SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 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 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) (Zip Code)
Registrant's telephone number, including area code: 512-532-4000
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
-- --
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
------------------------------------------------
(Title of class)
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
-- --
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
<PAGE>
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Registrant's common stock held by
nonaffiliates as of August 31, 2000: $17,346,542. Shares of common stock held
by any executive officer or director of the Registrant and any person who
beneficially owns 10% or more of the outstanding common stock have been excluded
from this computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
Number of shares of the Registrant's common stock outstanding as of August
31, 2000: 17,739,845.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of the
Stockholders of the Registrant are incorporated by reference into Part III of
this report.
2
<PAGE>
PART I
------
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS BASED ON
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED IN FORWARD-LOOKING STATEMENTS. SEE "ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - ADDITIONAL FACTORS MAY AFFECT FUTURE RESULTS."
GENERAL
Garden.com, Inc. ("Garden.com" or the "Company") is an online destination
integrating gardening and gardening-related commerce, content and community.
Primarily through its flagship Web site, www.garden.com, the Company provides
consumers with an intuitive, easy-to-use environment through which they can
access a wide variety of gardening information and resources, purchase a broad
selection of products, receive specific gardening advice and other personalized
services and interact with an online gardening community. The Company also
operates an additional gardening site, www.virtualgarden.com. In addition to
its Web site, the Company distributes seasonal, branded catalogs allowing both
existing and prospective customers an alternative means for purchasing the
Company's product offerings. The Company offers its suppliers a branding
opportunity, increased sales potential through an expanded customer base and the
ability to improve demand forecasting. By interacting with both its customers
and suppliers through the Internet, the Company provides consistent, high
quality customer service and streamlined distribution.
The Company uses its proprietary supplier information system, TRELLIS, to
provide information and submit orders to suppliers and to allow customers to
track their orders. The Company has recently launched a new division focusing
on its TRELLIS system with the intention of offering advanced virtual supply
chain management technology and a service solution to the retail industry and
other various industries.
According to its internal database records, the Company estimates that as
of June 30, 2000, its cumulative membership increased to 1.4 million, an
increase of approximately 117% over 645,000 for the same quarter in fiscal year
1999. Cumulative customer accounts reached 263,000 as of June 30, 2000, an
increase of 180% over 94,000 in the same quarter of fiscal year 1999. The
Company's revenues have increased to approximately $7.3 million in the quarter
ended June 30, 2000 from approximately $2.9 million in the quarter ended June
30, 1999.
3
<PAGE>
RESTRUCTURING PLAN
On September 28, 2000, the Company announced a corporate restructuring (the
"Restructuring Plan") with the intent of lowering ongoing operating expenses and
reducing future capital requirements. It is expected that the Restructuring
Plan will cost the Company between $2.5 million and $2.8 million. Pursuant to
the Restructuring Plan, the Company reduced its workforce on September 28, 2000
by 93 employees. In addition, the Company terminated or materially amended
multiple marketing initiatives, including the Company's relationships with
iVillage, Excite and PRIMEDIA, resulting in both write-offs of prepaid assets
and cash payments to third parties to discontinue certain contractual
obligations.
In connection with the Restructuring Plan, the Company announced the launch
of its TRELLIS division. It is anticipated that this division will concentrate
on developing additional revenue sources for the Company through software
licensing sales, ongoing software support fees and consulting revenues.
Additionally, the TRELLIS division will provide ongoing support to the Company's
Internet and branded catalog based sales efforts. At formation, the TRELLIS
division is comprised of 16 employees, or 10% of the total workforce of
Garden.com as of September 28, 2000.
Simultaneous with its announcement of the Restructuring Plan, the Company
also announced that it had engaged the investment bank of Robertson Stephens to
aid the Company in evaluating strategic alternatives and to assist the Company
with ongoing fund-raising efforts.
GARDEN.COM SOLUTION AND STRATEGY
The Company provides consumers with an intuitive, easy-to-use environment
through which they can access a wide variety of gardening information and
resources, purchase a broad selection of products and receive personalized
services, such as specific gardening advice, and interact with its online
gardening community. Key features of the Company's offerings for gardening
consumers include:
- Personalized Service. The Company targets personalized services and
content to consumers based on their individual preferences, geographic
location and level of gardening sophistication.
- New Distribution Channel. The Company has created a new distribution
channel between its consumers and suppliers that provides consistent
customer service and streamlined distribution.
- Branded Catalogs. The Company distributes seasonal, branded catalogs
allowing both existing and prospective customers an alternative means for
purchasing the Company's product offerings.
