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 October 1, 2000
___ 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
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(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:
26,392,178
----------
(Number of shares of Class A common stock outstanding as of November 9, 2000)
37,794,985
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(Number of shares of Class B common stock outstanding as of November 9, 2000)
<PAGE>
1-800-FLOWERS.COM, Inc.
FORM 10-Q
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-October 1, 2000 (unaudited) and
July 2, 2000 1
Consolidated Statements of Operations (unaudited)-
Three Months Ended October 1, 2000 and
September 26, 1999 2
Consolidated Statements of Cash Flows (unaudited)-
Three Months Ended October 1, 2000 and September 26, 1999 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<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)
October 1, July 2,
2000 2000
--------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 97,482 $111,624
Receivables, net 8,765 8,382
Inventories 15,040 10,569
Prepaid and other 4,605 4,330
-------------------------
Total current assets 125,892 134,905
Property, plant and equipment at cost, net 41,157 40,854
Capitalized investment in leases 900 965
Goodwill and investment in licenses, net of 35,871 38,040
accumulated amortization
Other assets 7,629 9,877
-------------------------
Total assets $211,449 $224,641
=========================
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable and accrued expenses $ 52,994 $ 50,937
Current maturities of long-term debt and
obligations under capital leases 7,654 1,839
-------------------------
Total current liabilities 60,648 52,776
Long-term debt and obligations under capital leases 10,916 9,441
Other liabilities 3,599 3,506
-------------------------
Total liabilities 75,163 65,723
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000
shares authorized, 26,415,448 and 26,362,068
shares issued at October 1, 2000 and July 2,
2000, respectively 264 264
Class B common stock, $.01 par value, 200,000,000
shares authorized, 43,103,265 and 43,141,645
shares issued at October 1, 2000 and July 2,
2000, respectively 431 432
Additional paid-in capital 238,557 239,475
Retained deficit (99,858) (77,357)
Deferred compensation - (788)
Treasury stock, at cost-52,800 Class A and
5,280,000 Class B shares (3,108) (3,108)
-------------------------
Total stockholders' equity 136,286 158,918
-------------------------
Total liabilities and stockholders' equity $211,449 $224,641
=========================
</TABLE>
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)
Three Months Ended
-----------------------------
October 1, September 26,
2000 1999
-----------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Net revenues $72,516 $57,530
Cost of revenues 45,091 36,527
-----------------------------
Gross profit 27,425 21,003
Operating expenses:
Marketing and sales 34,528 25,817
Technology and development 4,626 4,069
General and administrative 7,395 7,927
Depreciation and amortization 5,041 2,293
------------------------------
Total operating expenses 51,590 40,106
------------------------------
Operating loss (24,165) (19,103)
Other income (expense):
Interest income 1,898 2,027
Interest expense (322) (497)
Other, net 88 50
------------------------------
Total other income (expense) 1,664 1,580
------------------------------
Loss before income taxes and minority interests (22,501) (17,523)
Benefit from income taxes - 350
------------------------------
Loss before minority interests (22,501) (17,173)
Minority interests in operations of consolidated
subsidiaries - 29
------------------------------
Net loss $(22,501) $(17,144)
==============================
Basic and diluted net loss per common share $(0.35) $(0.31)
==============================
Shares used in the calculation of basic and
diluted net loss per
common share 64,184 54,787
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
------------------------------
October 1, September 26,
2000 1999
------------------------------
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Operating activities:
Net loss $(22,501) $(17,144)
Reconciliation of net loss to net cash used
in operations:
Depreciation and amortization 5,041 2,293
Deferred income taxes - 465
Management put liability - 1,451
Bad debt expense 6 157
Minority interests - (29)
Amortization of deferred compensation (157) 105
Other non-cash charges - 39
Changes in operating items, excluding the
effects of acquisitions:
Receivables (389) 321
Inventories (4,471) (2,580)
Prepaid and other (275) (751)
Accounts payable and accrued expenses 2,057 11,785
Other assets 2,281 (7,219)
Other liabilities 93 363
------------------------------
Net cash used in operating activities (18,315) (10,744)
Investing activities:
Acquisitions, net of cash acquired - (7,902)
Capital expenditures, net of non-cash
expenditures (3,091) (5,829)
Notes receivable, net (31) 117
------------------------------
Net cash used in investing activities (3,122) (13,614)
Financing activities:
Proceeds from issuance of common stock, net 25 115,847
Proceeds from bank borrowings 12,965 8,742
Repayment of notes payable and bank borrowings (5,270) (24,832)
Payment of capital lease obligations (425) (377)
------------------------------
Net cash provided by financing activities 7,295 99,380
------------------------------
Net change in cash and equivalents (14,142) 75,022
Cash and equivalents:
Beginning of period 111,624 99,183
------------------------------
End of period $ 97,482 $174,205
==============================
</TABLE>
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
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These consolidated financial statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary for a fair presentation
of the balance sheets, operating results, and cash flows for the periods
presented. Operating results for the three months ended October 1, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 1, 2001. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted in
accordance with the rules and regulations of the SEC. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements, and accompanying notes, included in the Company's Annual
Report on Form 10-K for the fiscal year ended July 2, 2000. The consolidated
balance sheet at July 2, 2000 has been derived from the audited consolidated
financial statements at that date. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 October 1, 2000 and September 26, 1999, the Company's
comprehensive losses were equal to the respective net losses for each of the
periods presented.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Adoption of the provisions of SAB
No. 101 did not have a material impact on the Company's revenue recognition
policies.
