UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and formal fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of each of the Registrant's classes of common
stock:
23,208,572
----------
(Number of shares of Class A common stock outstanding as of November 1, 1999)
38,413,105
----------
(Number of shares of Class B common stock outstanding as of November 1, 1999)
<PAGE>
1-800-FLOWERS.COM, Inc.
INDEX
Part I. Financial Information Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-September 26,
1999 and June 27, 1999 3
Consolidated Statements of Operations-Three
months ended September 26, 1999 and
September 27, 1998 4
Consolidated Statement of Stockholders'
Equity-Three months ended September 26, 1999 5
Consolidated Statements of Cash Flows-Three
months ended September 26, 1999 and
September 27, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitive and Qualitative Disclosures About
Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September June
26, 1999 27, 1999
---------- ----------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 174,205 $ 99,183
Receivables, net 8,806 9,284
Inventories 10,076 7,496
Prepaid and other 1,758 1,307
Recoverable income taxes 2,731 2,431
Deferred tax assets 1,039 1,504
--------- ---------
Total current assets 198,615 121,205
Property, plant and equipment at cost, net 31,966 27,525
Investments 937 984
Capitalized investment in leases 1,386 1,452
Notes receivable, net 605 722
Goodwill, net of accumulated amortization 21,540 21,362
Investment in licenses, net of accumulated amortization 3,347 3,428
Other 11,630 5,677
--------- ---------
Total assets $ 270,026 $ 182,355
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 32,082 $ 23,396
Accrued expenses 8,642 5,543
Current maturities of long-term debt
and obligations under capital leases 7,639 6,647
--------- ---------
Total current liabilities 48,363 35,586
Long-term debt and obligations under capital leases 10,491 27,457
Deferred rent and other liabilities 4,333 4,009
Management put liability -- 6,300
--------- ---------
Total liabilities 63,187 73,352
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, shares
authorized-10,000,000, shares issued and
outstanding-none at September 26, 1999 and 1,127,546
at June 27, 1999, stated at liquidation value -- 117,573
Class A common stock, $.01 par value, shares
authorized-200,000,000, shares issued-23,254,302
at September 26, 1999 and 4,100,012 at June 27,
1999 233 41
Class B common stock, $.01 par value, shares
authorized-200,000,000, shares issued-
43,700,175 at September 26, 1999 and 45,579,005
at June 27, 1999 437 456
Additional paid-in capital 238,313 6,038
Accumulated deficit (27,671) (10,527)
Deferred compensation (1,365) (1,470)
Treasury stock, at cost-52,800 Class A and
5,280,000 Class B shares (3,108) (3,108)
--------- ---------
Total stockholders' equity 206,839 109,003
--------- ---------
Total liabilities and stockholders' equity $ 270,026 $ 182,355
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended
-----------------------
September September
26, 1999 27, 1998
---------- -----------
Net revenues $ 58,109 $ 47,574
Cost of revenues 36,527 29,793
-------- --------
Gross profit 21,582 17,781
Operating expenses:
Marketing and sales 26,396 14,455
Technology and development 4,069 1,127
General and administrative 7,927 2,348
Depreciation and amortization 2,293 1,871
-------- --------
Total operating expenses 40,685 19,801
-------- --------
Operating loss (19,103) (2,020)
Other income (expense):
Interest income 2,027 200
Interest expense (497) (577)
Other, net 50 13
-------- --------
Total other income (expense) 1,580 (364)
-------- --------
Loss before income taxes and minority interests (17,523) (2,384)
Benefit from income taxes 350 677
-------- --------
Loss before minority interests (17,173) (1,707)
Minority interests in operations of
consolidated subsidiaries 29 137
-------- --------
Net loss (17,144) (1,570)
Redeemable Class C common stock dividends -- 444
-------- --------
Net loss applicable to common stockholders $(17,144) $ (2,014)
======== ========
Basic and diluted net loss per common share
applicable to common
stockholders $ (0.31) $ (0.05)
======== ========
Shares used in the calculation of basic and
diluted loss per common share applicable to
common stockholders 54,787 44,000
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three months ended September 26, 1999
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------
Preferred Stock Class A Class B
----------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 27, 1999 1,127,546 $ 117,573 4,100,012 $ 41 45,579,005 $ 456
Stock options issued to consultants in
lieu of compensation -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Conversion of preferred stock into
Class A common stock (1,127,546) (117,573) 11,275,460 113 -- --
Issuance of Class A common stock in
connection with Initial Public
Offering, net of issuance costs of -- -- 6,000,000 60 -- --
$11,164
Conversion of Class B common stock into
Class A common stock -- -- 1,878,830 19 (1,878,830) (19)
Comprehensive loss:
Net loss -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
----------- ----------- ----------- -------- ----------- -------
Balance at September 26, 1999 -- $ -- 23,254,302 $ 233 43,700,175 $ 437
=========== =========== =========== ======== =========== =======
<CAPTION>
Additional Treasury Stock Total
Paid-In Accumulated Deferred ------------------- Stockholders'
Capital Deficit Compensation Shares Amount Equity
----------- ----------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 27, 1999 $ 6,038 $ (10,527) $ (1,470) 5,332,800 $ (3,108) $ 109,003
Stock options issued to consultants in
lieu of compensation 39 -- -- -- -- 39
Amortization of deferred compensation -- -- 105 -- -- 105
Conversion of preferred stock into
Class A common stock 117,460 -- -- -- -- --
Issuance of Class A common stock in
connection with Initial Public
Offering, net of issuance costs of
$11,164 114,776 -- -- -- -- 114,836
Conversion of Class B common stock into
Class A common stock -- -- -- -- -- --
Comprehensive loss:
Net loss -- (17,144) -- -- -- (17,144)
-----------
Total comprehensive loss -- -- -- -- -- (17,144)
----------- ----------- ---------- ----------- --------- -----------
Balance at September 26, 1999 $ 238,313 $ (27,671) $ (1,365) 5,332,800 $ (3,108) $ 206,839
=========== =========== ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
------------------------
September September
26, 1999 27, 1998
---------- ----------
Operating activities:
Net loss $ (17,144) $ (1,570)
Reconciliation of net loss to net cash
used in operations:
Depreciation and amortization 2,293 1,871
Deferred income taxes 465 --
Management put liability 1,451 (1,227)
Bad debt expense 157 --
Minority interests (29) (137)
Amortization of deferred compensation 105 --
Other non cash charges 39 --
Loss on disposal of equipment and other -- 310
Changes in operating assets and liabilities:
Receivables 321 1,189
Inventories (2,580) (1,503)
Prepaid and other (451) (3,020)
Recoverable income taxes (300) (2,431)
Other assets (7,219) (2,631)
Accounts payable 8,686 (584)
Accrued expenses 3,099 763
Other liabilities 363 (528)
--------- ---------
Net cash used in operating activities (10,744) (9,498)
Investing activities:
Acquisitions, net of cash acquired (7,902) --
Capital expenditures, net of noncash
expenditures (5,829) (2,063)
Sale of investments -- 2,000
Notes receivable, net 117 19
--------- ---------
Net cash used in investing activities (13,614) (44)
Financing activities:
Proceeds from issuance of common stock,
net of issuance costs 115,847 --
Proceeds from bank borrowings 8,742 4,434
Payments of capital lease obligations (377) (368)
Repayment of notes payable and bank
borrowings (24,832) --
--------- ---------
Net cash provided by financing activities 99,380 4,066
--------- ---------
Net change in cash and equivalents 75,022 (5,476)
Cash and equivalents:
Beginning of period 99,183 8,873
--------- ---------
End of period $ 174,205 $ 3,397
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all material
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 26, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending July 2, 2000.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and accompanying footnotes
included in 1-800-FLOWERS.COM, Inc. and Subsidiaries' (the "Company") Annual
Report on Form 10-K for the fiscal year ended June 27, 1999. The consolidated
balance sheet at June 27, 1999 has been derived from the audited consolidated
financial statements at that date.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Comprehensive Loss
For the three months ended September 26, 1999 and September 27, 1998, the
Company's comprehensive losses of $17.1 million and $1.6 million, respectively
were equal to the respective net losses for each of the respective periods
presented.
