<PAGE>
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 DECEMBER 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:
23,377,201
-------------
(Number of shares of Class A common stock outstanding as of February 1, 1999)
38,413,105
--------------
(Number of shares of Class B common stock outstanding as of February 1, 1999)
1
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1-800-FLOWERS.COM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-December 26, 1999 and June
27, 1999 3
Consolidated Statements of Operations-Three and Six Months Ended
December 26, 1999 and December 27, 1998 4
Consolidated Statements of Cash Flows-Six Months Ended
December 26,1999 and December 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitive and Qualitative Disclosures About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
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
</TABLE>
2
<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)
<TABLE>
<CAPTION>
DECEMBER JUNE
26, 1999 27, 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 153,681 $ 99,183
Receivables, net 17,778 9,284
Inventories 11,193 7,496
Prepaid and other 2,243 1,307
Recoverable income taxes 3,214 2,431
Deferred tax assets 801 1,504
------------- -------------
Total current assets 188,910 121,205
Property, plant and equipment at cost, net 36,478 27,525
Investments 937 984
Capitalized investment in leases 1,222 1,452
Notes receivable, net 514 722
Goodwill, net of accumulated amortization 40,421 21,362
Investment in licenses, net of accumulated amortization 3,267 3,428
Other 8,551 5,677
------------- -------------
Total assets $280,300 $182,355
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 59,366 $ 23,396
Accrued expenses 12,164 5,543
Current maturities of long-term debt and obligations under capital leases 3,305 6,647
------------- -------------
Total current liabilities 74,835 35,586
Long-term debt and obligations under capital leases 9,145 27,457
Deferred rent and other liabilities 5,488 4,009
Management put liability - 6,300
------------- -------------
Total liabilities 89,468 73,352
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, shares authorized-10,000,000, shares issued
and outstanding-none at December 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- 23,378,751 at December 26, 1999 and 4,100,012 at June 27, 1999 234 41
Class B common stock, $.01 par value, shares authorized-200,000,000, shares
issued-43,693,105 at December 26, 1999 and 45,579,005 at June 27, 1999 437 456
Additional paid-in capital 239,711 6,038
Accumulated deficit (45,182) (10,527)
Deferred compensation (1,260) (1,470)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- -------------
Total stockholders' equity 190,832 109,003
------------- -------------
Total liabilities and stockholders' equity $280,300 $182,355
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
DECEMBER DECEMBER DECEMBER DECEMBER
26, 1999 27, 1998 26, 1999 27, 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 118,808 88,804 $ 176,917 $ 136,378
Cost of revenues 71,216 51,847 107,743 81,640
--------- --------- --------- ---------
Gross profit 47,592 36,957 69,174 54,738
Operating expenses:
Marketing and sales 52,802 33,065 79,198 47,520
Technology and development 3,833 1,807 7,902 2,934
General and administrative 7,249 3,273 15,176 5,621
Depreciation and amortization 3,422 2,015 5,715 3,886
--------- --------- --------- ---------
Total operating expenses 67,306 40,160 107,991 59,961
--------- --------- --------- ---------
Operating loss (19,714) (3,203) (38,817) (5,223)
Other income (expense):
Interest income 2,232 204 4,259 404
Interest expense (325) (626) (822) (1,203)
Other, net 37 (28) 87 (15)
--------- --------- --------- ---------
Total other income (expense) 1,944 (450) 3,524 (814)
--------- --------- --------- ---------
Loss before income taxes and minority interests (17,770) (3,653) (35,293) (6,037)
Benefit from income taxes 249 1,071 599 1,748
--------- --------- --------- ---------
Loss before minority interests (17,521) (2,582) (34,694) (4,289)
Minority interests in operations of consolidated subsidiaries 10 (173) 39 (36)
--------- --------- --------- ---------
Net loss (17,511) (2,755) (34,655) (4,325)
Redeemable Class C common stock dividends -- (441) -- (885)
--------- --------- --------- ---------
Net loss applicable to common stockholders (17,511) $ (3,196) $ (34,655) $ (5,210)
========= ========= ========= =========
Basic and diluted net loss per common share applicable to common
