<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 MARCH 26, 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
-------- ----------
(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:
26,309,268
----------
(Number of shares of Class A common stock outstanding as of May 5, 2000)
37,861,645
----------
(Number of shares of Class B common stock outstanding as of May 5, 2000)
<PAGE>
1-800-FLOWERS.COM, INC.
INDEX
PAGE
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets-March 26, 2000 and June 27,
1999 3
Consolidated Statements of Operations-Three and Nine
Months Ended March 26, 2000 and March 28, 1999 4
Consolidated Statements of Cash Flows-Nine Months Ended
March 26, 2000 and March 28, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitive and Qualitative Disclosures About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<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>
MARCH 26, JUNE 27,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 128,589 $ 99,183
Receivables, net 9,983 9,284
Inventories 14,025 7,496
Prepaid and other 1,624 1,307
Recoverable income taxes 3,674 2,431
Deferred tax assets 611 1,504
--------- ---------
Total current assets 158,506 121,205
Property, plant and equipment at cost, net 38,678 27,525
Investments 1,937 984
Capitalized investment in leases 1,147 1,452
Notes receivable, net 426 722
Goodwill, net of accumulated amortization 36,773 21,362
Investment in licenses, net of accumulated amortization 3,186 3,428
Other 7,808 5,677
--------- ---------
Total assets $ 248,461 $ 182,355
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,559 $ 23,396
Accrued expenses 10,132 5,543
Current maturities of long-term debt and obligations under
capital leases 4,380 6,647
--------- ---------
Total current liabilities 63,071 35,586
Long-term debt and obligations under capital leases 8,869 27,457
Deferred rent and other liabilities 4,717 4,009
Management put liability -- 6,300
--------- ---------
Total liabilities 76,657 73,352
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, shares authorized-10,000,000,
shares issued and outstanding-none at March 26, 2000 and
1,127,546 at June 27, 1999, stated at liquidation value -- 117,57
Class A common stock, $.01 par value, shares
authorized-200,000,000, shares issued-
26,318,398 at March 26, 2000 and 4,100,012 at June 27, 1999 263 41
Class B common stock, $.01 par value, shares
authorized-200,000,000, shares issued-
43,184,065 at March 26, 2000 and 45,579,005 at June 27, 1999 432 456
Additional paid-in capital 239,530 6,038
Accumulated deficit (64,447) (10,527)
Deferred compensation (866) (1,470)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
--------- ---------
Total stockholders' equity 171,804 109,003
--------- ---------
Total liabilities and stockholders' equity $ 248,461 $ 182,355
========= =========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
MARCH 26, MARCH 28, MARCH 26, MARCH 28,
2000 1999 2000 1999
----------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues $ 85,045 $ 67,290 $ 261,962 $ 203,668
Cost of revenues 54,143 42,098 161,886 123,738
--------- --------- --------- ---------
Gross profit 30,902 25,192 100,076 79,930
Operating expenses:
Marketing and sales 36,789 19,684 115,987 67,204
Technology and development 4,097 2,273 11,999 5,207
General and administrative 6,773 4,907 21,949 10,528
Depreciation and amortization 4,487 2,157 10,202 6,043
--------- --------- --------- ---------
Total operating expenses 52,146 29,021 160,137 88,982
--------- --------- --------- ---------
Operating loss (21,244) (3,829) (60,061) (9,052)
Other income (expense):
Interest income 1,894 298 6,153 702
Interest expense (294) (660) (1,116) (1,863)
Other, net 107 47 194 32
--------- --------- --------- ---------
Total other income (expense) 1,707 (315) 5,231 (1,129)
--------- --------- --------- ---------
Loss before income taxes and minority interests (19,537) (4,144) (54,830) (10,181)
Benefit from income taxes 268 1,178 867 2,926
--------- --------- --------- ---------
Loss before minority interests (19,269) (2,966) (53,963) (7,255)
Minority interests in operations of consolidated
subsidiaries 4 (63) 43 (99)
--------- --------- --------- ---------
Net loss (19,265) (3,029) (53,920) (7,354)
Redeemable Class C common stock dividends -- (443) -- (1,328)
--------- --------- --------- ---------
Net loss applicable to common stockholders $ (19,265) $ (3,472) $ (53,920) $ (8,682)
========= ========= ========= =========
Basic and diluted net loss per common share applicable
to common stockholders $ (0.31) $ (0.08) $ (0.90) $ (0.20)
========= ========= ========= =========
Shares used in the calculation of basic and diluted
net loss per common share applicable to common
stockholders 62,667 44,000 59,711 44,000
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------
MARCH 26, MARCH 28,
2000 1999
------------ ------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss $ (53,920) $ (7,354)
Reconciliation of net loss to net cash used in
operations:
Depreciation and amortization 10,203 6,043
Deferred income taxes 893 (633)
Management put liability 1,451 (1,631)
Bad debt expense 607 231
Minority interests (43) 99
Amortization of deferred compensation 289 105
Loss on disposal of equipment and other 118 151
Changes in operating assets and liabilities:
Receivables (2,824) (2,765)
Inventories (7,029) (3,089)
Prepaid and other 441 (292)
Recoverable income taxes (1,290) (4,062)
Other assets (4,118) (4,913)
Accounts payable 24,917 6,247
Accrued expenses 4,520 1,220
Other liabilities 858 941
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (24,927) (9,702)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (25,515) --
Disposition of subsidiary 2,488 --
Capital expenditures, net of noncash expenditures (16,760) (7,254)
Purchase of investments (1,000) --
Sale of investments -- 5,428
Notes receivable, net 296 122
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (40,491) (1,704)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
issuance costs 115,840 --
Proceeds from bank borrowings 20,340 32,402
Payments of capital lease obligations (1,488) (1,062)
Repayment of notes payable and bank borrowings (39,868) (26,175)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 94,824 5,165
--------- ---------
Net change in cash and equivalents 29,406 (6,241)
Cash and equivalents:
Beginning of period 99,183 8,873
--------- ---------
End of period $ 128,589 $ 2,632
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States 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
accounting principles generally accepted in the United States 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 nine
months ended March 26, 2000 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 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 and nine months ended March 26, 2000 and March 28, 1999,
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
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
("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 exceptions, and at the option of the
holder. During the three and nine months ended March 26, 2000, holders of
509,040 and 2,394,940 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.
<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.
EXERCISE OF CLASS A COMMON STOCK WARRANTS
On February 22, 2000, the Company issued 2,370,607 shares of Class A
common stock, upon the exercise, for a nominal price per share, of warrants
issued to a venture capital firm pursuant to a 1995 investment agreement.
NOTE 3 - BUSINESS DEVELOPMENTS
SALE 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, 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.
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 $18.7 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 has
been prepared assuming the sale of Floral Works and the acquisition of
GreatFood.com had taken place at the beginning of the respective periods
presented. 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 sale of Floral
Works and the acquisition of GreatFood.com taken place at the beginning of the
specified periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
MARCH 26, MARCH 28,
2000 1999
------------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues $ 255,278 $ 196,181
Loss from operations (67,893) (11,300)
Net loss applicable to common stockholders (61,443) (10,648)
Net loss per share applicable to common
stockholders $ (1.03) $ (0.24)
</TABLE>
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
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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:
MARCH 26, JUNE 27,
2000 1999
--------- --------
(IN THOUSANDS)
Bank term loan and revolving credit line $ -- $21,000
Commercial notes and revolving credit lines 8,744 4,675
Seller financed acquisition obligations 304 3,351
Obligations under capital leases 4,201 5,078
------- -------
13,249 34,104
Less current maturities of long-term debt and
obligations under capital leases 4,380 6,647
------- -------
$ 8,869 $27,457
======= =======
NOTE 5 - INCOME TAXES
The Company incurred a loss that provided a tax benefit of $0.3 million
and $0.9 million for the three and nine months ended March 26, 2000,
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,
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 the IPO and are included in the calculation of
weighted-average shares as of that date. During the three and nine months ended
March 28, 1999, 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 nine months ended March 26, 2000.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
<PAGE>
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 March 26, 2000, the
Company had sold its products to in excess of 8.5 million customers, of which
1.8 million had transacted business with us online.
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.
THE PLOW & HEARTH, INC.
<PAGE>
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 net revenues or
operating income for the fiscal year ending July 2, 2000.