In June 1998, the Financial Accounting Standards Board issued Statement No.133,
Accounting for Derivative Instruments and Hedging Activities, as amended, which
is required to be adopted in years beginning after June 15, 2000. The Company's
adoption of the new Statement did not impact earnings or the consolidated
financial position of the Company.
Note 2 - Acquisitions and Disposition
Acquisition of 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 $18.9 million was funded with a portion of the net proceeds
available from the Company's initial public offering ("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 results of
operations since the date of acquisition. The excess of the purchase price over
the fair market value of the net assets acquired, approximating $19.0 million,
is being amortized over three years.
Acquisition of TheGift.com, Inc.
Pursuant to an agreement and plan of reorganization, on November 12, 1999, the
Company completed its acquisition of TheGift.com, Inc. ("TheGift.com"), an
online retailer of specialty gift products. The purchase price of approximately
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$1.5 million was funded through the issuance of 117,379 shares of the Company's
common stock, as determined based upon the average closing price of the
Company's common stock for the five days prior to the date of acquisition. The
acquisition has been accounted for as a purchase and, accordingly, the
operating results of TheGift.com have been included in the Company's
consolidated results of operations since the date of acquisition. The excess of
the purchase price over the fair market value of the net assets acquired,
approximating $1.7 million, is being amortized over three years.
Disposition of Floral Works, Inc.
On January 12, 2000, the Company completed the sale of its Floral Works, Inc.
("Floral Works") subsidiary to a private investment firm, 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 following unaudited pro forma combined financial information has been
prepared as if the acquisitions of GreatFood.com and TheGift.com and the
disposition of Floral Works had taken place at the beginning of fiscal year
2000. The following 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
acquisitions of GreatFood.com and TheGift.com and the disposition of Floral
Works taken place at the beginning of the periods presented.
Three Months Ended
---------------------------------------
October 1, September 26,
2000 1999
---------------------------------------
(in thousands, except per share date)
<TABLE>
<CAPTION>
<S> <C> <C>
Net revenues (*) $72,516 $54,746
Loss from operations (24,165) (23,282)
Net loss (22,501) (21,272)
Net loss per common share $(0.35) $(0.39)
</TABLE>
(*) Pre-acquisition net revenues for GreatFood.com and TheGift.com were not
material to the Company's results of operations.
Acquisition of Minority Interest in 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
shareholders 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.
Note 3 - Redeployment Charge
In June 2000, in connection with management's plan to reduce costs and improve
operating efficiencies, the Company recorded a redeployment charge of
approximately $2.1 million. The principal actions of the charge relate to the
Company's plan to close certain retail stores in connection with its strategic
redeployment of its retail network as direct fulfillment centers and the
relocation of certain customer service centers, enabling the Company to meet
increasing call volume requirements while reducing costs per call. The
redeployment will be completed in phases during fiscal year 2001. Although the
Company completed the closure of its Marietta, Georgia service center during the
month of October 2000, in preparation for the November 2000 opening of its new
service center in Ardmore, Oklahoma, the Company had not yet incurred any
significant redeployment costs during the three months ended October 1, 2000.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
October 1, July 2,
2000 2000
----------------------------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Commercial notes and
revolving credit lines $14,142 $6,431
Seller financed acquisition
obligations 278 295
Obligations under capital
leases 4,150 4,554
----------------------------
18,570 11,280
Less current maturities of
long-term debt and
obligations under
capital leases 7,654 1,839
----------------------------
$10,916 $9,441
============================
</TABLE>
Note 5 - Stockholders' Equity
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 increased
the number of authorized shares of preferred stock to 10,000,000 and provided
for a ten-for-one split of the outstanding shares of common stock. 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 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 $11.2 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 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 exceptions, and at the option of the holder.