stockholders $ (0.28) $ (0.07) $ (0.60) $ (0.12)
========= ========= ========= =========
Shares used in the calculation of basic and diluted net loss per
common share applicable to common stockholders 61,680 44,000 58,234 44,000
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
DECEMBER 26, DECEMBER 27,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (34,655) $ (4,325)
Reconciliation of net loss to net cash used in operations:
Depreciation and amortization 5,715 3,886
Deferred income taxes 703 --
Management put liability 1,451 (1,631)
Bad debt expense 618 --
Minority interests (39) 36
Amortization of deferred compensation 210 --
Other non cash charges 222 --
Loss on disposal of equipment and other -- 310
Changes in operating assets and liabilities:
Receivables (9,026) (4,961)
Inventories (3,670) (2,307)
Prepaid and other (150) (4,769)
Recoverable income taxes (830) (3,974)
Other assets (4,789) (2,041)
Accounts payable 34,546 14,640
Accrued expenses 6,334 3,126
Other liabilities 1,318 910
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (2,042) (1,100)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (25,521) --
Capital expenditures, net of noncash expenditures (11,917) (3,828)
Sale of investments -- 2,000
Notes receivable, net 208 (40)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (37,230) (1,868)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 115,722 --
Proceeds from bank borrowings 13,332 4,434
Payments of capital lease obligations (805) (898)
Repayment of notes payable and bank borrowings (34,479) (1,104)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 93,770 2,432
--------- ---------
Net change in cash and equivalents 54,498 (536)
Cash and equivalents:
Beginning of period 99,183 8,873
--------- ---------
End of period $ 153,681 $ 8,337
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<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 and six
months ended December 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 and six months ended December 26, 1999 and December 27,
1998, the Company's comprehensive losses were equal to the respective net losses
for each of the periods presented.
NOTE 2 - COMMON STOCK
STOCK SPLIT
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.
INITIAL PUBLIC OFFERING
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 $114.7 million,
net of underwriting discounts, commissions and other offering costs of
approximately $11.3 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 and six months ended December 26, 1999, holders of
7,070 and 1,885,900 shares, respectively, of new Class B common stock elected to
convert such shares into an equal number of shares of new Class A common stock.
6
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 - ACQUISITIONS
GREATFOOD.COM, INC.
Pursuant to an agreement and plan of reorganization, on November 24,
1999, the Company completed its acquisition of GreatFood.com, Inc.,
("GreatFood.com"), an online retailer of specialty and gourmet food products.
The purchase price of approximately $18.7 million was funded with a portion of
the net proceeds available from the Company's IPO. The acquisition has been
accounted for as a purchase and, accordingly, the operating results of
GreatFood.com have been included in the company's consolidated financial
statements since the date of acquisition. The excess of the purchase price over
the fair market value of the net assets acquired, approximately $18.3 million,
is being amortized over three years.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the six months ended December 26, 1999
and December 27, 1998, as if the acquisition had occurred at the beginning of
the respective periods presented, and after giving effect to purchase accounting
adjustments. This unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the results of operations in
future periods or results that would have been achieved had the Company and
GreatFood.com been combined during the specified periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
DECEMBER DECEMBER
26, 1999 27, 1998
--------- ---------
(in thousands)
<S> <C> <C>
Net revenues $ 177,399 $ 137,061
Loss from operations (46,488) (9,072)
Net loss applicable to common stockholders (42,225) (7,253)
Net loss per share $ (0.73) $ (0.16)
</TABLE>
THE PLOW & HEARTH, INC.
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
in the Company's fiscal 2000 quarter ended September 26, 1999 as general and
administrative expense and goodwill in the amounts of $1.5 million and $0.1
million, respectively.