RESULTS OF OPERATIONS
NET REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Telephonic $ 47,249 $ 43,903 7.6% $162,490 $146,245 11.1%
Online 30,051 13,219 127.3% 71,525 30,248 136.5%
Retail/fulfillment 7,745 10,168 -23.8% 27,947 27,175 2.8%
-------- -------- ------ -------- -------- ------
$ 85,045 $ 67,290 26.4% $261,962 $203,668 28.6%
</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 nine months ended March
26, 2000, in comparison to prior year, was due to increased and more
efficient 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 20.9% and 15.5% of
total merchandise sold during the three months ended March 26, 2000 and March
28, 1999, respectively. During the three months ended March 26, 2000, the
Company added 628,000 new customers (347,000 telephonically and 281,000
online), bringing its cumulative customer accounts to over 8.5 million, of
which 1.8 million have transacted business either through the
1-800-FLOWERS.COM Web site or one of its affiliated portal partners. Of the
1.1 million customers who placed orders with the Company during the three
months ended March 26, 2000, approximately 40% were repeat purchases from
existing customers. In addition, online revenue growth continues to be driven
by increased traffic coming directly to the Company's URL (Universal Resource
Locator), which accounted for 71% of total online orders during the three
months ended March 26, 2000, compared to 44% during the same period of the
prior year. The growth of telephonic revenues demonstrates the customer
benefit of multiple channel access to our products and services. Revenue
derived from the Company's GreatFood.com 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 and nine
month periods ended March 26, 2000.
The decrease in retail/fulfillment revenues in comparison to prior year
periods was due to a $3.1 million reduction in floral wholesale net revenue as a
result of the Company's divestiture of Floral Works in January 2000, offset by
an increase in retail net revenue due to growth in the number of owned retail
stores from 27 at June 28, 1999 to 39 at March 26, 2000, and an increase in same
store sales. The Company does not expect to materially increase the number of
owned retail stores in the foreseeable future.
<PAGE>
GROSS PROFIT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross profit $ 30,902 $ 25,192 22.7% $ 100,076 $ 79,930 25.2%
Gross margin % 36.3% 37.4% 38.2% 39.2%
</TABLE>
Gross profit consists primarily of net revenues less cost of revenues
which is comprised 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
increased during the three and nine months ended March 26, 2000, in
comparison to prior year, as a result of increased sales volume. Gross margin
percentage declined in comparison to the prior year due to certain
introductory product pricing, including promotions related to the successful
launch of the Company's exclusive line of "Fleur de Chocolate" branded
Belgian candies, a higher credit and replacement rate on floral orders during
the Valentine's day holiday to increase customer satisfaction and loyalty,
and an increase in the average merchandise sales price on florist fulfilled
orders which, while generating higher absolute gross profit dollars, results
in a lower gross margin percentage since the Company's fixed service charge
is spread over a higher sales price.
MARKETING AND SALES EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales $36,789 $19,684 86.9% $115,987 $67,204 72.6%
Percentage of sales 43.3% 29.3% 44.3% 33.0%
</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
higher discretionary spending in traditional media advertising, relationship
and direct marketing; enhancements to the Company's marketing and
merchandising staff, as well as additional sales personnel in support of 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 executes its
business plan. However, the Company will continually evaluate the benefit of
its strategic relationships with its internet portal partners as well as the
effectiveness of its offline marketing efforts and will adjust its spending
accordingly.
TECHNOLOGY AND DEVELOPMENT EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Technology and development $4,097 $2,273 80.2% $11,999 $5,207 130.4%
Percentage of sales 4.8% 3.4% 4.6% 2.6%
</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 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 technology personnel.
During the nine months ended March 26, 2000, the Company expended $25.2
million on technology and development, of which $13.2 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 increase
in comparison to prior years, particularly in the areas of Web site
development and database management.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and administrative $6,773 $4,907 38.0% $21,949 $10,528 108.4%
Percentage of sales 8.0% 7.3% 8.4% 5.2%
</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, $3.1 million of the
increase during the nine months ended March 26, 2000 was attributable to the
effect of the management put liability associated with the Plow & Hearth
acquisition. During the nine months ended March 26, 2000, the Company recorded a
charge of $1.5 million to increase the liability, while during the nine months
ended March 28, 1999, the Company recorded a benefit of $1.6 million to reduce
the liability in accordance with the terms of the purchase agreement.