Note 2 - Common Stock
Capital Transactions
On August 6, 1999, the Company closed its initial public offering ("IPO")
of its Class A common stock, issuing 6,000,000 shares at a price of $21.00 per
share. The Company raised proceeds of approximately $114.8 million, net of
underwriting discounts, commissions and other offering costs of approximately
$11.2 million.
In anticipation of its IPO, the Company amended and restated its
certificate of incorporation on July 7, 1999 to provide that all previously
outstanding shares of Class A common stock, of which the holders were entitled
to one vote per share, and Class B common stock, which contained no voting
rights, convert into a new series of Class B common stock and are entitled to 10
votes per share. Additionally, a new series of Class A common stock was
established that entitles the holders to one vote per share. Each share of new
Class B common stock shall automatically convert into one share of new Class A
common stock upon transfer, with limited exception, and at the option of the
holder. During the three months ended September 26, 1999, holders of 1,878,830
shares of new Class B common stock elected to convert such shares into an equal
number of shares of new Class A common stock.
<PAGE>
On July 7, 1999, the board of directors and stockholders approved an
amendment to the certificate of incorporation, effective on July 28, 1999, that
provided for a ten-for-one split of the outstanding shares of common stock and
increased the number of authorized shares of preferred stock to 10,000,000.
Accordingly, the accompanying consolidated financial statements and footnotes
have been retroactively restated to reflect the stock split.
Also on July 7, 1999, the 1-800-FLOWERS.COM, Inc., 1999 Stock Incentive
Plan was adopted by the Company's board of directors and approved by its
stockholders. Pursuant to the terms of the plan, 9,900,000 shares of
<PAGE>
Class A common stock have been authorized for issuance. The share reserve will
automatically increase on the first trading day in January of each calendar
year, beginning January 2, 2000, by an amount equal to 3% of the total number of
shares of common stock outstanding on the last trading day in December in the
preceding calendar year, but in no event will this annual increase exceed
2,000,000 shares. The components of the plan include a discretionary option
grant program, an automatic option grant program, a stock issuance program, and
a salary investment option grant program. In August 1999, the Company granted
1,023,000 options at an exercise price of $21.00 per share and 300,000 options
at an exercise price of $16.00 per share. Such grants were made at fair market
value on their respective grant dates.
Preferred Stock Conversion
Upon completion of the Company's IPO, each issued and outstanding share of
preferred stock was converted into ten shares of Class A common stock, resulting
in the issuance of 11,275,460 shares of Class A common stock.
Note 3 - Acquisition of Minority Stockholders' Interest in Plow & Hearth
Pursuant to the terms of the Plow & Hearth stockholders' agreement between
1-800-FLOWERS.COM, Inc., its subsidiary, The Plow & Hearth, Inc. ("Plow &
Hearth") and Plow & Hearth management shareholders, upon completion of the
Company's IPO in August 1999, the Company satisfied its obligation under the
Plow & Hearth management put liability when it acquired the remaining
outstanding shares of common stock and stock options from the minority
stockholders of Plow & Hearth for cash of approximately $7.9 million, net of
Plow & Hearth stock option exercise proceeds of approximately $0.5 million.
Accordingly, the incremental amount of funding required to satisfy the
management put liability, which was $6.3 million at June 27, 1999, was recorded
as general and administrative expense and goodwill in the amounts of $1.5
million and $0.1 million, respectively.
Note 4 - Long-Term Debt
Upon completion of its IPO, the Company repaid $21.0 million of bank
borrowings, representing all amounts outstanding under a bank term loan and
revolving credit line. The Company's long-term debt and obligations under
capital leases are as follows:
September June
26, 1999 27, 1999
---------- ---------
(in thousands)
Bank term loan and revolving credit line $ -- $21,000
Commercial notes and revolving credit lines 9,885 4,675
Seller financed acquisition obligations 3,052 3,351
Obligations under capital leases 5,193 5,078
------- -------
18,130 34,104
Less current maturities of long-term debt and
obligations under capital leases 7,639 6,647
------- -------
$10,491 $27,457
======= =======
Note 5 - Income Taxes
The Company incurred a loss that provided a tax benefit of $0.4 million
for the three months ended September 26, 1999. The effective tax rate differed
from the combined statutory rate as a result of providing a full valuation
allowance on that portion of the Company's deferred tax asset, consisting
primarily of net operating loss carryforwards, that exceeded the amount of
recoverable income taxes due to allowable carryback claims, because of
<PAGE>
the uncertainty regarding its realizability.
Note 6 - Loss Per Share
Net loss per share is computed using the weighted-average number of common
shares outstanding. Shares associated with stock options and warrants are not
included in the computation as their inclusion would be antidilutive. The shares
of the Company's preferred stock were converted into common stock upon
completion of the IPO and are included in the calculation of weighted-average
shares as of that date. During the three months ended September 27, 1998, shares
of the Company's Class C common stock were excluded from the computation as
their inclusion would have been antidilutive. All outstanding shares of the
Company's Class C common stock were either redeemed or converted into Class A
common stock in May 1999, and as such those shares converted (263,452) are
included in the computation of weighted average shares for the entire three
month period ended September 26, 1999.
Note 7 - Commitments and Contingencies
Commitments
On September 1, 1999, the Company expanded both the term and scope of its
continuing strategic relationship with America Online, Inc. ("AOL"). Pursuant to
the terms under this new agreement, the Company will pay AOL $37.0 million over
the new four-year term of the agreement, which extends through fiscal 2003.