Note 6 - Net Loss Per Common Share
Net loss per share is computed using the weighted-average number of common
shares outstanding. Shares associated with stock options and warrants, prior to
exercise, 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 its IPO, and are included in the calculation of
weighted-average shares as of that date.
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7 - Commitments and Contingencies
Online Marketing Agreements
On September 1, 2000, the Company entered into a new five-year $22.1 million
interactive marketing agreement with America Online, Inc. ("AOL") that
effectively extends and enhances the terms of the July 1, 1999 agreement with
AOL for an additional two years, through August 2005. Under the terms of the new
agreement, the Company will continue as the exclusive marketer of fresh-cut
flowers across six AOL properties including AOL, AOL.com, CompuServe, Netscape
Netcenter, Digital City and ICQ and receive increased promotions across several
AOL properties. As a result of the termination of the previous agreement, the
Company recorded a one-time charge of approximately $7.3 million during the
three months ended October 1, 2000 to write-off amounts previously owed, paid
and unamortized under the old 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 consolidated financial position,
results of operations or liquidity.
<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, including those 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 multi-channel source of gift products,
offering an extensive array of fresh-cut flowers, plants, gift baskets, gourmet
foods, home decor, garden merchandise and other unique products. The Company's
product offering reflects a carefully selected assortment of high quality
merchandise chosen for its unique "thoughtful gifting" qualities which
accommodate customer needs in celebrating a special occasion or conveying a
personal sentiment. Many products are available for same-day or overnight
delivery and all come with the Company's 100% satisfaction guarantee. With one
of the most recognized brands in retailing and a history of successfully
integrating technologies and business innovations, the Company has evolved into
a "next age" retailer providing convenient, multi-channel access for customers
via the Internet, telephone, catalogs and retail stores.
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. However, the Company expects to achieve positive Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") for the fourth quarter
of fiscal 2001 and for the fiscal year ending June 30, 2002. No assurances can
be made that positive EBITDA can be achieved on this schedule or at all. In
order to achieve and maintain positive EBITDA, and/or profitability, the Company
will need to generate revenues significantly above historical levels. The
Company's prospects for achieving positive EBITDA, and/or profitability must be
considered in light of the risks, uncertainties, expenses, and difficulties
encountered by companies in the rapidly evolving market of online commerce
including those described under the caption "Additional Risk Factors that May
Affect Future Results" and elsewhere in this Quarterly Report.
Results of Operations
Net Revenues
Three Months Ended
---------------------------
October 1, September 26, % Change
2000 1999
------------ ------------- ----------
(in thousands)
<TABLE>
<CAPTION>
Net revenues:
<S> <C> <C> <C>
Telephonic $41,292 $37,220 10.9%
Online 25,422 11,716 117.0%
Retail/fulfillment 5,802 8,594 (32.5%)
--------- --------- ---------
Total net revenues $72,516 $57,530 26.0%
</TABLE>
Net revenues consist primarily of the selling price of merchandise and service
and shipping charges, net of discounts, returns and credits. Growth in both
telephonic and online revenues (together, referred to as the Company's "virtual
sales channels") in comparison to prior year, was primarily attributable to
increased order volume and average order value, as a result of more efficient
marketing efforts, strong brand name recognition and the Company's continued
expansion into non-floral products, including a broad range of items such as
plants, candies and gourmet foods, home and garden merchandise and other unique
gifts.
During the three months ended October 1, 2000, the Company fulfilled a total of
1,062,000 orders through its virtual sales channels, an increase of 33.9% in
comparison to the 793,000 virtual orders fulfilled during the same period of the
prior year. The Company's average virtual sales channel order increased to
$62.82 during the three months ended October 1, 2000 from $61.70 during the
prior year. Orders derived from the Company's online sales channel increased
109.0%, to 476,000 during the three months ended October 1, 2000 as compared to
228,000 during the same period of the prior year. In addition, the continued
online revenue growth has been driven by increased traffic coming directly to
the Company's URL (Universal Resource Locator), which accounted for 73.0% of
total online orders during the three months ended October 1, 2000, compared to
59.0% during the same period of the prior year. Complementing the increase in
online volume, orders derived from the Company's telephonic sales channel
continued to increase, further demonstrating the benefit of offering our
customers multiple channel access to our products and services. Non-floral gift
products accounted for 28.0% of total virtual net revenues during the three
months ended October 1, 2000, compared to 21.0% during the same period of the
prior year. Revenues derived from the Company's GreatFood.com and TheGift.com
subsidiaries, which is included in the Company's results of operations since
their acquisitions in November 1999, was not material in relation to
consolidated revenue for the three months ended October 1, 2000.