DEPRECIATION AND AMORTIZATION EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
March 26, March 28, March 28, March 29,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Depreciation and $4,487 $2,157 108.0% $10,202 $6,043 68.9%
amortization
Percentage of sales 5.3% 3.2% 3.9% 3.0%
</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 Nine Months Ended
--------------------------------- ---------------------------------
March 26, March 28, March 26, March 28,
2000 1999 % Change 2000 1999 % Change
----------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 1,894 $ 298 535.6% $ 6,153 $ 702 776.5%
Interest expense (294) (660) (55.5%) (1,116) (1,863) (40.1%)
Other 107 47 127.7% 194 32 506.3%
</TABLE>
<PAGE>
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 ($2.6 million)
associated with the Company's franchise operations were repaid in November
1999.
INCOME TAXES
For the three and nine months ended March 26, 2000, the Company incurred
a loss that provided a tax benefit of $0.3 million and $0.9 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 March 26, 2000, the Company had working capital of $95.4 million,
including cash and equivalents of $128.6 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 $24.9 million for the nine
months ended March 26, 2000 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 an increase in inventory associated with the Company's expansion into
non-floral product lines and in anticipation of heavier volume during the
Company's fiscal fourth quarter which historically has been its strongest
selling season.
Net cash used in investing activities was $40.5 million for the nine
months ended March 26, 2000, and consisted primarily 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 $94.8 million for the nine
months ended March 26, 2000, 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 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 obtain lines of
credit, in addition to the $4.5 million credit line currently available. 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
<PAGE>
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.
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 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. We will continue to
monitor our systems as well as those of our vendors throughout the year to
ensure that any latent Year 2000 problems that may arise are addressed promptly.
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 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:
o seasonality;
o the timing and effectiveness of our 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
<PAGE>
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 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 while a greater percentage of its online
customers will come to its Web site directly, it will not be independent 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. 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. 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 1,400 independent florists or the Company's owned or
franchised stores. Except for the 39 Company-owned stores as of March 26, 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
<PAGE>
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.
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:
o retail floral shops, some of which maintain toll-free telephone
numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are
highly competitive. Each of these categories encompasses a wide range of
products and is highly fragmented. Products in these categories may be purchased
from a number of outlets, including mass merchants, retail specialty shops,
online retailers and mail-order catalogs.
Competition is intense and the Company expects it to increase. Increased
competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
IF THE COMPANY DOES NOT ACCURATELY PREDICT CUSTOMER DEMAND FOR ITS
PRODUCTS, IT MAY LOSE CUSTOMERS OR
<PAGE>
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 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
<PAGE>
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:
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 our systems to incur delays or experience other service
interruptions. Such interruptions may materially impact our ability to operate
our business. If a computer virus affecting the Internet in general is highly
publicized or particularly damaging, our customers may not use the Internet
or may be prevented from using the Internet, which would have an adverse
effect on our 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
<PAGE>
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 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 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 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 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 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.
<PAGE>
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
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
<PAGE>
INTERNET OPERATIONS. The price at which the Company's Class A common stock will
trade may be highly volatile and may fluctuate substantially. The stock market
has from time to time experienced significant price and volume fluctuations that
have affected the market prices of securities, particularly securities of
companies with Internet operations. As a result, investors may experience a
material decline in the market price of the Company's Class A common stock,
regardless of the Company's operating performance. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
The Company may become involved in this type of litigation in the future.
Litigation of this type is often expensive and diverts management's attention
and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, certain of its long-term debt
arrangements. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings
and claims arising in the ordinary course of business. The Company is
not aware of any such legal proceedings or claims that it believes will
have, individually or in the aggregate, a material adverse effect on its
business, consolidated financial position, results of operations or
liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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:
o 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);
o 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);
o Acquisition of GreatFood.com ($17.6 million, net of cash acquired);
o Capital expenditures ($16.0 million);
o Funding of operating activities ($22.8 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 March 26, 2000, the Company had not made any specific
expenditure plans with respect to the remaining proceeds of this
offering. While the Company cannot specify with certainty the particular
uses for such proceeds, the Company currently intends to use the
remaining proceeds over time:
o to fund its marketing activities;
o to enhance its infrastructure;
o to enter into strategic relationships with Internet companies;
o to expand its product offerings;
o to expand its current business through strategic acquisitions, and
o for other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<PAGE>
Not applicable.
<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 nine months ended March 26,
2000.
(b) Reports on Form 8-K
Not applicable.
<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: May 10, 2000 /s/ James F. McCann
- ---------------------- ------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 10, 2000 /s/ John W. Smolak
- ---------------------- -------------------------------------
John W. Smolak
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
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