SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number: 0-26265
-------
Garden.com, Inc.
-------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2765381
- --------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3301 Steck Avenue, Austin, TX 78757
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 512-532-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 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
---- ----
On March 31, 2000, there were outstanding 17,619,618 shares of the Registrant's
$.01 par value common stock.
<PAGE>
GARDEN.COM, INC.
FORM 10-Q
MARCH 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheets as of March 31, 2000 and
June 30, 1999 3
Statements of Operations for the Quarters and Nine
Months Ended March 31, 2000 and 1999 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Garden.com, Inc.
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
---------------- ---------------
<S> <C> <C>
ASSETS: . . . . . . . . . . . . . . . . . . . . . . . . . (Unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 16,798 $ 15,340
Investments . . . . . . . . . . . . . . . . . . . . . . 15,600 3,710
Prepaid advertising . . . . . . . . . . . . . . . . . . 6,278 988
Other prepaid expenses and current assets . . . . . . . 2,523 1,086
Inventory . . . . . . . . . . . . . . . . . . . . . . . 1,026 522
---------------- ---------------
Total current assets . . . . . . . . . . . . . . . . 42,225 21,646
Property and equipment. . . . . . . . . . . . . . . . . . 7,615 3,487
Accumulated depreciation. . . . . . . . . . . . . . . . . (2,055) (828)
---------------- ---------------
Property and equipment, net . . . . . . . . . . . . . . . 5,560 2,659
Long term investments in securities . . . . . . . . . . . 6,584 -
Other assets, net . . . . . . . . . . . . . . . . . . . . 787 917
---------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 55,156 $ 25,222
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 2,060 $ 2,052
Accrued expenses and other liabilities. . . . . . . . . 3,198 956
Unearned revenue. . . . . . . . . . . . . . . . . . . . 848 188
Current portion of long-term debt . . . . . . . . . . . 40 127
---------------- ---------------
Total current liabilities. . . . . . . . . . . . . . 6,146 3,323
Long-term debt, less current portion. . . . . . . . . . . - 20
Commitments and contingencies:
Redeemable convertible preferred stock. . . . . . . . . . - 48,215
Warrants to purchase redeemable
convertible preferred stock . . . . . . . . . . . . . - 24
Stockholders' equity (deficit):
Common stock - $.01 par value; 50,000,000 shares
authorized and 17,619,618 shares issued and
outstanding on March 31, 2000; 12,000,000
shares authorized and 1,156,753 shares issued
and outstanding on June 30, 1999. . . . . . . . . . . 176 12
Additional paid-in-capital. . . . . . . . . . . . . . . 104,270 5,768
Deferred stock compensation . . . . . . . . . . . . . . (1,383) (2,305)
Accumulated deficit . . . . . . . . . . . . . . . . . . (54,053) (29,835)
---------------- ---------------
Total stockholders' equity (deficit) . . . . . . . . 49,010 (26,360)
---------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 55,156 $ 25,222
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Garden.com, Inc.
Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Quarter ended March 31, March 31,
------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Products. . . . . . . . . . . . . . . $ 2,600 $ 856 $ 7,076 $ 2,315
Advertising . . . . . . . . . . . . . 556 83 1,100 195
------------ ------------ ------------ ------------
Total revenues . . . . . . . . . . 3,156 939 8,176 2,510
COST OF REVENUES
Products. . . . . . . . . . . . . . . 2,109 763 5,766 2,019
Advertising . . . . . . . . . . . . . 90 8 156 54
------------ ------------ ------------ ------------
Total cost of revenues . . . . . . 2,199 771 5,922 2,073
GROSS PROFIT. . . . . . . . . . . . . . 957 168 2,254 437
OPERATING EXPENSES
Marketing and sales . . . . . . . . . 8,435 3,686 16,038 7,065
Content and product development . . . 1,768 928 4,824 2,167
General and administrative. . . . . . 2,002 803 4,976 1,881
Depreciation and amortization . . . . 577 142 1,388 377
Amortization of deferred
compensation. . . . . . . . . . . . 250 117 922 304
------------ ------------ ------------ ------------
Total operating expenses . . . . . 13,032 5,676 28,148 11,794
OPERATING LOSS. . . . . . . . . . . . . (12,075) (5,508) (25,894) (11,357)
Other income, net . . . . . . . . . . . 636 124 1,676 564
------------ ------------ ------------ ------------
NET LOSS. . . . . . . . . . . . . . . . $ (11,439) $ (5,384) $ (24,218) $ (10,793)
============ ============ ============ ============
Basic net loss per share. . . . . . . . $ (0.65) $ (5.00) $ (1.86) $ (10.44)
============ ============ ============ ============
Pro forma basic net loss per share. . . $ (0.65) $ (0.56) $ (1.49) $ (1.14)
============ ============ ============ ============
Shares used in computing basic net loss
per share . . . . . . . . . . . . . . . 17,610 1,076 12,988 1,034
============ ============ ============ ============
Shares used in computing pro forma
basic net loss per share. . . . . . . . 17,610 9,548 16,235 9,506
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Garden.com, Inc.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the nine months ended March 31,
2000 1999
---------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . $ (24,218) $ (10,793)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization. . . . . . . 1,388 377
Amortization of deferred compensation. . . 922 304
Changes in operating assets and liabilities:
Prepaid advertising. . . . . . . . . . . . (5,290) (425)
Other prepaid expenses and current assets. (1,437) (734)
Inventory. . . . . . . . . . . . . . . . . (504) (230)
Other non-current assets . . . . . . . . . 738 (13)
Accounts payable . . . . . . . . . . . . . 8 18
Accrued expenses and other liabilities . . 2,242 273
Unearned revenue . . . . . . . . . . . . . 660 401
---------------- -----------------
Net cash used in operating activities. . (25,491) (10,822)
Investing activities:
Purchase of other assets . . . . . . . . . (564) -
Purchase of property and equipment . . . . (4,128) (896)
Purchase of investments, net . . . . . . . (18,474) (5,002)
---------------- -----------------
Net cash used in investing activities. . (23,166) (5,898)
Financing activities:
Repayment of long-term debt. . . . . . . . (107) (138)
Exercise of stock options. . . . . . . . . 23 14
Exercise of warrants . . . . . . . . . . . 210 -
Issuance costs of Series E preferred stock - (36)
Proceeds from issuance of common stock,
net of issuance costs of $2,078. . . . . 49,989 -
---------------- -----------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . 50,115 (160)
Change in cash and cash
equivalents. . . . . . . . . . . . . . . . 1,458 (16,880)
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . 15,340 19,042
---------------- -----------------
Cash and cash equivalents, end of period . . $ 16,798 $ 2,162
================ =================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GARDEN.COM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of March 31, 2000 and 1999 have been prepared
by Garden.com, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). These statements are unaudited
and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the results for
the periods presented. The balance sheet at June 30, 1999 has been derived from
the audited financial statements at that date. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
SEC rules and regulations. Operating results for the quarter and nine months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2000. These financial statements
should be read in conjunction with the audited financial statements and the
accompanying notes included in the Company's Form S-1 Registration Statement
declared effective on September 15, 1999 (the "S-1") (SEC File No. 333-79487).
Certain prior-period balances have been reclassified to conform to the
current-period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE LOSS
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive loss and
its components in the financial statements. The Company does not have any
components of comprehensive income or loss for the quarter or nine months ended
March 31, 2000.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes
6
<PAGE>
will have, individually or in the aggregate, a material adverse effect on its
business, prospects, financial condition and operating results.
NOTE 3 - STOCKHOLDERS' EQUITY
On September 21, 1999, the Company completed its initial public offering of
4,650,000 shares of its common stock, which also included 550,000 shares sold by
the Company pursuant to the underwriters' overallotment option. Net proceeds to
the Company aggregated $49.8 million. As of the closing date of the offering,
all of the redeemable convertible preferred stock outstanding was converted into
an aggregate of 11,637,422 shares of common stock.