7
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - LONG-TERM DEBT
Using the proceeds of its IPO, the Company repaid amounts previously
outstanding under a bank term loan and revolving credit line, as well as seller
financed acquisition obligations associated with the Company's franchise
operations. The Company's long-term debt and obligations under capital leases
consist of the following:
<TABLE>
<CAPTION>
DECEMBER JUNE
26,1999 27, 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Bank term loan and revolving credit line $ -- $21,000
Commercial notes and revolving credit lines 7,109 4,675
Seller financed acquisition obligations (1) 771 3,351
Obligations under capital leases 4,570 5,078
------- -------
12,450 34,104
Less current maturities of long-term debt and obligations under
capital leases 3,305 6,647
------- -------
$ 9,145 $27,457
======= =======
</TABLE>
(1)Included in amounts outstanding under seller financed acquisition
obligations at December 26, 1999 is $450,000 related to the Company's
wholesale floral subsidiary. As described in further detail below, such
amounts were assumed by the purchaser upon the Company's divestiture of
this subsidiary in January 2000 (see Note 8).
NOTE 5 - INCOME TAXES
The Company incurred a loss that provided a tax benefit of $0.2 million
and $0.6 million for the three and six months ended December 26, 1999,
respectively. 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 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 and six months ended December 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 and
six months ended December 26, 1999.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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.
8
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8 - SUBSEQUENT EVENT - SALE OF FLORAL WORKS SUBSIDIARY
On January 12, 2000, the Company completed the sale of its Floral
Works, Inc. ("Floral Works") subsidiary to a private investment firm, Eaglestone
Partners, and the management of Floral Works. Floral Works is a provider of
wholesale floral bouquets to supermarkets and grocery store chains. The sales
price of $3.1 million approximated the Company's carrying value of the
subsidiary's net assets at the time of divestiture.
The divestiture of Floral Works is not expected to have a material
impact on the Company's consolidated revenues for the fiscal year ending July
2, 2000. During the six months ended December 26, 1999 and December 27, 1998,
Floral Works contributed revenue of approximately $6.7 million and $4.8
million, respectively. The Company's pro-forma net loss from operations, net
loss applicable to common stockholders and net loss per share for the six
months ended December 26, 1999 and December 27, 1998, assuming the
divestiture had occurred at the beginning of such periods, would not have
been materially different from the actual amounts reported for such periods.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
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 December 26, 1999,
the Company had sold its products to approximately 8.5 million customers, of
which 1.5 million had transacted business with us on-line.
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.
ACQUISITIONS
GREATFOOD.COM, INC.
On November 24, 1999, the Company completed its acquisition of
GreatFood.com, Inc., ("GreatFood.com"), an online retailer of specialty and
gourmet food products, pursuant to an agreement and plan of reorganization. The
purchase price of approximately $18.7 million was funded with a portion of the
net proceeds available from the Company's initial public offering ("IPO") in
August 1999. The acquisition has been accounted for as a purchase and,
accordingly, the operating results of GreatFood.com have been included in the
Company's consolidated financial statements since the date of acquisition. The
excess of the purchase price over the fair market value of the net assets
acquired of approximately $18.3 million is being amortized over three years.
PLOW & HEARTH
Upon closing of its IPO, the Company used a portion of the net
proceeds 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.
DIVESTITURE
On January 12, 2000, the Company completed the sale of its Floral
Works, Inc. ("Floral Works") subsidiary to a private investment firm, Eaglestone
Partners, and the management of Floral Works. Floral Works is a provider of
wholesale floral bouquets to supermarkets and grocery store chains. The sales
price of $3.1 million approximated the Company's carrying value of the
subsidiary's net assets at the time of divestiture. Such divestiture is not
expected to have a material impact on the Company's consolidated revenues for
the fiscal year ending July 2, 2000. Floral Works contributed revenues of
approximately $6.7 million and $4.8 million during the three and six months
ended December 26, 1999.
10
<PAGE>
RESULTS OF OPERATIONS
NET REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- --------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Telephonic $ 77,618 $ 67,972 14.2% $115,241 $102,342 12.6%
Online 29,703 10,771 175.8% 41,474 17,029 143.5%
Retail/fulfillment 11,487 10,061 14.2% 20,202 17,007 18.8%
-------- -------- ---- -------- -------- -----
$118,808 $ 88,804 33.8% $176,917 $136,378 29.7%
</TABLE>
Net revenues consist primarily of the selling price of merchandise
and service and shipping charges, net of returns and credits. Growth in both
telephonic and online revenues during the three and six months ended December
26, 1999, in comparison to prior year, was due to increased sales and
marketing efforts and the Company's continued expansion into non-floral
products, including a broad range of items such as online greeting cards,
candies and gourmet items, as well as unique gifts for the home and garden.