Additionally, during the first two years of the new agreement, the Company is
required to share a portion of the revenue derived from certain of the AOL
properties included in such agreement. The Company's remaining obligations to
AOL under the previous agreement were cancelled upon the effectiveness of the
new agreement.
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain of the matters and subject areas discussed in this Quarterly
Report on Form 10-Q contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties based on the Company's current
expectations, assumptions, estimates and projections about its business and the
Company's industry. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
as more fully described under the caption "Additional Risk Factors that May
Affect Future Results" and elsewhere in this Quarterly Report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis, judgment, belief or expectation only as of the
date hereof. The forward-looking statements made in this Quarterly Report on
Form 10-Q relate only to events as of the date on which the statements are made.
The Company undertakes no obligation to publicly update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Overview
1-800-FLOWERS.COM, Inc. is a leading provider of floral products and
gifts, gourmet foods and home and garden merchandise. The Company provides its
customers the choice of purchasing its products online, by calling us toll-free
or by visiting our owned or franchised retail stores. As of September 26, 1999,
the Company had sold its products to approximately 8.3 million customers, of
which 1.4 million had transacted business with us on-line.
Upon closing of the Company's initial public offering in August 1999, the
Company used a portion of the net proceeds, which amounted to $114.8 million, to
repay $21.0 million of bank borrowings and to acquire, for net cash of $7.9
million, all of the remaining outstanding shares of Plow & Hearth common stock
and stock options from the minority stockholders, thereby satisfying its
obligation under the management put liability.
Although the Company has been profitable in the past, the Company expects
to incur losses for the foreseeable future as a result of the significant
operating and capital expenditures required to achieve its objectives. In order
to achieve and maintain profitability, the Company will need to generate
revenues significantly above historical levels. The Company's prospects for
achieving profitability must be considered in light of the risks, uncertainties,
expenses, and difficulties encountered by companies in the rapidly evolving
market of online commerce.
Results of Operations
Net Revenues. Net revenues consist primarily of the selling price of
merchandise and service and shipping charges, net of returns and credits. Total
net revenues increased 22.1%, from $47.6 million for the three months ended
September 27, 1998 to $58.1 million for the three months ended September 26,
1999. Telephonic revenues increased 9.5%, from $34.4 million for the three
months ended September 27, 1998 to $37.6 million for the three months ended
September 26, 1999, driven primarily by the growth in sales of non-floral
products. Online revenues increased 88.1%, from $6.3 million for the three
months ended September 27, 1998 to $11.8 million for the three months ended
September 26, 1999. The increase was a result of our promotion efforts to
attract customers to the 1-800-FLOWERS.COM web site and web site enhancements
completed in July 1999.
During the three months ended September 26, 1999, the Company added
486,000 new customers (167,000 online and 319,000 telephonically), bringing our
cumulative customer accounts to 8.3 million, of which 1.4 million have
transacted business through either the 1-800-FLOWERS.COM Web site or one of our
affiliated portal partners.
Retail fulfillment revenues increased 25.5%, from $6.9 million for the
three months ended September 27, 1998 to $8.7 million for the three months ended
September 26, 1999, primarily due to the growth in the number of owned retail
stores from 27 to 38. The Company does not expect to materially increase the
number of owned retail stores in the foreseeable future.
Cost of Revenues. Cost of revenues consists primarily of fees paid to
clearinghouses, net of rebates, and the cost of merchandise sold, including
inbound freight and outbound shipping. Additionally, cost of revenues includes
<PAGE>
labor and facility expenses related to the Company's wholesale operations and
facility costs related to properties that are sublet to the Company's
franchisees. Cost of revenues increased 22.6%, from $29.8 million for the three
months ended September 27, 1998 to $36.5 million for the three months ended
September 26, 1999. For the same period, gross profit margin declined 0.3
percentage points to 37.1%, as margin improvements from the sale of higher
margin non-floral products were offset by both the introduction of our lower
margin "Express" products and an increase in the average value of florist
fulfilled orders which, while generating higher gross margin dollars, results in
a lower gross margin percentage.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising and promotional expenditures, catalog costs, fees paid
to establish and maintain strategic relationships with Internet companies, costs
associated with retail store, customer service center and fulfillment center
operations and the operating expenses of the Company's departments engaged in
marketing, selling and merchandising activities. Marketing and sales expenses
increased 82.6%, from $14.5 million, or 30.4% of total net revenues, for the
three months ended September 27, 1998, to $26.4 million, or 45.4% of total net
revenues, for the three months ended September 26, 1999. The increase was
primarily attributable to spending in traditional media advertising and
relationship and direct marketing; increases to the Company's marketing and
merchandising personnel as well as sales personnel in support of increased order
fulfillment and customer service activities; and additional online portal
expenses as a result of the Company's expanded agreement with America Online and
contract renewal with Excite@Home. The Company expects marketing and sales
expenses to continue to increase significantly in future periods as the Company
implements its strategy to expand its base of strategic relationships with
Internet companies and to pursue an aggressive branding and marketing campaign.
Technology and Development Expenses. Technology and development expenses
consist primarily of payroll and operating expenses of our information
technology group, costs associated with the 1-800-FLOWERS.COM web site,
including design, development and third-party hosting, and maintenance, support
and licensing costs pertaining to the Company's order entry, customer service,
fulfillment and database systems. Technology and development expenses increased
from $1.1 million for the three months ended September 27, 1998 to $4.1 million
for the three months ended September 26, 1999. The increase was primarily
attributable to development costs incurred to enhance the content and
functionality of the Company's Web site and transaction processing system, and
additional payroll and related expenses associated with the staffing of our
technology personnel. The Company believes that continued investment in
technology and development is critical to attaining its strategic objectives
and, as a result, technology and development costs are expected to continue to
increase in comparison to prior years, particularly in the areas of Web site
development and database management.
General and Administrative Expenses. General and administrative expenses
consist of payroll and other expenses in support of the Company's executive,
finance and accounting, legal, human resources and other administrative
functions, as well as professional fees and other general corporate expenses.
General and administrative expenses increased from $2.3 million, or 4.9% of
total net revenues, for the three months ended September 27, 1998 to $7.9
million, or 13.6% of total net revenues, for the three months ended September
26, 1999. $2.7 million of the increase was attributable to the effect of the
management put liability, as a $1.5 million charge was recorded for the three
months ended September 26, 1999 whereas a benefit of $1.2 million was recorded
for the three months ended September 27, 1998. The remainder of the increase was
the result of costs associated with additions to the management team and
administrative increases associated with operating as a public company. The
Company expects that general and administrative expenses will increase in the
future due to increased staffing required to support our growth strategy and the
incremental costs expected to be incurred as a public company.
Depreciation and Amortization. Depreciation and amortization increased
from $1.9 million for the three months ended September 27, 1998 to $2.3 million
for the three months ended September 26, 1999. The increase was primarily due to
additional capital expenditures in short-lived information systems hardware and
software.