In August 1999, the Company's Board of Directors declared a stock split of
four shares for every five shares of Common Stock then outstanding. The stock
split was effective September 15, 1999, the date the S-1 was declared effective.
Accordingly, the accompanying financial statements and footnotes have been
restated to reflect the stock split. The par value of the shares of common
stock to be issued in connection with the stock split was credited to common
stock and a like amount charged to additional paid-in capital.
BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding. Shares associated with stock options are not
included because they are antidilutive. The shares of redeemable convertible
preferred stock automatically converted into common stock effective upon the
closing of the Company's initial public offering are included in the calculation
of weighted average number of shares as of that date.
PRO FORMA NET LOSS PER SHARE
Pro forma basic net loss per share is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's redeemable convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on July 1,
1998, or at the date of original issuance, if later.
7
<PAGE>
The following table sets forth the computation of basic net loss per share
and pro forma basic net loss per share for the periods indicated (in thousands,
except per share amount):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
------------------------ --------------------
2000 1999 2000 1999
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net loss. . . . . . . . . . . . . . . . . . . . $ (11,439) $ (5,384) $(24,218) $(10,793)
Denominator:
Weighted average shares . . . . . . . . . . . . 17,610 1,076 12,988 1,034
----------- ----------- --------- ---------
Denominator for basic calculation . . . . . . . 17,610 1,076 12,988 1,034
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock - 600 167 600
Series B Redeemable Convertible Preferred Stock - 1,144 319 1,144
Series C Redeemable Convertible Preferred Stock - 2,414 674 2,414
Series D Redeemable Convertible Preferred Stock - 4,314 1,204 4,314
Series E Redeemable Convertible Preferred Stock - - 883 -
----------- ----------- --------- ---------
Denominator for pro forma calculation . . . . . . 17,610 9,548 16,235 9,506
Net loss per share:
Basic . . . . . . . . . . . . . . . . . . . . . $ (.65) $ (5.00) $ (1.86) $ (10.44)
Pro forma . . . . . . . . . . . . . . . . . . . $ (.65) $ (.56) $ (1.49) $ (1.14)
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included elsewhere
herein. This Form 10-Q and the following "Management's Discussion and Analysis
of Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact the Company makes in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and the Company's future results of operations, financial position or
financing requirements are forward-looking statements. Forward-looking
statements reflect the Company's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from the
Company's expectations. The section entitled "Additional Factors That May
Affect Future Results" describes some, but not all, of the factors that could
cause these differences.
RESULTS OF OPERATIONS
PRODUCT REVENUES
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Product revenues $ 2,600 $ 856 204% $ 7,076 $ 2,315 206%
</TABLE>
Product revenues consist of product sales to customers and charges to
customers for shipping. Revenues for products are recognized when the products
are shipped to the customer. Revenues are recorded net of promotional discounts
and coupons. Product returns are recorded as a reduction of revenues. The
growth in product revenues in the quarter and nine months ended March 31, 2000
as compared to the quarter and nine months ended March 31, 1999 is primarily
attributable to increases in both the Company's cumulative customer base and
repeat orders taken from the Company's existing customers. The cumulative
customer base increased 205% to 183,000 as of March 31, 2000 as compared to
60,000 as of March 31, 1999. Purchases from existing customers as a percent of
total orders taken, increased to 42% and 46% for the quarter and nine months
ended March 31, 2000 as compared to 38% and 36% for the quarter and nine months
ended March 31, 1999.
9
<PAGE>
ADVERTISING REVENUES
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Advertising revenues $ 556 $ 83 570% $ 1,100 $ 195 464%
</TABLE>
Advertising revenues consist primarily of short-term advertising contracts
for either guaranteed impression levels on the Company's Web sites, or
advertising placements on the Company's Web sites or in the Company's print
publications. Those revenues are recognized ratably in the period in which the
advertisement is displayed. The Company also recognizes a small portion of its
advertising revenues through barter transactions in which advertising is
exchanged for either guaranteed impressions on the Company's Web site or by
providing Web site services. Advertising revenues increased primarily due to
the focus of an internal advertising sales department established in February
1999, and a 77% and 87% increase in page views on the garden.com Web site to
49.3 million and 100.2 million for the quarter and nine months ended March 31,
2000 as compared to 27.9 million and 53.5 million for the quarter and nine
months ended March 31, 1999.
GROSS PROFIT
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Profit $ 957 $ 168 470% $ 2,254 $ 437 416%
Gross Margin 30% 18% 28% 17%
</TABLE>
Gross profit consists of total revenues minus cost of total revenues. Cost
of total revenues consists primarily of the cost of products sold to customers,
shipping and handling costs for product sales, and advertising sales commissions
paid both to a third party advertising agency and to the Company's internal
advertising sales department. The increase in gross profit in absolute dollars
is due in part to the Company's overall increased total revenues. Gross margin
percentage increased primarily due to an increase in higher margin advertising
revenues in both the quarter and nine months ended March 31, 2000 as compared to
the same periods in 1999, product management negotiating with suppliers that
raised contractual gross margins, and the elimination of a one-time promotional
activity, which totaled $79,000 in the nine months ended March 31, 1999. The
Company typically experiences some sequential quarterly variances in gross
margins due to seasonal shifts in sales of its product mix. Additionally, the
Company may at times use discounting and other promotional activities to promote
customer purchases that would negatively affect gross margins.
10
<PAGE>
MARKETING AND SALES
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Marketing and Sales. . . . . $ 8,435 $ 3,686 129% $ 16,038 $ 7,065 127%
Percentage of total revenues 267% 393% 196% 281%
</TABLE>
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, payroll and related expenses for personnel engaged in
marketing, customer solutions, advertising sales and distribution activities and
distribution expenses. Marketing and sales expenses increased in absolute
dollars primarily due to an increase in the Company's advertising and
promotional expenditures, and increases in payroll costs associated with the
Company's marketing and customer solutions departments. Marketing and sales
expenses decreased as a percentage of revenue due to the significant increase in
total revenues. The Company intends to continue to pursue an aggressive
branding and marketing campaign and to hire additional marketing and sales
personnel and, therefore, expects marketing and sales expenses to increase
significantly in absolute dollars in future periods. In addition, if the
Company's sales volume increases in future periods, the Company will need to
continue to expand its customer solutions and distribution departments, which
will result in increased marketing and sales expenses.
CONTENT AND PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Content and product development $ 1,768 $ 928 91% $ 4,824 $ 2,167 123%
Percentage of total revenues. . 56% 99% 59% 86%
</TABLE>
Content and product development expenses consist of payroll and related
expenses for personnel involved in creating and publishing content, product
merchandising and Web site development. The increase in content and product
development expenses in absolute dollars is primarily due to an increase in
payroll and related costs used for hiring additional personnel as well as
associated costs related to enhancing the products and features, editorial
content and functionality of the Company's Web sites. Such expenses decreased
as a percentage of total revenues due to the significant increase in total
revenues. The Company believes that continued investment in content and product
development is critical to attaining its strategic objectives and, as a result,
the Company expects content and product development expenses to increase in
absolute dollars in future periods.
11
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
General and administrative . $ 2,002 $ 803 149% $ 4,976 $ 1,881 165%
Percentage of total revenues 63% 86% 61% 75%
</TABLE>
General and administrative expenses consist of payroll and related expenses
for general corporate functions, including supplier operations support, finance,
facilities expenses, and professional services expenses. The increase in
general and administrative expenses in absolute dollars is primarily due to an
increase in payroll and related costs used for hiring additional personnel as
well as associated expenses necessary to support the growth of the Company's
operations, including facilities, professional services and supplier operations
support. General and administrative expenses decreased as a percentage of
revenue due to the significant increase in total revenues. The Company expects
general and administrative expenses to increase in absolute dollars in future
periods as the Company expands its staff and incurs additional costs related to
the growth of its business.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $ 577 $ 142 306% $ 1,388 $ 377 268%
Percentage of total revenues. 18% 15% 17% 15%
</TABLE>
Depreciation of property and equipment and amortization of intangible other
assets are based on the useful lives of the assets or terms of the license
agreements, generally three to seven years, and is computed using the
straight-line method. The increase in depreciation and amortization expense is
primarily due to the increase in property and equipment to support the growth of
the Company, including computer equipment, software, database servers, and build
out of new office space. In addition, if the Company's sales volume increases
in future periods, the Company will need to continue to expand its property and
equipment, which will result in increased depreciation and amortization
expenses.