The decrease in retail/fulfillment revenues in comparison to the same period of
the prior year was due to a $3.1 million reduction in floral wholesale net
revenues as a result of the Company's disposition of its Floral Works subsidiary
in January 2000, partially offset by an increase in same store retail revenues
from its owned retail stores. The Company does not expect to materially increase
the number of owned retail stores in the foreseeable future.
Gross Profit
Three Months Ended
--------------------------
October 1, September 26, % Change
2000 1999
---------- ------------- ---------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Gross profit $27,425 $21,003 30.6%
Gross margin % 37.8% 36.5%
</TABLE>
Gross profit consists primarily of net revenues less cost of revenues, which
consists primarily of florist fulfillment costs (fees paid to wire services that
serve as clearinghouses for floral orders, net of rebates), the cost of floral
and non-floral merchandise sold from inventory or through third parties, and the
associated costs of inbound freight and outbound shipping. Additionally, cost of
revenues includes labor and facility costs related to direct-to-consumer
operations and to properties that are sublet to the Company's franchisees. Gross
profit increased during the three months ended October 1, 2000 in comparison to
the prior year, primarily as a result of increased sales volume. Gross margin
percentage increased in comparison to the prior year primarily due to increased
online service and shipping charges, aligning them with industry norms, and the
growth in non-floral product sales, which generate a higher gross margin. In
addition, gross margin percentage was further increased by a lower credit and
replacement rate on floral orders. The lower credit and replacement rate
resulted from the implementation of stricter quality control standards, which
have the benefit of reducing costs and improving customer satisfaction levels.
The increase in gross margin was partially offset by the aforementioned increase
in the average merchandise sales price on florist fulfilled orders which, while
generating higher absolute gross profit dollars, resulted in a lower gross
margin percentage because the Company's fixed service charge is spread over a
higher sales price.
Marketing and Sales Expense
Three Months Ended
-----------------------------
October 1, September 26, % Change
2000 1999
------------ ------------- ----------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Marketing and sales $34,528 $25,817 33.7%
Percentage of net revenues 47.6% 44.9%
</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 stores,
customer service center and fulfillment center operations and the operating
expenses of the Company's departments engaged in marketing, selling and
merchandising activities. The increase in marketing and sales expense as
compared to the same period of the prior year was primarily attributable to a
non-recurring charge of $7.3 million ($0.11 per diluted share), associated with
the termination of an interactive marketing agreement with one of the Company's
portal partners. The Company subsequently entered into a new, enhanced
five-year, $22.1 million agreement with the same portal partner, thereby
reducing the Company's continuing annualized expense with such partner by $5.6
million. The balance of the increase in marketing and sales expense over the
prior year resulted primarily from volume driven order fulfillment and customer
service expenses. However, volume related efficiencies and cost-effective
advertising, exclusive of the aforementioned non-recurring charge, reduced
marketing and sales expense to 37.6% of net revenues during the three months
ended October 1, 2000 compared to 44.9% during the same period of the prior
year.
In order to continue to execute its business plan, in future periods the Company
expects to continue to invest significantly in its marketing and sales efforts
to continue to acquire new customers, while also leveraging its already
significant customer base through cost-effective customer retention initiatives.
Such spending will be within the context of the Company's overall marketing plan
which is continually evaluated and revised to reflect the results of the
Company's market research, which seeks to determine the most cost-efficient use
of the Company's marketing dollars. Such evaluation includes the ongoing review
of the Company's strategic relationships with its Internet portal partners to
ensure that such relationships continue to generate cost-effective incremental
volume.