Other Income (Expense). Other income (expense), consists primarily of
interest earned on the cash proceeds from the Company's IPO in August 1999, and
private placement which was completed in May 1999, offset by interest expense
attributable to the Company's credit facility, mortgage notes, promissory notes
issued to sellers in acquisitions, and capital leases. The Company's credit
facility, including an $18.0 million term loan and $3.0 million line of credit
drawdown, was repaid with the proceeds of the Company's IPO.
Income Taxes. For the three months ended September 26, 1999, the Company
incurred a loss that provided a
<PAGE>
tax benefit of $0.4 million. The effective tax rate differed from the combined
statutory rate as a result of providing a full valuation allowance on that
portion of the Company's deferred tax asset, consisting primarily of net
operating loss carryforwards, that exceeded the amount of recoverable income
taxes due to allowable back claims, because of the uncertainty regarding its
realizability.
<PAGE>
Liquidity and Capital Resources
At September 26, 1999, the Company had working capital of $150.3
million, including cash and equivalents of $174.2 million, compared to working
capital of $85.6 million, including cash and equivalents of $99.2 million at
June 27, 1999.
Net cash used in operating activities was $10.8 million for the
three months ended September 26, 1999 and was primarily attributable to net
losses during the period, payments to internet partners recorded as deferred
charges, and increases in inventory due to the Company's expansion into
non-floral product lines and in anticipation of heavier volume during the coming
holidays, offset in part by increases in accounts payable and accrued expenses.
Net cash used in investing activities was $13.6 million for the
three months ended September 26, 1999, and consisted of capital expenditures and
the acquisition of all of the remaining outstanding shares of common stock and
stock options from the minority shareholders of the Company's Plow & Hearth
subsidiary.
Net cash provided by financing activities was $99.4 million for the
three months ended September 26, 1999, resulting from the net proceeds from the
issuance of common stock in the Company's IPO, less repayments of amounts
outstanding under the Company's credit facilities and capital lease obligations.
The Company intends to continue to invest heavily to support its
growth strategy and expand its online sales channel. These investments include
expanded advertising and marketing programs designed to enhance the Company's
brand name recognition with customers, expansion of its product lines to include
a broad variety of gift and gourmet items, and the further development of its
operating infrastructure and management team. The Company believes that current
cash and equivalents will be sufficient to meet these anticipated cash needs for
at least the next twelve months. However, any projection of future cash needs
and cash flows are subject to substantial uncertainty. If current cash and cash
that may be generated from operations are insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or debt
securities or to obtain lines of credit, in addition to the $4.5 million credit
line which is currently available through one of the Company's operating
subsidiaries. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. In addition, the
Company will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
impact the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
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 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.
The Company's State of Readiness
The Company's critical systems fall into six categories: transaction
processing, call management, telecommunications, fulfillment, finance and
interactive applications. The core transaction processing and infrastructure
systems are internally maintained and hosted. Interactive-based applications,
which include the Company's Web site and BloomLink, are hosted at Fry
Multimedia. To date, the Company's assessment has determined that these critical
business systems are all Year 2000 compliant, except for its call routing system
which the Company is in the process of replacing with other call routing
software which has been represented to us as being Year 2000 compliant.
The Company's non-critical and non-information technology systems,
including those used for picking, packing, shipping, receiving, security and
mailing systems, mail room facilities for automated postage, fire and backup
generator systems and company-wide paging and alert systems, have been tested
and/or represented to the Company as Year 2000 compliant.
<PAGE>
All material commercial software and hardware on which the Company
depends is either Year 2000 compliant or will be upgraded to be compliant in the
normal course of business through the installation of upgrades or replacements.
The Company's material hardware, software and service vendors have informed the
Company that the products it uses, or will be using as upgrades or replacements,
to support its operations are Year 2000 compliant. The Company's Web site
hosting service, Fry Multimedia, has represented to the Company that its
hardware and software systems are Year 2000 compliant. The Company's internal
critical business systems are dependent on the software and hardware products of
four vendors: Oracle, Sun, Microsoft and AT&T. Oracle and Sun have represented
to the Company that their products are Year 2000 compliant. The Company is in
the process of migrating its current Microsoft software applications to Year
2000 compliant software recently released by Microsoft, and expects to complete
installation and testing by November 1999. Our AT&T products have been upgraded
for compliance, with the exception of AT&T's aforementioned call routing
software, which we are in the process of replacing with other call routing
software, which has been represented to us as Year 2000 compliant.
The Company has received representations from a majority of its
major suppliers of fresh products (flowers and plants) and hard goods that their
operations are Year 2000 compliant. The Company is continuing its assessment of
non-critical suppliers. However, the Company's business is not dependent on any
one supplier. If one or more of these suppliers are not Year 2000 compliant, the
Company will obtain its fresh products and hard goods from alternative suppliers
that are Year 2000 compliant.
Approximately one-half of BloomNet florists use the BloomLink
web-based order processing system, which is Year 2000 compliant. The remaining
BloomNet florists are being approached to implement BloomLink. By the end of
1999 the Company expects its fulfilling florists to be electronically linked to
1-800-FLOWERS.COM either through BloomLink or one of the other available Year
2000 compliant communication systems. The Company's business is not dependent on
any one florist or wire service. To the extent one or more BloomNet florists are
not so linked, then the Company may use an alternative fulfilling florist.
Costs to Address Year 2000 Issues
To date, the Company has not incurred any significant costs
attributable to Year 2000 compliance. The Company's recent information
technology investments have been in support of its expanding operating and
decision support requirements and to the extent they involved a replacement of
an existing system, also accommodated Year 2000 compliance. The Company does,
however, expect to incur approximately $1.0 million to make our call routing
system Year 2000 compliant. Other than these costs, the Company is not currently
aware of any material operational issues or costs associated with preparing its
systems for the Year 2000. Nonetheless, the Company may experience material
unexpected costs caused by undetected errors or defects in the technology used
in its systems or because of the failure of a material vendor to be Year 2000
compliant.
Risks Associated with Year 2000 Issues
Notwithstanding the Company's Year 2000 compliance efforts, the
failure of a material system or vendor, or the Internet generally, to be Year
2000 compliant could harm the operation of the Company's systems or have other
unforeseen, material adverse consequences. The Company may also experience
external Year 2000-related failures or disruptions that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions. All of these factors
could materially adversely affect the Company's business.
Contingency Plans
The Company is engaged in an ongoing Year 2000 assessment and is
currently in the process of finalizing its contingency plan. The results of our
Year 2000 assessment and testing, and the responses received from third-party
vendors and service providers have been taken into account in determining the
need for and nature and extent of any contingency plans, which currently consist
of manual workarounds for our call-routing system, and redundant/backup
processes for all other critical systems.