12
<PAGE>
AMORTIZATION OF DEFERRED COMPENSATION
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amortization of deferred compensation $ 250 $ 117 114% $ 922 $ 304 203%
</TABLE>
Deferred stock compensation is amortized to expense over the vesting
periods of the applicable stock options. The Company expects to record $215,000
of amortization over the remaining three months ended June 30, 2000. These
amounts represent the difference between the exercise price of stock option
grants and the deemed fair value of the Company's common stock at the time of
such grants. Amortization of deferred compensation expense for each of the next
four fiscal years is expected to be as follows:
<TABLE>
<CAPTION>
Year ended Amount in thousands
- ------------- --------------------
<S> <C>
June 30, 2001 $ 614
June 30, 2002 348
June 30, 2003 166
June 30, 2004 40
</TABLE>
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income. $ 637 $ 129 394% $ 1,683 $ 580 190%
Interest expense $ 1 $ 5 (80)% $ 7 $ 16 (56)%
</TABLE>
Interest income increased for the quarter and nine months ended March 31,
2000 due to six full months of interest income on the proceeds of the Company's
initial public offering. Interest expense continues to decline as the Company
pays down its debt.
13
<PAGE>
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. The Company has provided a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's principal source of liquidity consisted of
$16.8 million of cash and cash equivalents and $15.6 million in short term
investments compared to $15.3 million of cash and cash equivalents and $3.7
million in short term investments at June 30, 1999. Additionally, the Company
had $6.6 million of long-term investments in securities at March 31, 2000.
Net cash used in operating activities was $25.5 million and $10.8 million
for the nine months ended March 31, 2000 and 1999, respectively. Net cash used
in operating activities was primarily attributable to quarterly net losses and
increases in prepaid advertising, other prepaid expenses and current assets, and
inventories, offset by decreases in other noncurrent assets and increases in
accrued expenses and unearned revenue.
Net cash used in investing activities was $23.2 million and $5.9 million
for the nine months ended March 31, 2000 and 1999, respectively, and consisted
of purchases of investments, property and equipment and other assets. Cash
available for investment purposes increased substantially in the nine months
ended March 31, 2000 as a result of the proceeds from the issuance of common
stock in the Company's initial public offering.
Net cash provided by financing activities of $50.1 million for the nine
months ended March 31, 2000 resulted from net proceeds from the issuance of
common stock in the Company's initial public offering. Net cash used in
financing activities of $160,000 for the nine months ended March 31, 1999
resulted from payments on the Company's long term debt and issuance costs of
Series E preferred stock offset by the proceeds from stock option exercises.
The Company believes that its current cash and marketable securities and
investments balances will be sufficient to meet its anticipated cash needs
through the remainder of the fiscal year ended June 30, 2000. The Company
expects to experience operating losses and negative cash flow for the
foreseeable future and, as a result, the Company may be forced to rely on
external financing to meet future capital requirements. Any projections of
future cash needs and cash flows are subject to substantial uncertainty. The
Company's capital requirements depend on several factors, including:
- the rate of market acceptance of the Company's online solution;
- the Company's ability to expand its customer base and increase
revenues;
- the Company's level of expenditures for marketing and sales;
- purchases of equipment and software;
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- the cost of Web site upgrades;
- possible acquisitions of or investments in complementary businesses,
products, services and technologies; and
- other factors, including unforeseen factors and developments.
If the Company's capital requirements vary materially from those currently
planned, the Company may require additional financing sooner than anticipated.
If current cash, marketable securities 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 a
line of credit. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders and debt
financing, if available, may involve restrictive covenants which could restrict
the Company's operations or finances. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
If the Company cannot raise funds, if needed, on acceptable terms, the Company
may not be able to continue its operations, develop or enhance its Web site,
grow market share, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could negatively
impact the Company's business, operating results and financial condition.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this report and in the Company's Registration
Statement on Form S-1, the following additional factors may affect the Company's
future results.
RISKS RELATED TO THE COMPANY'S BUSINESS
THE COMPANY HAS A HISTORY OF SIGNIFICANT LOSSES AND EXPECTS TO INCUR SUBSTANTIAL
NET LOSSES IN THE FUTURE. IF THE COMPANY DOES NOT ACHIEVE PROFITABILITY, ITS
FINANCIAL CONDITION AND ITS STOCK PRICE COULD SUFFER.
The Company has incurred net losses since inception, including net losses
of $19.1 million in fiscal 1999 and $24.2 million in the first nine months of
fiscal 2000. As of March 31, 2000, the Company has incurred cumulative net
losses of $51.1 million. The Company expects to experience operating losses and
negative cash flow for the foreseeable future. The Company anticipates its
losses will increase significantly from current levels because future revenues
may not increase sufficiently to offset additional costs and expenses related to
brand development, marketing and other promotional activities, content
development and technology and infrastructure development. The Company does not
have sufficient cash to indefinitely sustain these operating losses.
Further, the Company will need to generate significant revenues to achieve
and maintain profitability. Although the Company's revenues have grown
significantly in recent quarters, the Company cannot be certain that it can
sustain these growth rates or that it will achieve sufficient revenues for
profitability. Cash from revenues must increase significantly for the Company
to fund anticipated development and marketing costs internally. If the Company
does achieve profitability, it cannot be certain that it can sustain or increase
profitability on a quarterly or annual basis in the future.
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The Company has been unable to fund its operations with the cash generated
from its business. If the Company does not generate cash sufficient to fund its
operations, it may need additional financing to continue its growth or its
growth may be limited. To date, the Company has funded its operations from the
sale of equity securities and has not generated sufficient cash from operations.
If the Company's cash flows are insufficient to fund these costs, it may need to
fund its growth through additional debt or equity financings or reduce costs.
Further, the Company may not be able to obtain financing on satisfactory terms.
The Company's inability to finance its growth, either internally or externally,
may limit its growth potential and its ability to execute its business
strategy.
THE COMPANY HAS A LIMITED OPERATING HISTORY AND EXPECTS TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY FACED BY EARLY STAGE COMPANIES IN RAPIDLY EVOLVING
MARKETS. THIS SUBJECTS THE COMPANY'S STOCKHOLDERS TO ADDITIONAL RISKS THAT THE
COMPANY'S MARKET MAY NOT DEVELOP AS ANTICIPATED OR THAT THE COMPANY MAY NOT
SUCCESSFULLY EXECUTE ITS BUSINESS STRATEGY.
The Company has a limited operating history on which to base an evaluation
of its business and prospects. The Company was formed in December 1995, and it
initiated its online operations and first recognized revenues in March 1996.
Accordingly, the Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets such as online commerce. Because of the Company's
limited operating history, it is difficult to assess whether the Company will
succeed at executing on its business strategy, managing growth and addressing
the market risks that it faces in a rapidly developing market.
The online market for gardening and gardening-related products is new and
rapidly developing. As is typical for any new, rapidly developing market,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. It is also difficult to
predict the online gardening market's future growth rate. The online gardening
market may fail to develop, develop more slowly than expected or become
saturated with competitors, or the Company's products may not achieve or sustain
market acceptance. To address these risks, the Company must maintain and expand
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade the technology and systems that the
Company uses to process customers' orders and payments, improve its Web sites,
provide superior customer service, respond to competitive developments and
attract, retain and motivate qualified personnel. There can be no assurance
that the Company will be successful in addressing these risks, and any failure
by the Company to do so could have a negative impact on its business, operating
results and financial condition.