Non-floral gift products accounted for 35.6% of online merchandise sold during
the three months ended December 26, 1999 compared to 10.9% during the same
period of the prior year. As a result, during the three months ended December
26, 1999, the Company added 806,000 new customers (529,000 telephonically and
277,000 online), bringing its cumulative customer accounts to 8.5 million, of
which 1.5 million have transacted business either through the
1-800-FLOWERS.COM Web site or one of its affiliated portal partners. Revenue
derived from the Company's GreatFood.com, Inc. subsidiary, which is included
in the Company's results of operations since it was acquired on November 24,
1999, was not material in relation to consolidated revenue for the three
months ended December 26, 1999.
The increase in retail/fulfillment revenues in comparison to prior year
periods was primarily due to the growth in the number of owned retail stores
from 27 at June 28, 1999 to 39 at December 26, 1999. The Company does not expect
to materially increase the number of owned retail stores in the foreseeable
future.
GROSS PROFIT
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- -------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
--------- -------- -------- ------- ------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross profit $ 47,592 $ 36,957 28.8% $69,174 $54,738 26.4%
Gross margin % 40.1% 41.6% 39.1% 40.1%
</TABLE>
Gross profit consists primarily of net revenues less cost of revenues
which consist 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 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. Gross profit in absolute dollars
increased during the three and six months ended December 26, 1999, in comparison
to prior year, as a result of increased sales volume. Gross margin percentages
declined over the same periods as margin improvements from the sale of higher
margin non-floral products were offset by lower margin "Express" products and an
increase in the average value of florist fulfilled orders which, while
generating higher absolute gross profit dollars, results in a lower gross margin
percentage.
11
<PAGE>
MARKETING AND SALES EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
----------- ---------- -------- ----------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales $ 52,802 $ 33,065 60.0% $ 79,198 $ 47,520 66.7%
Percentage of sales 44.4% 37.2% 44.8% 34.8%
</TABLE>
Marketing and sales expense consists 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. The increases in marketing and sales expense over
the comparable periods of the prior year 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, contract renewal with Excite and new
agreements with Snap.com, Microsoft Network and Yahoo!. The Company expects to
continue to invest significantly in marketing and sales expenses in future
periods as the Company maintains its strategic relationships with Internet
companies and pursues an aggressive branding and marketing campaign.
TECHNOLOGY AND DEVELOPMENT EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
------------- -------------------------- -------------- ------------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Technology and development $ 3,833 $ 1,807 112.1% $ 7,902 $2,934 169.3%
Percentage of sales 3.2% 2.0% 4.5% 2.2%
</TABLE>
Technology and development expense consists 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. The
increase in technology and development expense over the comparable periods of
the prior year 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 EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
------------- -------------------------- -------------- ------------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and administrative $7,249 $3,273 121.5% $15,176 $5,621 170.0%
Percentage of sales 6.1% 3.7% 8.6% 4.1%
</TABLE>
General and administrative expense consists 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. The increase in general and administrative
expense over the comparable periods of the prior year was the result of costs
associated with additions to the management team and administrative increases
associated with operating as a public company. In addition, $0.4 million and
$3.1 million of the increase during the three and six months ended December 26,
1999 was attributable to the effect of the management put liability associated
with
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<PAGE>
the Plow & Hearth acquisition. During the three and six months ended December
26, 1999 the Company recorded charges of $0.0 million and $1.5 million,
respectively, to increase the liability, while during the three and six months
ended December 27, 1998, the Company recorded benefits of $0.4 million and $1.6
million to reduce the liability in accordance with the terms of the Plow &
Hearth purchase agreement. The Company expects that general and administrative
expense 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 EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
------------- -------------------------- -------------- ------------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $3,422 $2,015 69.8% $5,715 $3,886 47.1%
Percentage of sales 2.9% 2.3% 3.2% 2.8%
</TABLE>
The increase in depreciation and amortization expense over the
comparable periods of the prior year was primarily due to additional capital
expenditures in short-lived information systems hardware and software and the
amortization of goodwill resulting from the Company's acquisition of
GreatFood.com.