Technology and Development Expense
Three Months Ended
------------------------------
October 1, September 26,
2000 1999 % Change
-------------- -------------- ---------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Technology and development $4,626 $4,069 13.7%
Percentage of net revenues 6.4% 7.1%
</TABLE>
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web site, including design, content 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 was primarily attributable to development
costs incurred to enhance the content and functionality of the Company's Web
site, which, in preparation for the upcoming holidays, is scheduled for relaunch
in November 2000, as well as volume related increases in web hosting fees
charged by the Company's third-party hosting facility and enhancements to the
Company's fulfillment and database systems. The Company is currently in the
process of bringing its web hosting capabilities in-house to reduce costs,
improve operating flexibility and provide additional back-up and system
redundancy. During the three months ended October 1, 2000, the Company expended
$6.8 million on technology and development, of which $2.1 million has been
capitalized. 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 decrease as a
percentage of net revenues in comparison to prior years, particularly in the
areas of Web site development and database management.
General and Administrative Expense
Three Months Ended
------------------------------
October 1, September 26,
2000 1999 % Change
------------ ------------- ---------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
General and administrative $7,395 $7,927 (6.7%)
Percentage of net revenues 10.2% 13.8%
</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 decrease in general and administrative
expense over prior year was attributable to a $1.5 million charge recorded in
August 1999 to account for the increase in the management put liability
associated with the Company's acquisition of the remaining minority
shareholders' interest in Plow & Hearth. Exclusive of such prior year charge,
general and administrative expense increased over the prior year due to
increased headcount and associated costs, and incremental administrative costs
associated with operating as a public company. The Company believes that its
general and administrative infrastructure is sufficient to support existing
requirements and, as such, while increasing in absolute dollars, the Company
expects general and administrative expenses to decline, on a seasonally adjusted
basis, as a percentage of net revenues.
Depreciation and Amortization Expense
Three Months Ended
------------------------------
October 1, September 26,
2000 1999 % Change
------------ ------------- ---------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Depreciation and amortization $5,041 $2,293 119.8%
Percentage of net revenues 7.0% 4.0%
</TABLE>
The increase in depreciation and amortization expense resulted from additional
capital expenditures in short-lived information systems hardware and software,
as well as amortization of goodwill resulting from the Company's November 1999
acquisitions of GreatFood.com and TheGift.com.
Other Income (Expense)
Three Months Ended
------------------------------
October 1, September 26,
2000 1999 % Change
------------ ------------- ---------
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest income $1,898 $2027 (6.4%)
Interest expense (322) (497) (35.2%)
Other, net 88 50 76.0%
</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
mortgage notes, capital leases, credit facility, and promissory notes issued to
sellers in certain acquisitions. 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 ($2.5 million) associated with the Company's franchise
operations were repaid in November 1999.
Income Taxes
Based on the utilization of loss carrybacks available during fiscal 2000, the
Company recorded a tax benefit of $0.4 million during the three months ended
September 26, 1999. All available loss carrybacks were fully utilized during
fiscal 2000, as such, no similar benefit was recorded during the three months
ended October 1, 2000. The Company provided a full valuation allowance on that
portion of its deferred tax assets, 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 October 1, 2000, the Company had working capital of $65.2 million, including
cash and equivalents of $97.5 million, compared to working capital of $82.1
million, including cash and equivalents of $111.6 million at July 2, 2000.
Net cash used in operating activities of $18.3 million for the three months
ended October 1, 2000 was primarily attributable to net losses, reduced by
non-cash charges of depreciation and amortization, and increased by working
capital changes comprised primarily of an increase in inventory associated with
the Company's expansion into non-floral product lines and in anticipation of
upcoming Holiday volume during the Company's fiscal second quarter.
Net cash used in investing activities was $3.1 million for the three months
ended October 1, 2000, and consisted primarily of capital expenditures for
software and computer hardware, including the development of an advanced,
Company-operated hosting facility which is expected to be operational during the
Company's fiscal second quarter, and the implementation of a new state of the
art inventory warehouse management system at the Company's Plow and Hearth
fulfillment center.
Net cash provided by financing activities was $7.3 million for the three months
ended October 1, 2000, resulting primarily from the net proceeds from short term
borrowings under the Company's credit line to finance inventory purchases for
the upcoming holiday selling season and long-term bank borrowings to finance the
purchase of the aforementioned inventory warehouse management system, offset by
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. These investments include continued 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 specialty gift and
gourmet items, and the further development of its Web site operating
infrastructure. 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 increase its
lines of credit. 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.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenues in financial statements. Adoption of the provisions of
SAB 101 did not have a material impact on the Company's revenue recognition
policies.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, which
is required to be adopted in years beginning after June 15, 2000. The Company's
adoption of the new Statement did not impact earnings or the consolidated
financial position of the Company.