THE COMPANY'S DEPENDENCE ON THE HIGHLY SEASONAL GARDENING INDUSTRY WILL CAUSE
ITS OPERATING RESULTS TO VARY FROM QUARTER TO QUARTER.
Seasonal factors typically influence product availability and the timing of
product shipments, which may affect both product demand and the period of
revenue recognition and, in turn, influence the Company's quarterly revenues and
product margins. For instance, the Company expects its revenues to be
relatively higher in its fourth fiscal quarter, which coincides with the spring
gardening season, and relatively lower in its first fiscal quarter, reflecting
decreasing consumer demand for garden products during the late
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summer. In addition, as is typical for gardening retailers, the Company's
product mix generally varies by season. Due to this variation in product mix
offered during the year, the Company's gross margin fluctuates on a quarterly
basis reflecting the sale of higher margin products during the holiday season,
such as gifts and decorating items, and the sale of lower margin products during
the spring season, such as live plants. Furthermore, the Company anticipates
that operating costs will typically increase in the third quarter of its fiscal
year as marketing expenses increase in anticipation of the spring planting
season.
Due to the Company's limited operating history, it is difficult to predict
the seasonal pattern of the Company's future revenues and operating costs and
the impact of such seasonality on the Company's future operating results. If
they become more pronounced, seasonal revenue and cost patterns may strain the
Company's personnel and fulfillment activities and could cause a shortfall in
revenues as compared to costs in a given period.
THE COMPANY EXPECTS ITS QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF THE
COMPANY FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS,
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK COULD DECLINE.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside its control. As a result, the Company believes that quarterly
comparisons of its operating results are not necessarily meaningful and that
investors should not rely on the results of one quarter as an indication of the
Company's future performance. The Company believes it is likely that, in the
future, fluctuations in its quarterly operating results will cause its results
to fall below the expectations of securities analysts and investors, which could
cause the price of the Company's common stock to drop. The Company believes
that many of the other risk factors listed in this report may negatively affect
its quarterly operating results and contribute to fluctuations. Further, the
Company's quarterly gross margins also may be impacted by a number of different
factors that are difficult for the Company to anticipate at this stage in its
business. Likely causes of gross margin fluctuations include changes in the mix
of online product revenues as compared to advertising revenues, the mix of
products sold and the mix of revenues derived from purchases originating from
the Company's Web sites and the Web sites of its distribution and advertising
partners.
The Company's limited operating history and the rapidly evolving nature of
its industry make forecasting quarterly operating results difficult.
Accordingly, the Company bases its expenses in large part on its operating plans
and future revenue projections. Most of the Company's expenses are fixed in the
short term, and the Company may not be able to quickly reduce spending if its
revenues are lower than it projects. Therefore, any significant shortfall in
revenues would likely have an immediate, negative impact on the Company's
business, operating results and financial condition.
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ESTABLISHING THE GARDEN.COM BRAND QUICKLY AND COST-EFFECTIVELY IS ESSENTIAL FOR
THE COMPANY TO BE SUCCESSFUL. IF THE COMPANY DOES NOT ESTABLISH THE GARDEN.COM
BRAND QUICKLY, IT MAY NOT CAPTURE SUFFICIENT MARKET SHARE OR INCREASE REVENUES
ENOUGH TO ACHIEVE PROFITABILITY.
The Company believes that it must establish, maintain and enhance the
Garden.com brand to attract more customers to its Web sites and to generate
revenues from product sales and advertising. Brand recognition and customer
loyalty will become increasingly important as more companies with
well-established brands in online services or the gardening industry offer
competing services on the Internet. For example, existing gardening retailers
with established brand names may establish an online presence that competes with
the Company's Web sites and existing online providers with better name
recognition than Garden.com may begin selling garden products. Development of
the Garden.com brand will depend largely on the Company's success in providing a
high quality online experience supported by a high level of customer service,
which cannot be assured. The Company expects that it will need to increase
substantially its spending on programs designed to create and maintain strong
brand loyalty among customers and the Company cannot be certain that its efforts
will be successful.
THE COMPANY EXPECTS SIGNIFICANT INCREASES IN IT OPERATING EXPENSES, WHICH COULD
HAVE A NEGATIVE IMPACT ON ITS OPERATING RESULTS.
The Company plans to increase its operating expenses substantially to
develop the Garden.com brand nationally, offer new gardening-related products
and services, enter into additional strategic relationships and further develop
its technology and transaction-processing systems. These expenses will be
incurred before the Company derives any revenues from this increased spending,
and the timing of these expenses may contribute to fluctuations in quarterly
operating results. If the Company's revenues do not increase proportionately
with these expenses, its losses will be greater than expected.
GARDENING CONSUMERS MAY NOT ACCEPT THE COMPANY'S ONLINE SOLUTION. THIS MAY
RESULT IN SLOWER REVENUE GROWTH, LOSS OF REVENUES AND INCREASED OPERATING
LOSSES.
To be successful, the Company must attract and retain a significant number
of consumers to the garden.com Web site at a reasonable cost. Any significant
shortfall in the number of transactions occurring over the Company's Web site
will negatively affect its financial results by increasing or prolonging
operating losses. Conversion of customers from traditional shopping methods to
electronic shopping may not occur as rapidly as the Company expects, if at all.
Therefore, the Company may not achieve the critical mass of customer traffic it
believes is necessary to become successful. Specific factors that could prevent
widespread customer acceptance of the Company's solution, and its ability to
grow revenues, include:
- customer concerns about the security of online transactions;
- customer concerns about buying live plants and other gardening
materials without first seeing them;
- pricing that may not meet customer expectations;
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- customer resistance to shipping charges, which generally do not apply
to purchases from traditional retail outlets;
- difficulties in timely shipment of plants, flowers and other live
goods;
- shipment of damaged goods or wrong products from the Company's
suppliers;
- delivery time before customers receive Internet orders, unlike the
immediate receipt of products at traditional retail outlets; and
- difficulties in returning or exchanging orders.
THE COMPANY DEPENDS ON THE ECONOMIC STRENGTH OF THE GARDENING INDUSTRY AND
FAVORABLE GENERAL ECONOMIC CONDITIONS. ANY SIGNIFICANT DOWNTURN IN THE
GARDENING INDUSTRY OR IN GENERAL ECONOMIC CONDITIONS COULD RESULT IN DECREASED
REVENUES AND COULD SERIOUSLY HARM THE COMPANY'S BUSINESS.
The Company derives substantially all of its revenues directly or
indirectly from the gardening industry, and its future operating results depend
on the economic strength of this industry. Any significant downturn in the
gardening industry could result in decreased revenues and seriously harm the
Company's business, operating results and financial condition. Purchases of
gardening and gardening-related products are typically discretionary for
consumers and may be harmed by negative trends in the general economy. In
addition, the Company's business strategy relies on advertising by and
agreements with other Internet companies. Any significant deterioration in
general economic conditions that harms these companies could result in decreased
advertising revenues and have a negative impact on the Company's business,
operating results and financial condition.
THE COMPANY'S BUSINESS RELIES ON ITS ABILITY TO MAINTAIN RELATIONSHIPS WITH ITS
SUPPLIERS TO OBTAIN SUFFICIENT QUANTITIES OF QUALITY MERCHANDISE ON ACCEPTABLE
COMMERCIAL TERMS. IF THE COMPANY FAILS TO MAINTAIN ITS SUPPLIER RELATIONSHIPS
ON ACCEPTABLE TERMS, ITS SALES AND PROFITABILITY COULD SUFFER.