Based on the Company's assessment done to date, management believes
that the reasonable likely worst-case scenario with respect to Year 2000 issues
could be the difficulty for customers to place orders in the event of
<PAGE>
disruption of power or communication facilities. Although these events could
have an adverse effect on the Company's business in the short-term, management
does not believe that Year 2000 issues will materially and adversely affect the
Company's business, results of operations or financial condition over the
long-term. No assurances can be given that these expectations will be realized.
<PAGE>
Additional Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only ones the Company
faces. Additional risks and uncertainties not presently known to the Company or
that are currently deemed immaterial may also impair its business operations. If
any of the following risks actually occur, the Company's business, financial
condition or results of operations would likely suffer.
The Company expects to incur losses for the foreseeable future which
may reduce the trading price of its Class A common stock. The Company expects to
incur significant operating and capital expenditures in order to:
o expand the 1-800-FLOWERS.COM brand through marketing and other
promotional activities;
o enter into strategic relationships with Internet companies;
o increase the number of products offered; and
o enhance the Company's technological infrastructure and order
fulfillment capabilities.
Although the Company has been profitable in the past, management
expects that the Company will incur losses for the foreseeable future as a
result of these expenditures. In order to achieve and maintain profitability,
the Company will need to generate revenues significantly above historical
levels. Management cannot assure you that the Company will achieve sufficient
revenues for profitability. Even if the Company does achieve profitability, it
may not sustain or increase profitability on a quarterly or annual basis in the
future.
The Company's quarterly operating results may significantly
fluctuate and you should not rely on them as an indication of its future
results. The Company's future revenues and results of operations may fluctuate
significantly due to a combination of factors, many of which are outside of
management's control. The most important of these factors include:
o seasonality;
o the timing and effectiveness of our marketing programs;
o the timing and effectiveness of capital expenditures;
o the Company's ability to enter into or renew marketing
agreements with Internet companies; and
o competition.
The Company may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall. If the Company has a shortfall in
revenue in relation to its expenses, operating results will suffer. The
Company's operating results for any particular quarter may not be indicative of
future operating results. You should not rely on quarter-to-quarter comparisons
of results of operations as an indication of the Company's future performance.
It is possible that, in future periods, results of operations may be below the
expectations of public market analysts and investors. This could cause the
trading price of the Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the
Company may vary with general economic conditions. If general economic
conditions deteriorate and the Company's customers have less disposable income,
consumers will likely spend less on its products and its quarterly operating
results will suffer.
The Company's operating results will suffer if sales during the
Company's peak seasons do not meet its expectations. Sales of the Company's
products are seasonal, concentrated in the second calendar quarter, due to
Mother's Day, Secretaries' Week and Easter, and the fourth calendar quarter, due
to the Thanksgiving and Christmas holidays. In anticipation of increased sales
activity during these periods, the Company hires a significant number of
temporary employees to supplement its permanent staff and the Company
significantly increases its inventory levels. If sales during these periods do
not meet the Company's expectations, it may not generate sufficient revenue to
offset these increased costs and its operating results will suffer.
If the Company's customers do not find its expanded product lines
appealing, revenues may not grow and net income will decrease. The Company's
business historically has focused on offering floral and gift products. The
Company has expanded its product lines in the gift, gourmet food and home and
garden categories, and expects to incur significant costs in marketing these new
products. If the Company's customers do not find its expanded product lines
appealing, the Company may not generate sufficient revenue to offset its related
costs and its net income will decrease.
<PAGE>
If the Company fails to develop and maintain its brand, its will not
increase or maintain its customer base or its revenues. The Company must develop
and maintain the 1-800-FLOWERS.COM brand to expand its customer base and its
revenues. In addition, the Company may introduce or acquire other brands in the
future. The Company believes that the importance of brand recognition will
increase as it expands its product offerings. Many of the Company's customers
may not be aware of the Company's non-floral products. The Company intends to
substantially increase its expenditures for creating and maintaining brand
loyalty and raising awareness of its additional product offerings. However, if
the Company fails to advertise and market its products effectively, it may not
succeed in establishing its brands, it will lose customers and revenues will
decline.
The Company's success in promoting and enhancing the
1-800-FLOWERS.COM brand will also depend on its success in providing its
customers high-quality products and a high level of customer service. If the
Company's customers do not perceive its products and services to be of high
quality, the value of the 1-800-FLOWERS.COM brand would be diminished, the
Company will lose customers and its revenues will decline.
A failure to establish and maintain strategic online relationships
that generate a significant amount of traffic could limit the growth of the
Company's business. The Company expects that in the future a significant portion
of its online customers will purchase products at its AOL online store or come
to its Web site from third party Web sites with which the Company has strategic
relationships, including AOL, Excite, SNAP.COM and the Microsoft Network. If
these third-parties do not attract a significant number of visitors, the Company
will not receive a significant number of online customers from these
relationships and its revenues will decrease or not grow. In addition, the
Company plans to enter into more of these relationships and it may pay
significant fees to do so. There is strong competition to establish
relationships with leading Internet companies, and the Company may not
successfully enter into additional relationships, or renew existing ones. The
Company may also be required to pay significant fees to maintain and expand
existing relationships. The Company's online revenues will suffer if it fails to
enter into new relationships or maintain existing relationships or if these
relationships do not result in traffic sufficient to justify their costs.
If local florists and other third-party vendors do not fulfill
orders to the Company's customers' satisfaction, its customers may not shop with
the Company again. Floral orders placed by the Company's customers are fulfilled
by local florists, a majority of which are either part of the BloomNet network
of approximately 1,500 independent florists or are owned or franchised stores.
Except for the Company-owned stores, the Company does not directly control any
of these florists. In addition, many of the non-floral products sold by the
Company are manufactured and delivered to its customers by independent
third-party vendors. If customers are dissatisfied with the performance of the
local florist or other third-party vendors, they may not utilize the Company's
services when placing future orders and its revenues will decrease.
If a florist discontinues its relationship with the Company, the
Company's customers may experience delays in service or declines in quality and
may not shop with the Company again. Many of the Company's arrangements with
local florists for order fulfillment, including arrangements with BloomNet
florists, are not formalized in writing. Of those relationships which have been
formalized in writing, including arrangements with BloomNet florists, most may
be terminated with 10 days notice. If a florist discontinues its relationship
with the Company, it will be required to obtain a suitable replacement located
in the same area, which may cause delays in delivery or a decline in quality,
leading to customer dissatisfaction and loss of customers.
If a significant amount of customers are not satisfied with their
purchase, the Company will be required to incur substantial costs to issue
refunds, credits or replacement products. The Company offers its customers a
100% satisfaction guarantee on its products. If customers are not satisfied with
the products they receive, the Company will either send the customer another
product or issue the customer a refund or a credit. The Company's net income
could decrease if a significant number of customers request replacement
products, refunds or credits.