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 maintain certain of its 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. The Company may also be required to incur additional unanticipated
expenditures in order to execute its business plan. However, the Company expects
to achieve positive EBITDA for the fourth quarter of fiscal 2001 and for the
fiscal year ending June 30, 2002. No assurances can be made that positive EBITDA
can be achieved on this schedule or at all. In order to achieve and maintain
positive EBITDA and/or profitability, the Company will need to generate revenues
significantly above historical levels and/or reduce operating expenses.
Management cannot assure you that the Company will generate revenues or reduce
operating expenses sufficiently to achieve positive EBITDA and/or profitability.
Even if the Company does achieve positive EBITDA and/or profitability, it may
not sustain or increase positive EBITDA and/or 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 marketing programs;
o the timing of the introduction of new products and services;
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 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 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 floral related gift products.
The Company has expanded its product lines in the plant, gift baskets, gourmet
treats, unique or specialty gifts and home and garden categories, and expects to
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 maintain 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.
If the Company does not cost effectively market its products, its advertising
expenses will increase and reduce its income.
The Company must advertise its products effectively and cost efficiently in
order to increase sales and maintain its expenses. If the Company does not
advertise effectively, it will likely be necessary to increase marketing
expenditures to maintain its revenue growth. As a result, the Company's customer
acquisition costs will increase, leading to an increase in expenses and a
decrease in income.
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 while a greater percentage of its online
customers will come to its Web site directly, it will also rely on third party
Web sites with which the Company has strategic relationships, including AOL,
Yahoo!, NBCi.com, and the Microsoft Network for traffic. 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. There continues to be strong
competition to establish relationships with leading Internet companies, and the
Company may not successfully enter into additional relationships, or renew
existing ones beyond their current terms. 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 independent florists or the Company's owned or franchised stores.
Except for the 40 Company-owned stores as of October 1, 2000, 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, the Company 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.
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, plant, gift basket, gourmet treat, unique gift 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 these 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 plant gift basket, gourmet treat, unique gift 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 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:
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;
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 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
default under the primary lease. Furthermore, as a franchiser, 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 into
its operations, its business and operations could suffer, management may be
distracted and its expenses may increase. Moreover, the expected benefits from
any acquisition may not be realized, resulting in lost opportunities and loss of
capital.
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:
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. Additionally, computer "viruses" may cause the
Company's systems to incur delays or experience other service interruptions.
Such interruptions may materially impact the Company's ability to operate its
business. If a computer virus affecting the Internet in general is highly
publicized or particularly damaging, the Company's customers may not use the
Internet or may be prevented from using the Internet, which would have an
adverse effect on its revenues. 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 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, AT&T and MCI 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 its
Web site and on AT&T and MCI to provide telephone services to its customer
service centers. If Fry Multimedia or AT&T and MCI 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 host its Web site or maintain 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 telephone service without these or other third parties. The Company
is currently in the process of bringing its web hosting capabilities in-house to
reduce costs, improve operating flexibility and provide additional back-up and
system redundancy. Failure to maintain these relationships or replace them on
financially attractive terms 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 are 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, whereby FTD
has stated that it is considering reducing the Company's 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 President, Christopher G. McCann. In addition,
the Company has recently hired or promoted several new members to its senior
management team to help manage its growth and it may 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 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 Arizona, Connecticut, Florida, Georgia, New York, Texas 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 financing 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
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
were attributable to underwriting discounts.
As of October 1, 2000, the Company had fully utilized the net proceeds
of its IPO for the following purposes:
o Repayment of amounts previously outstanding under a bank term loan
($18.0 million), revolving line of credit ($8.2 million), seller
financed acquisition obligations ($2.5 million) and commercial notes
and capital leases ($2.3 million);
o Redemption of all common stock of the Company's Plow & Hearth
subsidiary held by minority shareholders ($7.9 million, net of
option exercises by Plow & Hearth option holders);
o Acquisition of GreatFood.com and other investments ($18.6 million,
net of cash acquired);
o Capital expenditures ($24.3 million) and;
o Funding of operating activities ($33.0 million), including marketing
and other activities associated with the Company's expansion into
non-floral product lines.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.4 1-800-FLOWERS.COM, INC. 2001 Employee Stock Purchase Plan.
27.1 Financial Data Schedule for the three months ended October
1, 2000.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on September 21, 2000
related to the termination and subsequent replacement of its
interactive marketing agreement with America Online, Inc.
<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 15, 2000 /s/ James F. McCann
--------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 15, 2000 /s/ William E. Shea
------------------------ ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