Because the Company carries minimal inventory and relies largely on rapid
fulfillment from its suppliers, the Company's business would be seriously harmed
if it were unable to develop and maintain relationships with suppliers that
allow it to obtain sufficient quantities of quality merchandise on acceptable
commercial terms. The Company's contracts or arrangements with suppliers do not
guarantee the availability of merchandise, establish guaranteed prices or
provide for the continuation of particular pricing practices. Although the
Company has alternative sources of supply for a small percentage of the products
it offers, the Company has not established alternative sources for all its
products. The Company's current suppliers may not continue to sell products to
it on current terms or at all, and the Company may not be able to establish new
supply relationships to ensure delivery of product in a timely and efficient
manner or on terms acceptable to it. In addition, the Company's supply
contracts typically do not restrict a supplier from selling products to
retailers other than online retailers, which could limit the Company's ability
to supply the quantity of product requested by its customers. If the
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Company cannot supply its products to consumers at acceptable prices, the
Company may lose sales and market share as consumers make purchases elsewhere.
Further, an increase in supply costs could increase operating losses beyond
current expectations.
THE COMPANY DEPENDS ON ITS THIRD PARTY SUPPLIERS TO PROVIDE QUALITY PRODUCTS
DIRECTLY TO ITS CUSTOMERS. THE COMPANY COULD LOSE REVENUES AND MARKET SHARE AND
ITS BRAND NAME COULD BE HARMED IF THE COMPANY'S SUPPLIERS FAIL TO SHIP QUALITY
PRODUCTS TO ITS CONSUMERS.
Because the Company's revenues depend on the number of customers who buy
products from the Company, the reliability and quality of the Company's products
are critical to its operating results. The Company is heavily dependent on
suppliers for assuring the quality and health of the products shipped directly
to the Company's customers. The failure of the Company's suppliers to
consistently provide high quality products could result in lost revenues, delays
in customer acceptance, damage to the Company's reputation and harm to the
Company's brand name. In addition, the Company does not currently maintain
insurance against any product defect losses and, accordingly, could be subject
to significant defense costs or damages in the event of a significant product
defect claim.
WEATHER AND OTHER ACTS OF NATURE COULD AFFECT THE SUPPLY OF AND DEMAND FOR THE
COMPANY'S PRODUCTS. AS A RESULT, INCLEMENT WEATHER COULD INCREASE THE COMPANY'S
COSTS OR DECREASE ITS REVENUES.
Weather and other acts of nature outside of the Company's control could
negatively impact its business, operating results and financial condition.
Adverse weather, such as frost, droughts, floods and other severe weather
patterns, as well as plant diseases and pests can reduce or eliminate the supply
of live products, which could lead to increased prices for available products.
In addition, adverse weather or other growing conditions could negatively impact
consumer demand for gardening and gardening-related products. For example, a
late spring can lead to delayed or poor spring growing conditions for the
Company's live goods reducing product availability. Decreased availability
could lead to reduced sales or increased costs and operating losses. Further,
inclement weather during the peak gardening season in spring and early summer
may discourage consumer gardening purchases.
BECAUSE THE COMPANY FACES SIGNIFICANT COMPETITION FROM ESTABLISHED TRADITIONAL
GARDENING RETAILERS, MAIL ORDER CATALOGS, ONLINE RETAILERS AND OTHERS, THE
COMPANY MAY EMERGE FROM ITS PERIOD OF GROWTH WITH ONLY A MODEST INCREASE IN
MARKET SHARE OR DECREASED PROFIT MARGINS.
The Company may be unable to compete successfully against current and
future competitors, and competitive pressures could have a negative impact on
the Company's business, operating results and financial condition. Online
commerce, and specifically the online retail gardening market, is new and
rapidly evolving, and the Company expects competition to intensify in the future
as companies attempt to utilize the advantages of the Internet. The Company's
competition includes existing companies that have built or are trying to
establish an online retail presence, as well as new entrants trying to build a
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brand online. The Company currently or potentially competes with a variety of
other companies, including:
- local nurseries and gardening centers;
- home improvement superstores, such as Lowe's and Home Depot, and mass
merchant retailers, such as Wal-Mart;
- established gardening mail order catalogs, including Foster &
Gallagher and Smith & Hawken;
- media groups with existing, well-defined brands in the home and
garden market, such as Martha Stewart Living; and
- multi-channel online retailers seeking to diversify their product
offerings, such as Amazon.com, 1-800-FLOWERS and FTD.
The Company expects competition to increase as current competitors increase
the sophistication of their offerings and as new participants enter the market.
Many of the Company's current and potential store-based, catalog and online
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than the Company does and could enter into strategic or commercial
relationships with larger, more established and well-financed companies. Due to
their size and greater resources, many of the Company's current and potential
competitors may be able to secure services and products from suppliers on more
favorable terms, devote greater resources to marketing and promotional campaigns
and devote substantially more resources to Web site and systems development than
the Company does. Their financial strength could prevent the Company from
increasing market share. In addition, the development of new technologies and
the expansion of existing technologies, such as price comparison programs that
select specific products from a variety of Web sites, may increase competitive
pressures on the Company. Increased competition may result in reduced operating
margins, as well as loss of market share and brand recognition.
THE COMPANY DEPENDS UPON FEDERAL EXPRESS TO DELIVER ITS PRODUCTS ON A TIMELY AND
CONSISTENT BASIS. A DETERIORATION IN THE COMPANY'S RELATIONSHIP WITH FEDERAL
EXPRESS COULD DECREASE THE COMPANY'S ABILITY TO TRACK SHIPMENTS, CAUSE SHIPMENT
DELAYS, AND INCREASE ITS SHIPPING COSTS AND THE NUMBER OF DAMAGED PRODUCTS.
The Company's supply and distribution system is dependent upon its
relationship with Federal Express. Federal Express ships substantially all of
the Company's orders, and the Company does not currently maintain a distribution
relationship with any other carrier. Because the Company does not have a
written agreement with Federal Express, the Company cannot be sure that its
relationship with Federal Express will continue on terms favorable to the
Company, if at all. If the Company's relationship with Federal Express is
terminated or impaired or if Federal Express is unable to deliver product for
the Company, whether through labor shortage, slow down or stoppage,
deteriorating financial or business condition or for any other reason, the
Company would be required to use alternative carriers for the shipment of
products to its customers. The Company
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may be unable to engage an alternative carrier on a timely basis or upon terms
favorable to the Company. Changing carriers would likely have a negative effect
on the Company's business, operating results and financial condition. Potential
adverse consequences include:
- reduced visibility into order status and package tracking;
- delays in order processing and product delivery;
- increased cost of delivery, resulting in reduced gross margins; and
- reduced shipment quality which may result in damaged products and
customer dissatisfaction.
THE COMPANY RELIES SUBSTANTIALLY ON ITS RELATIONSHIPS WITH VARIOUS ONLINE
SERVICES, SEARCH ENGINES AND DIRECTORIES TO DRIVE TRAFFIC TO THE COMPANY'S WEB
SITES. IF THESE RELATIONSHIPS DO NOT CONTINUE, IT WILL BE DIFFICULT FOR THE
COMPANY TO INCREASE MARKET SHARE AND ACHIEVE PROFITABILITY.
The Company has relationships with various online services, search engines
and directories to provide content and advertising banners that hyperlink to the
Company's Web sites. The Company relies on search engines, directories and
other navigational tools to direct traffic to the Company's Web sites. The
Company cannot be sure that such relationships will be available to it in the
future on acceptable commercial terms, if at all. If the Company is unable to
maintain satisfactory relationships with these parties on acceptable commercial
terms, or if the Company's competitors are better able to leverage such
relationships, the Company's business, operating results and financial condition
could be negatively affected. The Company may not achieve sufficient online
traffic or product purchases to realize sufficient sales to compensate for the
Company's significant obligations to these distribution and advertising
partners. Failure to achieve sufficient traffic or generate sufficient revenues
from purchases originating from third-party Web sites would likely reduce the
Company's profit margins and may result in termination of these types of
relationships. Without these relationships, it is unlikely that the Company can
sufficiently increase market share and achieve profitability.