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December December December December
26, 1999 27, 1998 % Change 26, 1999 27, 1998 % Change
------------- -------------------------- -------------- ------------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $2,232 $204 994.1% $4,259 $404 954.2%
Interest expense (325) (626) (48.1%) (822) (1,203) (31.7%)
Other 37 (28) 232.1% 87 (15) 680.0%
</TABLE>
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 a
term loan ($18.0 million) and line of credit drawdown ($3.0 million) was repaid
with the proceeds of the Company's IPO in August 1999, while certain seller
financed acquisition obligations ($2.6 million) associated with the Company's
franchise operations were repaid in November 1999.
INCOME TAXES
For the three and six months ended December 26, 1999, the Company
incurred a loss that provided a tax benefit of $0.2 million and $0.6 million,
respectively. 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 the uncertainty regarding its
realizability.
LIQUIDITY AND CAPITAL RESOURCES
At December 26, 1999, the Company had working capital of $114.1
million, including cash and equivalents of $153.7 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 of $2.0 million for the six
months ended December 26, 1999 was primarily attributable to net losses, reduced
by noncash charges of depreciation and amortization and working capital changes
comprised primarily of increases in accounts payable and accrued expenses,
offset by increases in accounts receivable arising from the recent holiday
season, and inventory increases associated with the Company's expansion into
non-floral product lines and in anticipation of heavier volume during the coming
holidays.
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<PAGE>
Net cash used in investing activities was $37.2 million for the six
months ended December 26, 1999, and consisted of capital expenditures and the
acquisitions of GreatFood.com and 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 $93.8 million for the
six months ended December 26, 1999, resulting from the net proceeds from the
issuance of Class A common stock in the Company's IPO, less repayments of
amounts outstanding under the Company's credit facilities, seller financed
acquisition obligations 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 were
coded to accept or recognize only two digit entries in the date code field.
These programs were designed and developed without addressing the impact of the
recent change in the century, and as such, are subject to failure or
miscalculations which could potentially result in disruptions of normal business
activities. As a result, computer systems and software used by many companies
and governmental agencies required upgrades to comply with Year 2000
requirements.
In response to these issues, during fiscal 1999, the Company prepared
and executed a Year 2000 readiness program which encompassed all of its critical
systems including transaction processing, call management, telecommunications,
fulfillment, finance and interactive applications. Although the Company's recent
information technology investments had been in support of its expanding
operating and decision support requirements, to the extent they involved a
replacement of an existing system, Year 2000 compliance requirements were also
addressed. To date, the Company's assessment has determined that all of its
critical business systems, including its call-routing system which was replaced
in December 1999, are Year 2000 compliant.
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.
Based upon the Company's evaluation of the performance of its systems,
as well as the operations of the business subsequent to December 31, 1999, the
Company is not aware of any material adverse effects arising from the Year 2000
phenomenon. 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.
To date, the Company has not incurred any significant costs
attributable to Year 2000 compliance with the exception of replacing its call
routing system at a cost of $0.8 million.
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<PAGE>
After considering currently available information, management believes
that the reasonable likely worst-case scenario with respect to any remaining
Year 2000 issues could be the difficulty for customers to place orders in the
event of 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.
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:
- expand the 1-800-FLOWERS.COM brand through marketing and other
promotional activities;
- maintain its strategic relationships with Internet companies;
- increase the number of products offered; and
- enhance the Company's technological infrastructure and order
fulfillment capabilities.
Although the Company has been profitable in the past, management
expects that the Company may incur losses for the foreseeable future as a result
of these expenditures. In order to achieve and maintain profitability, the
Company may need to generate revenues significantly above historical levels
and/or reduce operating expenses. Management cannot assure you that the Company
may 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:
- seasonality;
- the timing and effectiveness of our marketing programs; - the timing
and effectiveness of capital expenditures;
- the Company's ability to enter into or renew marketing agreements
with Internet companies; and - 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 may 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 may likely spend less on its products and its quarterly operating
results may suffer.