4
<PAGE>
- Breadth and Depth of Product Selection. The Company maintains a broad and
deep product selection for its customers. The Company's product line
includes live plants, shrubs, trees, bulbs, seeds, organic fertilizers and
pesticides, tools, furniture, garden ornaments, clothing, garden
accessories and a distinctive garden-inspired gift line.
- Compelling Content. The Company delivers compelling content on an
interactive basis, including daily and weekly online features, which are
hyperlinked to companion product offerings and which provide gardeners
with planting advice, design ideas, introductions to trends and
entertaining stories. The Company maintains a large and growing library of
gardening photography which provides inspiration and a horticultural
database which allows consumers to research by attribute or keyword.
- Gardening Community. The Company has created a community for users to
interact and share interests, ideas and gardening information. The Company
believes that this environment makes gardening information accessible to a
wide-range of gardeners and allows the gardening community from around the
world the opportunity to communicate with each other, gardening experts
and authors, friends and family, Garden.com editors and the Garden Doctor,
the Company's network of dedicated gardening experts.
The Company intends to continue to provide products and services to home
gardeners through its Web site and branded catalogs while developing its
technology, including TRELLIS and potentially other proprietary software
applications, as additional revenue sources. As reflected in the Restructuring
Plan, the Company intends to reduce ongoing operating expenses. Such reduction
in expenses combined with the Company's limited cash, cash equivalent and
investment balances may impair the Company's ability to successfully implement
all or part of the Company's strategy, which would have an adverse effect on the
Company's business, operating results and financial condition.
GARDEN.COM'S PRODUCTS AND SERVICES
The Company provides consumers with a complete online gardening destination
integrating gardening commerce, content and community. The Company believes it
offers attractive benefits to consumers, including convenience, ease-of-use,
personalization, enhanced product selection, depth of content and information
and avenues for community. Key features of the Garden.com experience include:
Shopping Departments and Utilities. The Company categorizes its products
into three broad categories: livegoods, hardgoods, and gifts and seasonal. A
description of these categories and other Garden.com shopping utilities follows.
- Livegoods. With its broad selection of perennials, herbs, bulbs, seeds,
trees and shrubs, the Company believes that it currently offers one of the
largest selection of plants and flowers available from a single source.
The Company offers consumers a comprehensive selection of both traditional
and specialty plants. The Company also offers a number of preselected
combinations of plants and flowers, which the Company markets through its
Web site's editorial content. In addition, the Company sells complete
garden kits comprised of plant collections and complementary tools.
5
<PAGE>
- Hardgoods. The Company offers an extensive selection of gardening-related
products including furniture, ornaments, tools, books, organic pest and
fertilizer solutions and gardening accessories. The Company believes that
its gardening-related products complement its diverse plant product
offerings.
- Gifts and Seasonal. The Company offers a range of holiday, wedding,
birthday and special occasion gifts, including wreaths, cut flowers and
bath and body products. The Company has developed distinctive gift
packaging to differentiate its brand and to enhance the gift recipient's
experience.
- Online and Branded Catalog Ordering. Visitors can place items into their
shopping "wheelbarrow" which can be saved from online session to online
session. Customers can make purchases via online secure credit card
transaction or via a toll-free number.
- Customer Solutions. Through the Customer Solutions Center, customers gain
full access to their order status, order history, frequently asked
questions and other customer services. In addition, Customer Solutions
provides general help and horticultural advice through timely response to
e-mail and a dedicated toll-free number.
Garden Design. The Company provides its users with the resources necessary
to plan their gardens, design garden plots and choose the appropriate plants for
their gardens. The Company offers the following specialized garden design
features to its users:
- Landscape Planner. Landscape Planner enables its users to graphically
design a garden plot, by dragging and dropping plants onto a grid. Once
the customer has completed the garden design, the customer can purchase
the plants used in the design. Using Landscape Planner, customers can
further customize one of the Company's garden designs to meet their needs
and preferences.
- Plant Finder. Visitors can use Plant Finder to search its proprietary
database of plants and flowers to get suggestions tailored to a member's
preferences, geographic location, and garden conditions.
- Garden Designs and Collections / Design Portfolio. The Company has
established several predesigned garden plans to provide ideas, highlight
many facets of gardening and inspire creativity. The Design Portfolio
provides useful tips and information on garden design and maintenance.
Once a user has researched the garden designs, the user can purchase the
plants highlighted in the Company's Design Portfolio.
- Garden Minder. Garden.com members can sign up for a personalized,
semi-monthly e-mail on a variety of garden related subjects, such as lawn
or rose care, alerting them to time-sensitive garden care and maintenance
tips.