Increased shipping costs and labor stoppages may adversely affect
sales of the Company's non-floral products. Non-floral products are delivered to
customers either directly from the manufacturer or from the Company's warehouse
in Virginia. The Company has established relationships with the United States
Postal Service, Federal Express, United Parcel Service and other common carriers
for the delivery of these products. If these carriers were to raise the prices
they charge to ship the Company's goods, its customers might choose to buy
comparable products locally to avoid shipping charges. In addition, these
carriers may experience labor stoppages, which could impact the Company's
ability to deliver products on a timely basis to its customers and adversely
affect its customer relationships.
<PAGE>
If the Company fails to continuously improve our Web site, it will
not attract or retain customers. If potential or existing customers do not find
the Company's Web site a convenient place to shop, the Company will not attract
or retain customers and its sales will suffer. To encourage the use of the
Company's Web site, it must continuously improve its accessibility, content and
ease of use. If competitors' Web sites are perceived as easier to use or better
able to satisfy customer needs, customer traffic and the Company's business
would be adversely affected.
Competition in the floral, gift, gourmet food and home and garden
industries is intense and a failure to respond to competitive pressure could
result in lost revenues. There are many companies that offer products in the
floral, gift, gourmet food and home and garden categories. In the floral
category, the Company's competitors include:
o retail floral shops, some of which maintain toll-free
telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are
highly competitive. Each of these categories encompasses a wide range of
products and is highly fragmented. Products in these categories may be purchased
from a number of outlets, including mass merchants, retail specialty shops,
online retailers and mail-order catalogs.
Competition is intense and the Company expects it to increase.
Increased competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
If the Company does not accurately predict customer demand for its
products, it may lose customers or experience increased costs. In the past, the
Company did not need to maintain significant inventory of products. However, as
the Company expands the volume of non-floral products offered to its customers,
the Company intends to increase inventory levels and the number of products
maintained in its warehouses. Because the Company has limited experience
offering many of its non-floral products through its Web site, the Company may
not predict inventory levels accurately. If the Company overestimates customer
demand for its products, excess inventory and outdated merchandise could
accumulate, tying up working capital and potentially resulting in reduced
warehouse capacity and inventory losses due to damage, theft and obsolescence.
If the Company underestimates customer demand, it will disappoint customers who
may turn to its competitors. Moreover, the strength of the 1-800-FLOWERS.COM
brand could be diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of
flowers will rise or flowers may be unavailable and the Company's revenues and
gross margins could decline. A variety of factors affect the supply of flowers
in the United States and the price of the Company's floral products. If the
supply of flowers available for sale is limited due to weather conditions or
other factors, prices for flowers will likely rise and customer demand for the
Company's floral products may be reduced, causing revenues and gross margins to
decline. Alternatively, the Company may not be able to obtain high quality
flowers in an amount sufficient to meet customer demand. Even if available,
flowers from alternative sources may be of lesser quality and/or may be more
expensive than those currently offered by the Company.
Most of the flowers sold in the United States are grown by farmers
located abroad, primarily in Colombia, Ecuador and Holland, and the Company
expects that this will continue in the future. The availability and price of
flowers could be affected by a number of factors affecting these regions,
including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and
disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
<PAGE>
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation
against foreign trade practices.
A failure to manage our internal operating and financial functions
could lead to inefficiencies in conducting the Company's business and subject it
to increased expenses. The Company's expansion efforts have significantly
strained its operational and financial systems. To accommodate the Company's
growth, it recently implemented new or upgraded operating and financial systems,
procedures and controls. Any failure to integrate these initiatives in an
efficient manner could adversely affect its business. In addition, the Company's
systems, procedures and controls may prove to be inadequate to support its
future operations.
The Company's franchisees may damage its brand or increase its costs
by failing to comply with its franchise agreements or its operating standards.
As of September 26, 1999, the Company franchised 85 flower shops through 53
franchisees. The Company's franchise business is governed by its Uniform
Franchise Offering Circular, franchise agreements and applicable franchise law.
If the Company's franchisees do not comply with its established operating
standards or the terms of the franchise agreements, the 1-800-FLOWERS.COM brand
may be damaged. The Company may incur significant additional costs, including
time-consuming and expensive litigation, to enforce its rights under the
franchise agreements. Additionally, the Company is the primary tenant on 54
leases, which the franchisees sublease from the Company. If a franchisee fails
to meet its obligations as subtenant, the Company could incur significant costs
to avoid a default under the primary lease. Furthermore, as a franchisor, the
Company has obligations to its franchisees. Franchisees may challenge the
performance of the Company's obligations under the franchise agreements and
subject it to costs in defending these claims and, if the claims are successful,
costs in connection with their compliance.
If third parties acquire rights to use similar domain names or phone
numbers or if the Company loses the right to use its phone numbers, its brand
may be damaged and it may lose sales. The Company's Internet domain names are an
important aspect of its brand recognition. The Company cannot practically
acquire rights to all domain names similar to www.1800flowers.com. If third
parties obtain rights to similar domain names, these third parties may confuse
the Company's customers and cause its customers to inadvertently place orders
with these third parties, which would result in lost sales and could damage its
brand.
Likewise, the phone number that spells 1-800-FLOWERS is important to
the Company's brand and its business. While the Company has obtained the right
to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well
as common "FLOWERS" misdials, it may not be able to obtain rights to use the
FLOWERS phone number as new toll-free prefixes are issued, or the rights to all
similar and potentially confusing numbers. If third parties obtain the phone
number which spells "FLOWERS" with a different prefix or a toll-free number
similar to FLOWERS, these parties may also confuse the Company's customers and
cause lost sales and potential damage to its brand. In addition, under
applicable FCC rules, ownership rights to telephone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS.
If the Company does not continue to receive rebates from wire
services, its results of operations could suffer. The Company has entered into
arrangements with independent wire service companies that provide it with
rebates when it settle its customers' floral orders utilizing their service. If
the Company cannot renew these arrangements or enter similar arrangements on
commercially reasonable terms, its results of operations could suffer. In
addition, these companies may eliminate or modify the rebate structure they have
in place with the Company. Any adverse modification to these rebate structures
could also cause the Company's results of operations to suffer.
The Company's net sales and gross margins would decrease if it
experiences significant credit card fraud. A failure to adequately control
fraudulent credit card transactions would reduce its net sales and gross margins
because it does not carry insurance against this risk. The Company has developed
technology to help detect the fraudulent use of credit card information.
Nonetheless, to date, the Company has suffered 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,
the Company is liable for fraudulent credit card transactions because it does
not obtain a cardholder's signature.
<PAGE>
A failure to integrate the systems and operations of any acquired
business with the Company's operations may disrupt its business. The Company has
acquired complementary businesses and may continue to do so in the future. If
the Company is unable to fully integrate these acquisitions or any future
acquisition, its business and operations could suffer, management will be
distracted and its expenses may increase.