THE COMPANY'S PERFORMANCE, INCLUDING ITS REVENUE GROWTH, DEPENDS ON ITS ABILITY
TO OFFER NEW AND EXPANDED PRODUCTS AND SERVICES.
The Company plans to introduce new and expanded products and services and
to enter into new relationships with third parties in order to generate
additional revenues, attract more consumers, increase market share and respond
to competition. The Company may be unable to offer such products or services in
a cost-effective or timely manner. Furthermore, any new product or service the
Company launches that is not favorably received by consumers could damage its
reputation and brand name, resulting in lower revenues. Expansion of the
Company's products or services in this manner would also require significant
additional expenses and development and may strain the Company's management,
financial and operational resources. The Company's business, operating results
and financial condition could be seriously harmed if it is unable to generate
revenues from expanded services or products sufficient to offset their cost.
The
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Company's success also depends on its ability to accurately determine the
products and features required by customers and to design and implement
offerings that meet these requirements in a timely and efficient manner. The
Company may be unsuccessful in determining customer requirements, and the
Company's offerings may not adequately satisfy current or future customer
demands. Furthermore, even if the Company correctly forecasts customer demands,
the Company may be unable to design and implement a Web site that meets these
demands.
THE COMPANY HAS EXPERIENCED SIGNIFICANT GROWTH IN ITS BUSINESS IN RECENT PERIODS
AND ANY INABILITY TO MANAGE THIS GROWTH AND ANY FUTURE GROWTH COULD HARM THE
COMPANY'S BUSINESS.
The Company's historical growth has placed, and any further growth is
likely to continue to place, a significant strain on the Company's management
and resources. Any failure to manage growth effectively could seriously harm
the Company's business and operating results. To be successful, the Company
will need to continue to implement management information systems and improve
its operating, administrative, financing and accounting systems and controls.
The Company will also need to train new employees and maintain close
coordination among its executive, accounting, finance, marketing, sales and
operations organizations. These processes are time consuming and expensive,
will increase management responsibilities and will divert management attention.
THE COMPANY RELIES ON CONTENT AND TECHNOLOGIES LICENSED FROM THIRD PARTIES. THE
LOSS OF OR INCREASE IN COST OF THE COMPANY'S LICENSED CONTENT AND TECHNOLOGY MAY
IMPAIR ITS ABILITY TO ASSIMILATE AND MAINTAIN CONSISTENT, APPEALING CONTENT OR
MAINTAIN AND IMPROVE THE SERVICES THE COMPANY OFFERS TO CONSUMERS.
The Company intends to continue to strategically license a portion of its
content for its Web sites from third parties, including content that is
integrated with internally developed content and used on the Company's Web sites
to provide key services. Although substantially all of the content on
garden.com is developed and created internally, the Company licenses a majority
of the content for its Virtual Garden site from third parties. These third
party content licenses may be unavailable to the Company on commercially
reasonable terms, and the Company may be unable to integrate third party content
successfully. Such content licenses may expose the Company to increased risks,
including:
- the risks associated with the assimilation of new content;
- the diversion of resources from the development of the Company's
content;
- the inability to generate revenues from new content sufficient to
offset associated acquisition costs; and
- the maintenance of uniform, appealing content.
The inability to obtain any of these licenses could result in delays in
site development or services until equivalent content can be identified,
licensed and
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integrated. Any such delays in site development or services could negatively
impact the Company's business, operating results and financial condition.
The Company currently licenses some of the technology incorporated into its
Web sites from third parties. For example, third parties have developed
substantially all of the hardware used for the Company's Web sites. However,
the Company has developed a majority of the software that the Company uses to
run its Web sites. Therefore, the Company relies to a material extent on
technology developed and licensed from third parties. This reliance on licensed
technology exposes the Company to increased risks:
- third parties from which the Company licenses its technology may not
be able to defend successfully their proprietary rights against
claims of infringement, which could cause the Company to lose its
rights to use such technology or increase its licensing costs;
- third parties from which the Company licenses its technology may not
develop new technology quickly enough to meet the Company's needs for
improvement; and
- renewals, replacements and upgrades for the Company's licensed
technology may not be available on commercially reasonable terms.
The loss of existing technology licenses could negatively affect the
performance of the Company's existing services until equivalent technology can
be identified, obtained and integrated. Failure to obtain new technology
licenses may result in delays or reductions in the introduction of new features,
functions or services. The Company's business could suffer if these risks
materialize.
PROTECTION OF THE COMPANY'S DOMAIN NAMES IS UNCERTAIN. IF THE COMPANY CANNOT
PROTECT ITS DOMAIN NAMES, IT WILL IMPAIR THE COMPANY'S ABILITY TO BRAND
SUCCESSFULLY THE GARDEN.COM NAME.
The Company currently holds various World Wide Web domain names, including
garden.com. The acquisition and maintenance of domain names generally is
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result,
the Company may be unable to acquire or maintain relevant domain names in all
countries in which it conducts business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, the Company may be unable to prevent
third parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of the Company's trademarks and other proprietary
rights. The Company may not successfully carry out its business strategy of
establishing a strong brand for Garden.com if the Company cannot prevent others
from using similar domain names or trademarks. This could impair the Company's
ability to increase market share and revenues.
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THE COMPANY'S OPERATING RESULTS DEPEND ON ITS INTERNALLY DEVELOPED WEB SITES,
NETWORK INFRASTRUCTURE AND TRANSACTION-PROCESSING SYSTEMS.
The satisfactory performance, reliability and availability of the Company's
Web sites, transaction-processing systems and network infrastructure are
critical to the Company's operating results, as well as to its ability to
attract and retain customers and maintain adequate customer service levels. Any
system interruptions that result in the unavailability of the Company's Web
sites or reduced performance of the transaction systems would reduce the volume
of sales and the attractiveness of the Company's service offerings, which would
seriously harm its business, operating results and financial condition.
The Company uses internally developed systems for its Web sites and
substantially all aspects of transaction processing, including customer
profiling and order verifications. The Company has experienced periodic systems
interruptions due to server failure, which the Company believes will continue to
occur from time to time. If the volume of traffic on the Company's Web sites or
the number of purchases made by customers substantially increases, the Company
will need to further expand and upgrade its technology, transaction processing
systems and network infrastructure. The Company has experienced and expects to
continue to experience temporary capacity constraints due to sharply increased
traffic during sales or other promotions, which cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality and delays in reporting accurate financial information.
The Company's transaction processing systems and network infrastructure may
not be able to accommodate increases in traffic in the future. The Company may
be unable to project accurately the rate or timing of traffic increases or
successfully upgrade its systems and infrastructure to accommodate future
traffic levels on its Web sites. In addition, the Company may be unable in a
timely manner to effectively upgrade and expand its transaction processing
systems or to successfully integrate any newly developed or purchased modules
with its existing systems. Any inability to do so could negatively impact the
Company's sales volume, business, operating results and financial condition.
THE COMPANY'S COMPUTERS AND COMMUNICATIONS SYSTEMS ARE VULNERABLE TO DAMAGE OR
INTERRUPTION WHICH MAY HINDER THE COMPANY'S ABILITY TO DELIVER TIMELY
INFORMATION OR EXECUTE ONLINE TRANSACTIONS.
The Company's ability to successfully receive and fulfill orders and
provide high quality customer service depends on the efficient and uninterrupted
operation of its computer and communications hardware systems. Substantially
all of the Company's computer and communications systems are located in three
separate locations in Austin, Texas. The Company's systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins and similar events. Despite the Company's
implementation of network security measures, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and confirm customer orders. The occurrence of any of the foregoing
risks could negatively impact the Company's sales volume, business, operating
results and financial condition.