6
<PAGE>
Gardening Content. The Company's retailing strategy integrates content
with product merchandising, blending a publishing strategy with its retail
efforts. To pursue this strategy, the Company maintains five distinct test
gardens where many of its designs, products and how-to features are researched
and photographed. Below is a sampling of the content that the Company provides
its users:
- Online Magazine. Created exclusively for online purposes, the magazine
section of garden.com includes weekly inspirational features, garden
ideas, practical tips, design advice and planting guides, which
incorporate the latest gardening trends. In addition, the Company provides
more targeted content focusing on topics such as weekend projects, kitchen
gardening, wildlife and famous gardens of the world. This content serves
as a merchandising platform to highlight various products and gardening
activities offered on Garden.com's Web site.
- Regional Gardening. For those seeking gardening advice specific to their
region, the Company offers specific ideas and planting advice from
Garden.com's ten regional gardening editors. In addition, its Regional
Gardening section highlights monthly to-do lists, activities and native
plants. Sales promotions and other gardening utilities are tailored for
each of the ten regions of the country designated by Garden.com.
Community. The Company has created an environment which makes gardening
information accessible to a wide range of gardeners and facilitates discussion
and exchange between gardeners. In building a successful community of active
members and loyal customers, the Company uses the following features:
- Chat Sessions. Through the Company's newsgroups and chat rooms, members
can easily communicate with each other, authors and other gardening
experts. The Company also offers additional activities for its members
such as live chat sessions with gardening experts and online garden design
classes.
- Garden Doctor. Through Garden Doctor, the Company provides a network of
gardening experts dedicated to answering Garden.com member's questions.
This valuable resource offers personalized solutions to the Company's
users' problems. In this way, the Company makes gardening more
approachable and enjoyable to a wider range of consumers.
As a result of the reduced expenditures contemplated by the Restructuring
Plan and the Company's limited cash, cash equivalent and investment balances,
the Company may be unable to provide the same commerce, content and community
offerings to consumers. This reduction in products and services could result in
reduced product and advertising revenue levels.
7
<PAGE>
ADVERTISING SALES
Through its internal sales force, the Company has continued to actively
pursue advertising sales as an additional revenue source. A variety of
marketers, including IKEA, GMC Trucks, Nestle's Taster's Choice, Sears.com and
Wells Fargo Home Equity, have advertised with the Company through multiple
advertising vehicles including the Web site and member and customer e-mail
programs. The Company intends to continue to explore promotional and
distribution arrangements that generally have longer terms and higher dollar
value than typical banner advertising deals to support brand marketing
objectives, including product awareness and introductions, online research and
editorial integration. Advertising sales accounted for approximately 13% of the
Company's revenues in the fiscal year ended June 30, 2000. The Company's
ability to grow advertising sales in future periods will depend in part upon its
ability to successfully implement its overall strategy at the lower expense
levels contemplated by the Restructuring Plan. The Company's advertising sales
may also be adversely affected by financial difficulties being experienced by
other Internet and e-commence companies that may result in reduced advertising
expenditures by such companies. In connection with the Restructuring Plan, the
Company has discontinued Garden Escape Magazine.
MARKETING AND PROMOTION
Marketing and Promotion Strategy. The Company's marketing and promotion
strategy is designed to:
- maximize repeat purchases;
- build strong customer loyalty;
- increase consumer traffic to the garden.com Web site;
- add new customers; and
- develop incremental revenue opportunities.
Marketing and Promotion Channels. In order to implement the Company's
marketing and promotion strategy, the Company has employed multiple channels,
including:
- Branded Catalogs and Other Direct Marketing. The Company is conducting an
ongoing direct mail campaign that distributes a variety of direct response
pieces, including seasonal, branded catalogs and commerce and content
based e-mails listing upcoming features and promotions on the Company's
Web site. The Company sends mailings to selected members, customers and
third party lists.
8
<PAGE>
- Customer Retention Efforts. The Company's customer retention efforts
include its one year, 110% guarantee on all products; Garden Minder;
Bloom Times, a monthly e-mail newsletter distributed to the Company's
entire membership featuring products, promotions, upcoming features and
chat events; targeted e-mail promotions, such as the first time buyer
program, occasional sales and holiday promotions; and Shoppers'
Preview, a service that sends customized e-mails about new products and
promotions, tailored to specific customer segments identified in the
customer database.
- Affiliate Program. The Company's affiliate initiative, which was launched
in October 1999, currently has over 23,000 affiliate members. The
affiliate program is supported by a link on the Web site, where third-
party Web sites can register to sell garden.com products on a sales
commission basis.
- Other Marketing and Promotion Channels. The Company has historically
engaged in multiple programs of print, radio, television and Internet
advertising to access potential customers. The Company expects that these
programs will represent a less significant percentage of overall marketing
and promotion spending in future periods.