The Company's revenues will not grow if the Internet is not accepted
as a medium for commerce. The Company expects to derive an increasing amount of
its revenue from electronic commerce, and intends to extensively market its
non-floral products online. If the Internet is not accepted as a medium for
commerce, its revenues will not grow as the Company expects and its business
will suffer. A number of factors may inhibit Internet usage, including:
o inadequate network infrastructure;
o consumer concerns for Internet privacy and security;
o inconsistent quality of service; and
o lack of availability of cost-effective, high speed service.
If Internet usage grows, the infrastructure may not be able to
support the demands placed on it by that growth and its performance and
reliability may decline. Web sites have experienced interruptions as a result of
delays or outages throughout the Internet infrastructure. If these interruptions
continue, Internet usage may decline.
A lack of security over the Internet may cause Internet usage to
decline and cause the Company to expend capital and resources to protect against
security breaches. A significant barrier to electronic commerce over the
Internet has been the need for secure transmission of confidential information
and transaction information. Internet usage could decline if any well-publicized
compromise of security occurred. As a result, the Company may be required to
expend capital and resources to protect against or to alleviate these problems.
Unexpected system interruptions caused by system failures may result
in reduced revenue and harm to the Company's reputation. In the past,
particularly during peak holiday periods, the Company has experienced
significant increases in traffic on its Web site and in its toll-free customer
service centers. The Company's operations are dependent on its ability to
maintain its computer and telecommunications systems in effective working order
and to protect its systems against damage from fire, natural disaster, power
loss, telecommunications failure or similar events. The Company's systems have
in the past, and may in the future, experience:
o system interruptions;
o long response times; and
o degradation in service.
The Company cannot assure you that it will adequately implement
systems to improve the speed, security and availability of its Internet and
telecommunications systems. Because the Company's business depends on customers
making purchases on its systems, its revenues will decrease and its reputation
could be harmed if it experiences frequent or long system delays or
interruptions or if a disruption occurs during a peak holiday season.
If Fry Multimedia and AT&T does not adequately maintain the
Company's Web site and telephone service, the Company may experience system
failures and its revenues will decrease. The Company is dependent on Fry
Multimedia to host and maintain its Web site and on AT&T to provide telephone
services to its customer service centers. If Fry Multimedia or AT&T experience
system failures or fail to adequately maintain the Company's systems, the
Company would experience interruptions and its customers might not continue to
utilize its services. If the Company does not maintain its Web site or its
telephone service, it will be unable to generate revenue. The Company's future
success depends upon these third-party relationships because it does not have
the resources to maintain its Web site or its telephone service without these or
other third parties. The Company may not be able to maintain these relationships
or replace them on financially attractive terms. Failure to do so may disrupt
the Company's operations or require it to incur significant unanticipated costs.
Interruptions in FTD's Mercury system or a reduction in the
Company's access to this system may disrupt order fulfillment and create
customer dissatisfaction. A significant portion of the Company's customers'
orders were communicated to the fulfilling florist through FTD's Mercury system.
The Mercury system is an order processing and messaging network used to
facilitate the transmission of floral orders between florists. The Mercury
system has in the past experienced interruptions in service. If the Mercury
system experiences interruptions in the future, the Company would experience
difficulties in fulfilling its customers' orders and many of its customers might
<PAGE>
not continue to shop with the Company.
In addition, the Company has been engaged in discussions with FTD
regarding decreasing its level of access to the Mercury system. FTD is one of
the Company's competitors, and any material decrease or elimination access to
Mercury by FTD would adversely impact the Company's ability to fulfill orders in
a timely fashion during peak periods and may result in lost revenues and
customers.
If the Company is unable to hire and retain key personnel, its
business and growth will suffer. The Company's success is dependent on its
ability to hire, retain and motivate highly qualified personnel. In particular,
the Company's success depends on the continued efforts of its Chairman and Chief
Executive Officer, James F. McCann, and its Senior Vice President, Christopher
G. McCann. In addition, the Company has recently hired several new members of
its senior management team to help manage its growth and it will need to
recruit, train and retain a significant number of additional employees,
particularly employees with technical backgrounds. These individuals are in high
demand and the Company is not certain it will be able to attract the personnel
it needs. The loss of the services of any of the Company's executive management
or key personnel, its failure to integrate any of its new senior management into
its operations or its inability to attract qualified additional personnel could
cause its growth to suffer and force it to expend time and resources in locating
and training additional personnel.
Many governmental regulations may impact the Internet, which could
affect the Company's ability to conduct business. Any new law or regulation, or
the application or interpretation of existing laws, may decrease the growth in
the use of the Internet or the Company's Web site. The Company expects there
will be an increasing number of laws and regulations pertaining to the Internet
in the United States and throughout the world. These laws or regulations may
relate to liability for information received from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services sold over the Internet. Moreover, the applicability to the
Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. This could
decrease the demand for the Company's products, increase its costs or otherwise
adversely affect its business.
Regulations imposed by the Federal Trade Commission may adversely
affect the growth of the Company's Internet business or its 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 the Company 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 the Company. These
regulations may also include enforcement and redress provisions. Moreover, 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. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts may adversely affect its ability to collect demographic and personal
information from users, which could adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third
parties may damage its brand. Unauthorized use of the Company's intellectual
property by third parties may damage its brand and its reputation and will
likely result in a loss of customers. It may be possible for third parties to
obtain and use the Company's intellectual property without authorization. Third
parties have in the past infringed or misappropriated the Company's intellectual
property or similar proprietary rights. The Company believes infringements and
misappropriations will continue to occur in the future. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be
expensive and, if the Company is not successful, could disrupt its ability to
conduct business. The Company cannot be certain that its products do not or will
not infringe valid patents, trademarks, copyrights or other intellectual
property rights held by third parties. The Company may be a party to legal
proceedings and claims relating to the intellectual property of others from time
<PAGE>
to time in the ordinary course of its business. The Company may incur
substantial expense in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against the Company
may result in substantial monetary liability or may materially disrupt its
ability to conduct business.
If states begin imposing state sales and use taxes, the Company may
lose sales or incur significant expenses in satisfaction of these obligations.
At present, except for the Company's retail operations, the Company does not
collect sales or other similar taxes in respect of sales and shipments of its
products in states other than New York, Texas, Arizona, Florida, Georgia and
Virginia. However, various states have sought to impose state sales tax
collection obligations on out-of-state direct marketing companies such as
1-800-FLOWERS.COM. A successful assertion by one or more of these states that
the Company should have collected or be collecting sales tax on the sale of its
products could result in additional costs and corresponding price increases to
its customers. Any imposition of state sales and use taxes on the Company's
products sold over the Internet may decrease customers' demand for its products
and revenue. The U.S. Congress has passed legislation limiting for three years
the ability of states to impose taxes on Internet-based transactions. Failure to
renew this legislation could result in the broad imposition of state taxes on
e-commerce.
Product liability claims may subject the Company to increased costs.