25
<PAGE>
IF THE COMPANY EXPANDS ITS BUSINESS INTERNATIONALLY, ITS BUSINESS WOULD BECOME
INCREASINGLY SUSCEPTIBLE TO NUMEROUS INTERNATIONAL BUSINESS RISKS AND CHALLENGES
THAT COULD AFFECT THE COMPANY'S PROFITABILITY.
The Company believes that the current globalization of the economy requires
businesses to pursue or consider pursuing international expansion. The Company
will probably expand into international markets. Although the Company has not
had international sales revenue to date, the Company may increase its
international sales efforts. International sales are subject to inherent risks
and challenges that could affect the Company's profitability, including:
- the need to develop new supplier relationships;
- unexpected changes in international regulatory requirements and
tariffs;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- greater difficulty in accounts receivable collection;
- potential adverse tax consequences;
- price controls or other restrictions on foreign currency; and
- difficulties in obtaining export and import licenses.
To the extent the Company generates international sales in the future, any
negative effects on its international business could impact detrimentally the
Company's business, operating results and financial condition as a whole. In
particular, gains and losses on the conversion of foreign payments into U.S.
dollars may contribute to fluctuations in the Company's results of operations
and fluctuating exchange rates could cause reduced gross revenues and/or gross
margins from dollar-denominated international sales.
FUTURE ACQUISITIONS COULD INCREASE THE RISK OF THE COMPANY'S BUSINESS.
The Company may broaden the scope and content of its Web sites by acquiring
other online services and businesses or other gardening enterprises. As part of
the Company's business strategy, the Company expects to review acquisition
prospects that would complement its existing business, augment the distribution
of its content and community or enhance its technical capabilities. The Company
anticipates that it will acquire other businesses or assets meeting its
strategic goals that can be purchased on terms acceptable to the Company. The
Company may not locate suitable acquisition opportunities. Any future
acquisitions would expose the Company to increased risks, including:
- issuances of equity securities that may dilute existing stockholders;
26
<PAGE>
- increased debt obligations or contingent liabilities;
- risks associated with the assimilation of new operations, Web sites
and personnel;
- the diversion of resources from the Company's existing businesses,
sites and technologies;
- the inability to retain the customers of acquired businesses and
generate sufficient revenues from new sites or businesses to offset
associated acquisition costs;
- the maintenance of uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as a
result of any integration of new management personnel.
If these risks materialize, future acquisitions could require additional
capital investment or result in additional operating losses, amortization of
goodwill and other intangible assets or other charges against earnings.
THE COMPANY IS SUBJECT TO GOVERNMENT REGULATIONS RELATING TO THE SHIPMENT OF
LIVE GOODS, FERTILIZERS AND OTHER PRODUCTS, WHICH EXPOSES THE COMPANY TO RISKS
THAT IT WILL BE FINED OR EXPOSED TO CIVIL OR CRIMINAL LIABILITY, RECEIVE
NEGATIVE PUBLICITY OR BE PREVENTED FROM SHIPPING PRODUCTS INTO ONE OR MORE
STATES.
The Company is subject to federal, state and local laws and regulations
relating to the shipment of live goods, fertilizers and other products. For
instance, various federal, state and local authorities regulate the shipment of
plants and products across their borders, in an attempt to restrict the
introduction of harmful plants, pests and diseases. Additionally, products
marketed or that may be marketed as fertilizers or pesticides are subject to
federal, state and local laws and regulations. The Company currently relies on
its suppliers to comply with these laws and regulations. However, the Company
is unable to verify that its suppliers have complied or will comply with all
such laws and regulations. The Company could be subject to the following if
these requirements have not been fully met by its suppliers or by it directly:
- the Company could be fined or exposed to civil or criminal liability
or remediation expenses;
- the Company could receive negative publicity, devaluing its brand
name; and
- the Company may be prevented from shipping products into one or more
states.
27
<PAGE>
RISKS RELATED TO THE INTERNET INDUSTRY
THE COMPANY'S PERFORMANCE DEPENDS ON THE GROWTH AND ACCEPTANCE OF THE INTERNET
AS A MEDIUM FOR COMMERCE. WITHOUT THE GROWTH AND ACCEPTANCE OF ELECTRONIC
COMMERCE, THE COMPANY MAY NOT ACHIEVE THE REVENUE GROWTH REQUIRED FOR IT TO
ACHIEVE PROFITABILITY.
The Company cannot be sure that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and commercial online services as a
medium for commerce, particularly for purchases of gardening and
gardening-related products. Even if consumers adopt the Internet as a medium
for commerce, the Company cannot be sure that the necessary infrastructure will
be in place to process such transactions. The Company's long-term viability
depends substantially upon the widespread acceptance and the development of the
Internet as an effective medium for consumer commerce. Use of the Internet to
effect retail transactions is at an early stage of development. Convincing
consumers to purchase gardening-related products online may be particularly
difficult because consumers are accustomed to a high degree of human interaction
in purchasing gardening-related products.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty and few
proven services and products exist. The development of the Internet and
commercial online services into a viable commercial marketplace is subject to a
number of factors, including:
- continued growth in the number of users of such services;
- concerns about transaction security;
- continued development of the necessary technological infrastructure;
- development of enabling technologies;
- uncertain and increasing government regulation; and
- the development of complementary services and products.
To the extent that the Internet and other online services continue to
experience growth in the number of users and frequency of use by consumers
resulting in increased bandwidth demands, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. In addition, the Internet or other online
services could lose their viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
or other online service activity, or due to increased governmental regulation.
Insufficient availability of telecommunications services to support the Internet
or other online services also could result in slower response times and
negatively impact use of the Internet and other online services generally and
the Company in particular. If the use of the Internet and other online services
fails to grow or grows more slowly than expected, if the infrastructure for the
Internet and other online services do not
28
<PAGE>
effectively support growth that may occur or if the Internet and other online
services do not become a viable commercial marketplace, the Company's sales
growth may be insufficient to achieve profitability, and its operating results
and financial condition will consequently suffer.
RAPID TECHNOLOGICAL CHANGE COULD RENDER THE COMPANY'S WEB SITES AND SYSTEMS
OBSOLETE AND REQUIRE SIGNIFICANT CAPITAL EXPENDITURES.
If the Company is unable, for technical, legal, financial or other reasons,
to adapt in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition could be harmed. The Internet and the online commerce industry are
characterized by rapid technological change, sudden changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing online sites and proprietary
technology and systems obsolete. The emerging nature of these products and
services and their rapid evolution will require that the Company continually
improve the performance, features and reliability of its online services,
particularly in response to competitive offerings. The Company's success will
depend, in part, on its ability:
- to enhance the Company's existing services;
- to develop and license new services and technology that address the
increasingly sophisticated and varied needs of the Company's
prospective customers; and
- to respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of Web sites and other proprietary technology entails
significant technical and business risks and requires substantial expenditures
and lead time. The Company may be unable to use new technologies effectively or
adapt its Web sites, proprietary technology and transaction-processing systems
to customer requirements or emerging industry standards. Updating the Company's
technology internally and licensing new technology from third parties may
require significant additional capital expenditures and could affect the
Company's profitability.
THE COMPANY IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD, WHICH MAY REDUCE COLLECTIONS AND DISCOURAGE ONLINE
TRANSACTIONS.
Consumer concerns about the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as
customer credit card numbers, the Company relies on encryption and
authentication technology that it licenses from third parties. The Company
cannot predict whether events or developments will result in a compromise or
breach of the algorithms the Company uses to protect customer transaction data.
Furthermore, the Company's servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. The Company may need
29
<PAGE>
to expend significant additional capital and other resources to protect against
a security breach or to alleviate problems caused by any breaches. The
Company's business may be adversely affected if its security measures do not
prevent security breaches and there can be no assurance that it can prevent all
security breaches.