Consistent with the reduction in expenses contemplated by the Restructuring
Plan and the Company's limited cash, cash equivalent and investment balances,
the Company expects to spend fewer absolute dollars on marketing and promotional
efforts for the year ending June 30, 2001 than in the prior fiscal year. As a
result, the Company may not be able to successfully implement its marketing and
promotion strategy, which would have an adverse effect on the Company's
business, operating results and financial condition.
SUPPLY MANAGEMENT
As of June 30, 2000, the Company had over 70 supplier relationships. The
Company uses these relationships and its TRELLIS technology to "virtually
integrate" the gardening supply chain to provide a broader product selection to
its customers than the Company believes is currently available through any other
gardening retail channel. To address the highly fragmented supply base,
geographically dispersed suppliers and the perishability of live planting
material, the Company has assembled a virtual warehouse for its gardening and
gardening-related products.
The Company's suppliers benefit from its unique marketing channel without
dedicating resources to build an online presence. As of June 30, 2000, the
Company had strategic mutually exclusive or semi-exclusive online relationships
with approximately 25 of its suppliers. Under these relationships, the supplier
serves as the Company's exclusive provider of a specific product line and the
Company in turn acts as either the exclusive online outlet, or one of a limited
number of online outlets, for the respective suppliers' products. For the
fiscal year ended June 30, 2000, shipments from these 25 suppliers accounted for
greater than 65% of the Company's total product revenue. However, in the event
that its demand unexpectedly exceeds the quantities its suppliers can provide,
the Company has the right to establish relationships with alternative suppliers
that the Company believes can satisfy its demand on reasonable terms. Finally,
the Company negotiates pricing with suppliers based upon the supplier's
wholesale price at the beginning of each shipping season.
9
<PAGE>
For the fiscal year ended June 30, 2000, one external supplier, Milaeger's
Gardens, accounted for more than 12% of the Company's revenue.
To ensure that the Company's automated supply network is efficient and
scaleable, the Company uses its TRELLIS technology to enable the efficient
exchange of information with the Company's suppliers. Over 95% of product
shipments are now processed through the Company's automated supply network as
orders are placed online, automatically downloaded to the Company's suppliers
for fulfillment and directly shipped to the Company's customers via Federal
Express. By avoiding the expense and overhead of traditional multi-tier
distribution models that focus on centralized distribution, the Company believes
it has a competitive advantage over traditional gardening retailers. While the
majority of the Company's customer orders are directly shipped from its
suppliers, the Company maintains an inventory of specialty gifts, promotional
items and some high volume products in its Austin, Texas warehouse.
The Company leverages information systems capabilities of Federal Express
to link Garden.com with its suppliers and customers. In conjunction with
Federal Express, the Company developed the TRELLIS shipping module to virtually
integrate its supply chain. This system provides significant efficiencies by
automating the process for updating order status and offers the reliability of
Federal Express delivery. The Company's order process and the respective roles
of its suppliers and Federal Express can be summarized as follows:
1. A customer visits the garden.com Web site, browses for products,
selects items for purchase and completes the order online or by calling the
Company's Customer Solutions 800 telephone number. A customer may purchase
several items on the same order, and these items may ship directly from one or
more of the Company's suppliers.
2. The customer order automatically is recorded in TRELLIS.
3. After the order is recorded, the Company routes it to the
appropriate supplier or suppliers for processing via TRELLIS. Suppliers can
access the Internet, enter a special supplier area of the garden.com Web site,
view all the orders that contain one of their products and print packing slips
to prepare the order.
4. The supplier prepares the order for shipment by selecting the items
specified on the packing slip from its warehouse or growing field and by packing
the items.
5. The supplier then downloads a Federal Express shipping label from
TRELLIS and places the label on the exterior of the box. When the supplier
requests a label for an order, the Company's system also automatically updates
that customer's order record with the Federal Express tracking number. From the
time the order is placed until it is delivered to the customer's location, both
the Company's Customer Solutions representatives and the customer can track
order status and package location during shipment through the garden.com Web
site.
6. Federal Express picks up all of the processed orders and delivers
the orders directly to the location specified by the customer in its online
order.
10
<PAGE>
7. The supplier then uses TRELLIS to print a summary of all the items
processed that day for the Company and uses the summary to invoice the Company
on a weekly or monthly basis.
8. Federal Express bills the Company directly for all the shipping
costs associated with each order. The Company's suppliers are not responsible
for processing shipping invoices.