Several of the products the Company sells, including perishable food products,
may expose it to product liability claims in the event that the use or
consumption of these products results in personal injury. Although the Company
has not experienced any material losses due to product liability claims to date,
it may be a party to product liability claims in the future and incur
significant costs in their defense. Product liability claims often create
negative publicity, which could materially damage the Company's reputation and
its brand. Although the Company maintains insurance against product liability
claims, its coverage may be inadequate to cover any liabilities it may incur.
The Company's stock price may be highly volatile and could drop
unexpectedly, particularly because it has Internet operations. The price at
which the Company's class A common stock will trade may be highly volatile and
may fluctuate substantially. The stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
of securities, particularly securities of companies with Internet operations. As
a result, investors may experience a material decline in the market price of the
Company's Class A common stock, regardless of the Company's operating
performance. In the past, following periods of volatility in the market price of
a particular company's securities, securities class action litigation has often
been brought against that company. The Company may become involved in this type
of litigation in the future. Litigation of this type is often expensive and
diverts management's attention and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations
due to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, certain of its long-term debt
arrangements. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and
claims arising in the ordinary course of business. The Company is not
aware of any such legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its
business, consolidated financial position, results of operations or
liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 6, 1999, the Company closed its initial public offering
("IPO") of its Class A common stock, issuing 6,000,000 shares at a price
of $21.00 per share. The Company raised proceeds of approximately $114.8
million, net of underwriting discounts, commissions and other offering
costs of approximately $11.2 million.
In anticipation of its IPO, the Company amended and restated its
certificate of incorporation on July 7, 1999 to provide that all
previously outstanding shares of Class A common stock, of which the
holders were entitled to one vote per share, and Class B common stock,
which contained no voting rights, convert into a new series of Class B
common stock and are entitled to 10 votes per share. Additionally, a new
series of Class A common stock was established that entitles the holders
to one vote per share. Each share of new Class B common stock shall
automatically convert into one share of new Class A common stock upon
transfer, with limited exception, and at the option of the holder.
On July 7, 1999, the board of directors and stockholders approved an
amendment to the certificate of incorporation, effective on July 28, 1999,
that provided for a ten-for-one split of the outstanding shares of common
stock and increased in the number of authorized shares of preferred stock
to 10,000,000.
Also on July 7, 1999, the 1-800-FLOWERS.COM, Inc., 1999 Stock
Incentive Plan was adopted by the Company's board of directors and
approved by its stockholders. Pursuant to the terms of the plan, 9,900,000
shares of Class A common stock have been authorized for issuance. The
share reserve will automatically increase on the first trading day in
January of each calendar year, beginning January 2, 2000, by an amount
equal to 3% of the total number of shares of common stock outstanding on
the last trading day in December in the preceding calendar year, but in no
event will this annual increase exceed 2,000,000 shares. The components of
the plan include a discretionary option grant program, an automatic option
grant program, a stock issuance program, and a salary investment option
grant program. In August 1999, the Company granted 1,023,000 options at an
exercise price of $21.00 per share and 300,000 options at an exercise
price of $16.00 per share. Such grants were made at fair market value on
their respective grant dates.
Use of proceeds information is provided herewith in Connection with
the Offering. The effective date of the Company's registration statement
(File # 333-78985) filed on Form S-1 under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of Class A
common stock was August 2, 1999. In its initial public offering, the
Company sold 6,000,000 shares of its Class A common stock to an
underwriting syndicate led by Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and Wit Capital Corporation. The offering commenced on
August 3, 1999 and closed on August 6, 1999; resulting in aggregate
proceeds of $126 million. The Company's net proceeds from the offering
were $114.8 million. Approximately $8.8 million of offering expenses was
attributable to underwriting discounts.
Since the closing of the Company's IPO, the Company has utilized the
proceeds as follows:
o $18.0 million to repay a term loan with Chase Bank that was
used to fund our acquisition of Plow & Hearth;
<PAGE>
o $3.0 million to repay a line of credit with Chase Bank that
was used for working capital and general corporate purposes;
and
o $7.9 million, net of option exercises by Plow & Hearth option
holders, to redeem all outstanding common stock of our Plow &
Hearth subsidiary not held by us and Plow & Hearth stock
options.
o $10.9 million to fund operating activities, including
marketing and other activities associated with the Company's
expansion into non-floral product lines.
Unused proceeds of the offering are currently invested in money
market funds with portfolios of investment grade corporate and U.S.
government securities.
As of September 26, 1999, the Company had not made any specific
expenditure plans with respect to the remaining proceeds of this offering.
While the Company cannot specify with certainty the particular uses for
such proceeds, the Company currently intends to use the remaining proceeds
over time:
o to fund its marketing activities;
o to enhance its infrastructure;
o to enter into strategic relationships with Internet companies;
o to expand its product offerings;
o for other general corporate purposes, and
o to expand its current business through strategic acquisitions.
Additional securities of the Company may be issued as follows:
o 1,237,500 shares of Class B common stock upon the exercise of
options outstanding as of November 1, 1999 at a weighted
average exercise price of $1.73 per share;
o 1,323,000 shares of Class A common stock upon the exercise of
options outstanding as of November 1, 1999 at a weighted
average exercise price of $19.87, and up to 8,577,000
additional shares of Class A common stock that could be issued
under our 1999 stock incentive plan; and
o 2,371,040 shares of Class A common stock upon the exercise of
an outstanding warrant with a nominal exercise price.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Refer to "Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS" for
matters submitted to a vote of security holders.
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, filed with
the Commission on July 9, 1999 (File No. 333-78985).*
3.2 Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation of the Registrant. Incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1, filed with the Commission on July 22, 1999 (File No.
333-78985).*
3.3 Amended and Restated By-Laws of the Registrant. Incorporated
by reference to Exhibit 3.3 to the Registrant's Registration
Statement on Form S-1, filed with the Commission on May 21,
1999 (File No. 333-78985).*
4.1 Form of Certificate for Common Stock of the Registrant.
Incorporated by reference to Exhibit 4.1 to the Registrant's
Statement on Form S-1, filed with the Commission on July 9,
1999 (File No. 333-78985).*
10.19 Employment Agreement, effective as of July 1, 1999, between
James F. McCann and 1-800-FLOWERS.COM, Inc.*
10.20 Employment Agreement, effective as of July 1, 1999, between
Christopher G. McCann and 1-800-FLOWERS.COM, Inc.*
10.22 Amended and Restated Interactive Marketing Agreement, made and
entered into on September 1, 1999, by and between America
Online, Inc. and 800-FLOWERS.COM, Inc.*
27.1 Financial Data Schedule for the three months ended September
26, 1999.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 26, 1999.
- ----------
* Incorporated by reference to the Company's registration statement on Form
S-1 (no. 333-78985), dated August 2, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
----------------------------------
(Registrant)
Date: November 11, 1999 /s/ James F. McCann
----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 11, 1999 /s/ John W. Smolak
----------------------------------
John W. Smolak
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer
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