To date, the Company has suffered minor losses as a result of orders placed
with fraudulent credit card data even though the associated financial
institution approved payment of the orders in each case. Under current credit
card practices, a merchant is liable for fraudulent credit card transactions
where, as is the case with the transactions the Company processes, that merchant
does not obtain a cardholder's signature. A failure to adequately control
fraudulent credit card transactions could reduce the Company's collections and
harm its business.
THE COMPANY COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
THROUGH ITS WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS.
As a publisher and distributor of online content, the Company faces
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that the Company publishes or distributes. Claims have been successfully
brought against online services. In addition, the Company does not and cannot
practically screen all of the content generated by its users on the bulletin
board system on its Web sites, and the Company could be exposed to liability
with respect to such content. Although the Company carries general liability
insurance, the Company's insurance may not cover claims of these types or may
not be adequate to indemnify the Company for all liability that may be imposed.
Any imposition of liability, particularly liability that is not covered by
insurance or is in excess of insurance coverage, could negatively impact the
Company's reputation and result in litigation costs or increased insurance
costs.
FUTURE GOVERNMENT REGULATION OF THE INTERNET COULD DECREASE DEMAND FOR THE
COMPANY'S PRODUCTS OR INCREASE THE COMPANY'S COSTS OF CONDUCTING BUSINESS.
New Internet legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the Internet
and online commerce, or the application of existing laws and regulations to the
Internet and online commerce could harm the Company's business, operating
results and financial condition. The Company is subject to regulations
applicable to businesses generally and laws or regulations directly applicable
to communications over the Internet and access to online commerce. Although
there are currently few laws and regulations directly applicable to the Internet
and online retailing services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust, taxation
and characteristics and quality of products and services. For example, the
United States Congress enacted Internet laws regarding children's privacy,
copyrights, taxation and transmission of sexually explicit material and the
European Union enacted its own privacy regulations. Furthermore, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations regarding Internet commerce and communications may decrease the
growth of the Internet or commercial online services, which could, in turn,
decrease the
30
<PAGE>
demand for the Company's products and services and increase the Company's cost
of doing business, leading to further losses.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
For example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce, and new state
tax regulations may subject the Company to additional state sales and income
taxes. Additionally, German authorities have challenged major U.S. online
services for making certain content accessible in Germany. If the Company was
alleged to have violated federal, state or foreign civil or criminal law, the
Company could be subject to liability, and even if the Company could
successfully defend such claims, they may involve significant legal compliance
and litigation costs.
RISKS RELATED TO THE SECURITIES MARKETS
THE COMPANY'S COMMON STOCK PRICE MAY FLUCTUATE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS.
The market price for the Company's common stock may fluctuate significantly
in response to a number of factors, some of which are beyond the Company's
control, including:
- variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of online commerce companies;
- announcements by the Company or its competitors of significant
contracts,
- acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major supplier;
- additions or departures of key personnel;
- sales of common stock in the future; and
- fluctuations in stock market price and trading volume, which are
particularly common among highly volatile securities of Internet and
online commerce companies.
As a result, investors in the Company's common stock may not be able to
resell their shares at or above their purchase price. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of its securities. The Company may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention
31
<PAGE>
and resources, which could negatively impact the Company's business, operating
results and financial condition.
THE COMPANY MAY BE UNABLE TO MEET ITS FUTURE CAPITAL REQUIREMENTS AND EXECUTE ON
ITS BUSINESS STRATEGY.
The Company expects current cash balances, cash equivalents and investments
to meet its working capital and capital expenditure needs for the remainder of
the fiscal year ended June 30, 2000. Because the Company is not currently
generating sufficient cash to fund its operations, the Company may be forced to
rely on external financing to meet future capital requirements. Any projections
of future cash needs and cash flows are subject to substantial uncertainty. The
Company's capital requirements depend upon several factors, including the rate
of market acceptance, its ability to expand its customer base and increase
revenues, its level of expenditures for marketing and sales, purchases of
equipment and software, the cost of Web site upgrades and other factors. If the
Company's capital requirements vary materially from those currently planned, the
Company may require additional financing sooner than anticipated.
The Company can make no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. Further, if the
Company issues equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock, and debt financing, if
available, may involve restrictive covenants which could restrict the Company's
operations or finances. If the Company cannot raise funds, if needed, on
acceptable terms, the Company may not be able to continue its operations,
develop or enhance its Web site, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
which could negatively impact the Company's business, operating results and
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not hold any significant market risk sensitive instruments
during the period covered by this report.
32
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of its business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently 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, prospects, financial
condition and operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On September 21, 1999, the Company sold 4,650,000 shares of common
stock and certain selling stockholders sold 65,000 shares of common stock in an
underwritten public offering (the "Offering"), which constituted all of the
securities registered pursuant to the Company's Registration Statement on Form
S-1 (Registration No. 333-79487). The Securities and Exchange Commission
declared the Registration Statement effective on September 15, 1999. The
managing underwriters of the Offering were Hambrecht & Quist LLC, BancBoston
Robertson Stephens Inc. and Thomas Weisel Partners LLC.
The selling stockholders sold 65,000 shares of common stock in the offering
for an aggregate offering price of $780,000 and received aggregate net proceeds
of $725,400.
The following table summarizes the offering expenses incurred by the
Company through March 31, 2000 and the net proceeds received by the Company as
of March 31, 2000 pursuant to the Offering:
<TABLE>
<CAPTION>
<S> <C>
Aggregate offering price of shares sold by the Company $55,800,000
Underwriting discounts and commissions . . . . . . . . 3,906,000
Finder's fees. . . . . . . . . . . . . . . . . . . . . -
Expenses paid to or for underwriters . . . . . . . . . -
Other expenses . . . . . . . . . . . . . . . . . . . . 2,078,000
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . 5,984,000
-----------
Net offering proceeds to the Company . . . . . . . . . 49,816,000
</TABLE>
An estimate of how these proceeds were used by the Company during the period
September 15, 1999 through March 31, 2000 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Marketing and sales. . . . . . . . . . . . . . . . . $6,855,000
Content and product development. . . . . . . . . . . 1,437,000
General and administrative . . . . . . . . . . . . . 1,627,000
Purchase and installation of property and equipment. 915,000
</TABLE>
As of March 31, 2000, the remaining net proceeds of the Offering were invested
in cash and cash equivalents and short-term and long-term investments pending
the Company's use of the net proceeds.
33
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of the Company
during the third quarter of fiscal 2000.
ITEM 5. OTHER INFORMATION.
On May 10, 2000, the Company's Compensation Committee approved an increase
in the number of shares authorized for issuance under the Garden.com, Inc. 1996
Stock Option/Stock Issuance Plan (the "Plan"). The Plan was amended to increase
the authorized shares by 900,000 shares. The Compensation Committee approved
this increase to enable the Company to make option grants to employees in fiscal
2000 in amounts it believes are necessary to remain competitive with levels in
its industry.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company. (Filed as
exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 0-26265) and incorporated herein by reference).
3.2 Amended and Restated By-Laws of the Company. (Filed as exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 (File No. 0-26265) and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the third quarter of fiscal 2000.
34
<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.
Dated this 15th day of May, 2000.
GARDEN.COM, INC.
By /s/ Clifford A. Sharples
-----------------------------
Clifford A. Sharples, President and
Chief Executive Officer
By /s/ Jana D. Wilson
-----------------------
Jana D. Wilson, Chief Financial
Officer
35
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 16,798
<SECURITIES> 15,600
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,026
<CURRENT-ASSETS> 42,225
<PP&E> 7,615
<DEPRECIATION> (2,055)
<TOTAL-ASSETS> 55,156
<CURRENT-LIABILITIES> 6,146
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 48,834
<TOTAL-LIABILITY-AND-EQUITY> 55,156
<SALES> 2,600
<TOTAL-REVENUES> 3,156
<CGS> (2,109)
<TOTAL-COSTS> (2,199)
<OTHER-EXPENSES> (13,032)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 636
<INCOME-PRETAX> (11,439)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,439)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
</TABLE>