As a result of reduced expenses contemplated by the Restructuring Plan and
the Company's limited cash, cash equivalent and investment balances, the Company
may experience problems with its supplier base or with Federal Express. These
vendors may be unwilling to continue to supply Garden.com with the products or
services necessary to successfully implement its strategy or may require other
terms and conditions adverse to the Company. In addition the Company may not be
able to attract new suppliers or shipping carriers because of concerns regarding
the Company's ability to continue to operate its business.
OPERATIONS AND TECHNOLOGY
The Company's Web site is run off multiple front-end Web servers and an
enterprise database server. The Company's servers are located at a third-party
network operating center in Austin, Texas, which provides 24-hour systems
support and connectivity via high speed DS-3 and higher connections.
Additionally, the Company maintains another set of servers at its headquarters,
to promote redundancy from the primary servers. These services and systems are
based on a combination of the Company's own proprietary technologies, including
TRELLIS, Landscape Planner and Plant Finder, and commercially available,
licensed technologies. As part of the Company's continuing effort to refine its
automated supply network, the Company uses its Austin, Texas warehouse to test
technological upgrades and enhancements to the network. The Company believes
that its Web site and its proprietary supplier information system, TRELLIS,
provide the amount of customization, interactivity and performance required by
online consumers and suppliers. The Company uses a set of applications for:
- accepting and validating customer orders;
- organizing, placing and managing orders with suppliers;
- notifying and updating customers of order status; and
- managing shipment of products to customers.
The Company is currently engaged in a project to upgrade its system
architecture, involving the purchase from third parties of computer equipment,
software and consulting services. The Company believes this investment will
assist Garden.com in the implementation of its strategy by expanding the
internal system capacity and functionality needed to help support potential
growth in both product demand and visitors to the Web site. As of June 30, 2000
the Company had invested approximately $2.7 million related to this system
architecture upgrade, and anticipates that it will make the remaining purchases
of approximately $5.7 million by December 31, 2000.
11
<PAGE>
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards and changing customer demands.
Accordingly, the Company's future success will depend on its ability to adapt to
rapidly changing technologies, to adapt its services to evolving industry
standards and to continually improve the performance, features and reliability
of its service in response to competitive service and product offerings and
evolving demands of the marketplace. The Company's failure to adapt to such
changes would have a negative impact on its operating results. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by the Company to modify or adapt its services or infrastructure
which could have a negative impact on its operating results.
In connection with the Restructuring Plan, the Company announced the launch
of its TRELLIS division. It is anticipated that this division will concentrate
on developing additional revenue sources for the Company through software
licensing sales, ongoing software support fees, and consulting revenues.
During the first quarter of the fiscal 2001, the Company also formed a
subsidiary to pursue other software development opportunities. This subsidiary
is currently proceeding with its first software application project, which
involves developing computer software designed to enhance database performance.
The Company owns 80% of this subsidiary and the Company issued restricted stock
for the other 20% of this subsidiary to four executive officers of the Company.
The software applications being developed by this subsidiary are in the early
development stages, and the Company can make no assurance that this subsidiary
will be able to develop any commercially viable software applications,
particularly in view of the Company's limited resources.
As a result of reduced expenses contemplated by the Restructuring Plan and
the Company's limited cash, cash equivalent and investment balances, the Company
may experience problems related to operations and technology development. The
Company may be unable to retain or attract employees with the required
technological skills. In addition the Company may have insufficient resources to
invest in the hardware or software products necessary to successfully implement
its strategy.
COMPETITION
Internet and online commerce generally, and the online retail gardening
market specifically, are new, rapidly evolving and intensely competitive, and
the Company expects such competition to intensify in the future. The Company
currently or potentially competes with a variety of other companies, including:
- traditional local nurseries;
- home improvement superstores, such as Lowe's and Home Depot;
12
<PAGE>
- 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 believes that the following are principal competitive factors
in its market:
- convenience;
- quality;
- selection;
- customer service;
- information; and
- brand recognition.
Many of these current and potential competitors can devote substantially
more resources to Web site and systems development than the Company. In
addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with the Company's online competitors. Some of
the Company's competitors may be able to secure products from suppliers on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than the Company can.
Finally, new technologies and the expansion of existing technologies, such as
price comparison programs that select specific products from a variety of Web
sites, may direct customers to other online gardening destinations. If the
Company faces increased competition, its operating results may be negatively
impacted.
The Company believes that its TRELLIS division will face intense
competition as the Company attempts to commercialize internally developed
technology. Competitors to the TRELLIS division could include Yantra, Optum,
AtlasCommerce and Order Trust. The Company believes that its lack of experience
in commercializing technology and its limited resources may put the TRELLIS
division at a disadvantage as compared to its competitors.
