration of employment, you are eligible to participate in ------ Fogdog's 401(k) Savings Plan. The Company reserves the right to amend, modify or terminate this benefit at any time for any reason. 7. Vacation. You will accrue paid vacation days at a rate of one and one-half --------- (1.5) days per month of employment. 8. Family & Sick Leave. You will accrue paid family and sick leave at a rate -------------------- of one-half day (1/2) per month of employment. 9. At Will Employment. Your employment with Fogdog is at-will and can be ------------------- terminated or modified at any time, with or without cause, at the option of either you or Fogdog. This provision may be modified only in writing, signed by the CEO of the company. Except as otherwise provided herein, upon the termination of your employment with Fogdog you shall immediately cease to accrue salary, vacation, benefits, vesting of stock options and all other compensation. If employment is terminated for reasons other than cause, you will be entitled to a 6 month severance package (salary and benefits only). 10. Expense Reimbursement. Corporate travel and other company-related --------------------- expenses incurred by you on your personal accounts shall be reimbursed. Those expenses plus any travel and company-related expenses incurred on any Fogdog company account are to be approved by your direct supervisor prior to event. 11. Confidentiality. For the duration of employment and after any termination --------------- of employment, you will keep all Cedro information confidential and proprietary, including but not limited to, new product development, business practices, and corporate initiatives. In any case, Fogdog will, at its sole discretion, provide written authorization to allow you to reveal such information. You may be asked to sign additional confidentiality documentation. If this offer of employment is acceptable to you, please sign a copy of this letter and return it to me no later than 5:00pm PST, November 3rd, 1999. Best Regards, /s/ Tim Harrington Tim Harrington Chief Executive Officer I accept your offer of employment as outlined in this letter. Signature Date /s/ Mark Garrett --------------------- ---------------------- Mark Garrett EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 28, 1999, except for Note 11, which is as of December 6, 1999, relating to the financial statements of Fogdog, Inc., which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP San Jose, California December 6, 1999 EX-23.2 8 CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated September 8, 1999 relating to the financial statements of Sports Universe, Inc., which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP San Jose, California December 6, 1999 -----END PRIVACY-ENHANCED MESSAGE-----