THE COMPANY'S OPERATING RESULTS MAY SUFFER IF REVENUES 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 revenues 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 may suffer.
IF THE COMPANY'S CUSTOMERS DO NOT FIND ITS EXPANDED PRODUCT LINES
APPEALING, REVENUES MAY NOT GROW AND NET INCOME MAY 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
15
<PAGE>
continue 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
results of operations may be negatively impacted.
IF THE COMPANY FAILS TO DEVELOP AND MAINTAIN ITS BRAND, IT MAY 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 has introduced and acquired other
brands in the past and may continue to do so 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 may lose customers and revenues may
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 may lose customers and
its revenues may 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 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 may not receive a
significant number of online customers from these relationships and its
revenues from these relationships may decrease or not grow. In addition, the
Company may 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 may 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
Company's "BloomNet" network of approximately 1,500 independent florists or
are owned or franchised stores. Except for the 39 Company-owned stores, as of
December 26, 1999, 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 may 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.
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<PAGE>
IF THE COMPANY FAILS TO CONTINUOUSLY IMPROVE ITS WEB SITE, IT MAY 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 may not attract or
retain customers and its sales may suffer. To encourage the use of the Company's
Web site, it must continuously improve its accessibility, content and ease of
use. Customer traffic and the Company's business would be adversely affected if
competitors' Web sites are perceived as easier to use or better able to satisfy
customer needs.
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:
- retail floral shops, some of which maintain toll-free telephone
numbers;
- online floral retailers;
- catalog companies that offer floral products;
- floral telemarketers and wire services; and
- 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:
- price reductions, decreased revenue and lower profit margins;
- loss of market share; and
- 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 a significant inventory of products. However,
as the Company expands the volume of non-floral products offered to its
customers, the Company may be required 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 may 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:
- import duties and quotas;
- agricultural limitations and restrictions to manage pests and
disease;
- changes in trading status;
- economic uncertainties and currency fluctuations;
- severe weather;
- work stoppages;
- foreign government regulations and political unrest; and
- trade restrictions, including United States retaliation against
foreign trade practices.
17
<PAGE>
A FAILURE TO MANAGE ITS 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. 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 certain 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 could 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 settles 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.
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 may be
distracted and its expenses may increase.
THE COMPANY'S REVENUES MAY 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 may not grow as the Company expects and its business may
suffer. A number of factors may inhibit Internet usage, including:
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<PAGE>
- inadequate network infrastructure;
- consumer concerns for Internet privacy and security;
- inconsistent quality of service; and
- 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:
- system interruptions;
- long response times; and
- 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 may 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 DO NOT ADEQUATELY MAINTAIN THE COMPANY'S
WEB SITE AND TELEPHONE SERVICE, THE COMPANY MAY EXPERIENCE SYSTEM FAILURES AND
ITS REVENUES MAY 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 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 of access
to the Mercury System 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 MAY 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 may need to recruit,
train and retain a significant number of
19
<PAGE>
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 may 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
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,
Virginia and Washington. 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
20
<PAGE>
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.
21
<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
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 $114.7 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:
- Repayment of amounts previously outstanding under a bank
term loan ($18.0 million), revolving line of credit ($3.0
million) and seller financed acquisition obligation ($2.6
million);
- Redemption of all common stock of our Plow & Hearth
subsidiary held by minority shareholders ($7.9 million, net
of option exercises by Plow & Hearth option holders);
- Acquisition of GreatFood.com ($18.7 million);
- Capital expenditures ($11.2 million);
- Funding of operating activities ($1.4 million), 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 December 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:
- to fund its marketing activities;
- to enhance its infrastructure;
- to enter into strategic relationships with Internet
companies;
- to expand its product offerings;
- to expand its current business through strategic
acquisitions; and
- for other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule for the six months ended December
26, 1999.
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K dated
November 24, 1999 pertaining to its acquisition of
GreatFood.com, Inc.
23
<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: FEBRUARY 8, 2000 /s/ JAMES F. MCCANN
- --------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
DATE: FEBRUARY 8, 2000 /s/ JOHN W. SMOLAK
- --------------------------- ------------------------------------
John W. Smolak
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
24
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