13
<PAGE>
INTELLECTUAL PROPERTY
The Company regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its future success and
relies on a combination of copyright, trademark, service mark and trade secret
laws and contractual restrictions to establish and protect its proprietary
rights in products and services. The Company has entered into confidentiality
and invention assignment agreements with its employees and contractors, and
nondisclosure agreements with its suppliers and strategic partners in order to
limit access to and disclosure of its proprietary information. There can be no
assurance that these contractual arrangements or the other steps taken by the
Company to protect its intellectual property will prove sufficient to prevent
misappropriation of its technology or to deter independent third-party
development of similar technologies. The Company pursues the registration of
its trademarks and service marks in the U.S. and internationally. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which the Company's services are made available
online. The Company has licensed in the past, and expects that it may license
in the future, certain of its proprietary rights, such as trademark or
copyrighted material, to third parties. While the Company attempts to ensure
that the quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company also relies on certain
technologies that it licenses from third parties, including the suppliers of the
operating systems and financial and reporting system for its business. There
can be no assurance that these third-party technology licenses will continue to
be available to the Company on commercially reasonable terms. The loss of such
technology could require the Company to obtain substitute technology of lower
quality or performance standards or at greater cost, which could negatively
impact the Company's business, results of operations and financial condition.
To date, the Company has not been notified that its technologies infringe
the proprietary rights of third parties. There can be no assurance that third
parties will not claim infringement by the Company with respect to past, current
or future technologies. The Company expects that participants in its markets
will be increasingly subject to infringement claims as the number of services
and competitors in the Company's industry segment grows. Any such claim,
whether meritorious or not, could be time-consuming, result in costly
litigation, cause service upgrade delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to the Company or at all. As a result, any
such claim could have a material adverse effect upon the Company's business,
results of operations and financial condition.
GOVERNMENT REGULATION
The Company is not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising,
14
<PAGE>
intellectual property rights and information security. The nature of such
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, such legislation could subject the Company
and/or its customers to potential liability, which in turn could have an adverse
effect on the Company's business, results of operations and financial condition.
The adoption of any such laws or regulations might also decrease the rate of
growth of Internet use, which in turn could decrease the demand for the
Company's service or increase the cost of doing business or in some other manner
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
information is collected from users and provided to third parties. Changes to
existing laws or the passage of new laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace that could reduce demand for the Company's services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could in some other manner have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, because the Company's services are accessible throughout the United
States, other jurisdictions may claim that the Company is required to qualify to
do business as a foreign corporation in a particular state. The Company is
qualified to do business in California, Iowa, Michigan and Texas and its failure
to qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to qualify
and could result in its inability to enforce contracts in such jurisdictions.
Any such new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, results of operations and financial condition.
In addition to regulations applicable to businesses generally, the Company
is regulated by federal, state and local governmental agencies with respect to
the shipment of plants and other live goods, fertilizers and pesticides. For
example, the California Department of Food and Agricultural restricts the import
of plants into California from those states or regions which may have
undesirable diseases, parasites or insects. The Company currently seeks to rely
upon its suppliers to meet the various regulatory and other legal requirements
applicable to the Company's business. However, the Company is unable to verify
that they have in the past, or will in the future, always do so, or that their
actions are adequate or sufficient to satisfy all governmental requirements that
may be applicable to these sales. The Company would be fined or exposed to
civil or criminal liability, and the Company could receive potential negative
publicity, if these requirements have not been fully met by its suppliers or by
the Company directly.
15
<PAGE>
There are, to the Company's knowledge, currently no investigations,
inquiries, citations, fines, or allegations of violations or noncompliance
pending by government agencies or by third parties against the Company. It is
possible that there may be investigations or allegations in the future. The
risk that any noncompliance may be discovered in the future is currently
unknown. Although any potential impact on the Company for noncompliance cannot
currently be established, it could result in civil or criminal penalties,
including monetary fines and injunctions, for noncompliance and negative
publicity, and have a material adverse impact on the Company's business,
revenues, results of operations and financial conditions.
EMPLOYEES
As of June 30, 2000, the Company employed 267 full-time equivalent
individuals. Pursuant to the Restructuring Plan, the Company reduced its
workforce on September 28, 2000 by 93 employees. The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and senior management personnel. The loss of the services of
one or more of the Company's key employees could negatively impact the Company's
business, operating results and financial condition. With potential employee
uncertainty resulting from the Restructuring Plan and the Company's limited
resources, there can be no assurance that the Company will be able to retain and
motivate its employees. The Company has adopted a severance policy for those
employees remaining after the implementation of the Restructuring Plan. None of
the Company's employees is represented by a labor union.
ITEM 2. PROPERTIES
The Company's headquarters are located in Austin, Texas at 3301 Steck
Avenue, Austin, Texas 78757. The Company also maintain an office in Des Moines,
Iowa, where its publishing office is located and where the Company maintains
five test gardens, where products are grown, tested and evaluated for the main
product line. The Company leases all of its facilities, with the Austin lease
comprising approximately 32,500 square feet of office and warehouse space and
the Iowa lease comprising approximately 1,500 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this report, the Company is not a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2000.
16
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"GDEN". The following table sets forth the high and low closing sale prices for
the Common Stock as reported by the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
QUARTER HIGH LOW
--------------------------------------------- ------- -------
<S> <C> <C>
First (September 16, 1999-September 30, 1999) $20.813 $14.969
Second. . . . . . . . . . . . . . . . . . . . $19.000 $ 8.500
Third . . . . . . . . . . . . . . . . . . . . $10.500 $ 6.750
Fourth. . . . . . . . . . . . . . . . . . . . $ 8.500 $ 2.375
</TABLE>
At June 30, 2000, there were approximately 194 holders of record of Common
Stock.
The Company has not paid any cash dividends on its Common Stock. The
Company intends to retain any earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended June 30, 2000,
1999, 1998 and 1997 and for the period from October 2, 1995 (inception) to June
30, 1996 and the balance sheet data as of June 30, 2000, 1999, 1998, 1997 and
1996 are derived from the Company's financial statements that have been audited
by Ernst & Young LLP, independent auditors.
17
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, Period from
--------------------------------------------------- October 2, 1995
(inception) to
2000 1999 1998 1997 June 30, 1996
------------ ----------- ----------- ----------- ---------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Products. . . . . . . . . . $ 13,564 $ 4,952 $ 1,283 $ 308 $ 8
Advertising . . . . . . . . 1,938 442 56 8 --
------------ ----------- ----------- ----------- ---------------
Total revenues . . . . . . . . 15,502 5,394 1,339 316 8
------------ ----------- ----------- ----------- ---------------
Cost of revenues:
Products. . . . . . . . . . . 11,416 4,466 1,086 242 5
Advertising . . . . . . . . . 205 74 22 4 --
------------ ----------- ----------- ----------- ---------------
Total cost of revenues . . . . 11,621 4,540 1,108 246 5
------------ ----------- ----------- ----------- ---------------
Gross Profit. . . . . . . . . . 3,881 854 231 70 3
Operating expenses:
Marketing and sales . . . . . 26,654 13,305 2,411 927 189
Technology, content and
product development. . . . . 6,918 3,167 1,188 858 161
General and administrative. . 7,052 2,941 1,218 668 311
Depreciation and amortization 2,107 610 219 97 29
Amortization of deferred
compensation . . . . . . . . 1,136 674 73 -- --
Restructuring and other
activities . . . . . . . . . 888 -- -- -- --
------------ ----------- ----------- ----------- ---------------
Total operating expenses . 44,755 20,697 5,109 2,550 690
------------ ----------- ----------- ----------- ---------------
Operating loss. . . . . . . . . (40,874) (19,843) (4,878) (2,480) (687)
Other income and expense. . . . 2,151 784 194 40 22
------------ ----------- ----------- ----------- ---------------
Net loss. . . . . . . . . . . . $ (38,723) $ (19,059) $ (4,684) $ (2,440) $ (665)
============ =========== =========== =========== ===============
Beneficial conversion
feature and insubstance
dividend. . . . . . . . . . . -- (2,700) -- -- --
------------ ----------- ----------- ----------- ---------------
Net loss application to
common stockholders . . . . . $ (38,723) $ (21,759) $ (4,684) $ (2,440) $ (665)
============ =========== =========== =========== ===============
Basic net loss per share. . . . $ (2.74) $ (20.48) $ (4.68) $ (2.44) $ (1.19)
============ =========== =========== =========== ===============
Shares used to compute
basic net loss per share. . . 14,149,167 1,062,696 1,000,820 999,993 558,908
Balance Sheet Data:
Cash and cash equivalents . . $ 9,047 $ 15,340 $ 19,042 $ 4,948 $ 114
Working capital . . . . . . . 25,023 18,323 18,308 4,568 (10)
Total assets. . . . . . . . . 42,495 25,222 20,489 5,423 323
Total liabilities and
deferred revenue . . . . . . 7,546 3,343 1,473 586 251
Total redeemable
convertible preferred
stock, warrants, and
stockholders' deficit. . . . 34,949 21,879 19,015 4,837 92
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Financial
Statements and the related notes. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as the Company's plans, objectives, expectations and intentions. The
Company's actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Item 1 - Business" and
elsewhere in this report. See "- Additional Factors that May Affect Future
Results."
OVERVIEW
The Company was formed in December 1995 as Garden Escape, Inc. as a result
of a merger with The Asbury Group, Inc., a Texas company formed in October 1995.
The Company began offering products for sale on its Web site in March 1996. For
the period from the Company's inception on October 2, 1995 through March 1996,
the Company had no sales and its operating activities related primarily to
developing its Web site and computer infrastructure and establishing supplier
relationships. Since launching its Web site, the Company has continued these
operating activities and has also focused on building sales momentum, extending
its product offerings, establishing supplier and vendor relationships, promoting
its brand and establishing distribution and Customer Solutions operations. As a
result, the Company's operating expenses have increased significantly. In
February 1999, the Company changed its name to Garden.com, Inc.
The Company derives its revenues primarily from product sales and shipping
charges. For approximately 80% of the Company's product revenues, customers
place orders on the Company's Web site which orders are routed to the
appropriate third-party supplier. The Company takes title to all goods and,
accordingly, has the risks and rewards of ownership for each shipment. The
remaining 20% of the Company's product revenues are for products purchased and
inventoried by the Company and shipped to customers when ordered. The Company
buys products from the suppliers at a wholesale price and then sells the
products to the customer at a retail price. The revenues the Company records
reflect the sales price of the products collected from the customer. The
revenues generated from shipping charges to the Company's customers do not have
a direct correlation to the costs that the Company pays Federal Express for
shipping the products. Typically, the Company charges the customer a shipping
amount equal to the greater of $4.50 and a variable percentage from 10 to 18
percent for shipping based on the total purchase amount. Revenues received from
shipping charges are recognized when the related products for that order are
shipped to the customer. Seasonal factors typically influence product
availability and the timing of product shipments, which may affect the period of
revenue recognition and, therefore, may 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
summer.
19
<PAGE>
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.
The Company also has generated revenues through advertising on its Web site
or in its print publications, including Garden Escape Magazine which the Company
discontinued during the first quarter of fiscal 2001. Approximately 95% of the
Company's advertising revenues represent transactions in which the Company
recognizes a short-term receivable that typically is converted into cash within
60 to 90 days. The remaining percentage of the Company's advertising revenues
consists of barter transactions in which the Company receives advertising with
companies in exchange for offering those companies guaranteed impressions on its
Web site. Advertising revenues are derived principally from short-term
advertising contracts in which the Company typically guarantees a minimum number
of impressions to be delivered to users over a specified period of time for a
fixed fee. Advertising revenues are recognized ratably in the period in which
the advertisement is displayed. Because advertising revenues are less seasonal
than product revenues, the higher gross margins associated with advertising
revenue may have a more pronounced effect on the total gross margin in periods
when product sales are lower.
On September 28, 2000, the Company announced its Restructuring Plan with
the intent of lowering ongoing operating expenses and reducing future capital
requirements. It is expected that the Restructuring Plan will cost the Company
between $2.5 million and $2.8 million. Pursuant to the Restructuring Plan, the
Company reduced its total workforce on September 28, 2000 by 93 employees. In
addition, the Company terminated or materially amended multiple marketing
initiatives, including the Company's relationships with iVillage, Excite and
PRIMEDIA, resulting in both write-offs of prepaid assets and cash payments to
third parties to discontinue certain contractual obligations.
In connection with the Restructuring Plan, the Company announced the launch
of its TRELLIS division. It is anticipated that this division will concentrate
on developing additional revenue sources for the Company through software
licensing sales, ongoing software support fees and consulting revenues.
Additionally, the TRELLIS division will provide ongoing support to the Company's
Internet and branded catalog based sales efforts. At formation, the TRELLIS
division is comprised of 16 employees, or 10% of the total workforce of
Garden.com as of September 28, 2000.
Simultaneous with its announcement of the Restructuring Plan, the Company
also announced that it had engaged the investment bank of Robertson Stephens to
aid the Company in evaluating strategic alternatives and to assist the Company
with ongoing fund-raising efforts.
As a result of reduced expenses contemplated by the Restructuring Plan and
the Company's limited cash, cash equivalent and investment balances, the Company
may be unable to successfully implement its strategy, which would have an
adverse effect on the Company's business, operating results and financial
condition.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations
expressed as a percentage of total revenues. The Company's historical operating
results are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Percentage of Revenues
---------------------------------
Fiscal Year Ended
June 30,
---------------------------------
2000 1999 1998
---------------- ---------------- ----------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenues:
Products 87% 92% 96%
Advertising . . . . . . . . . . . . . . . . 13 8 4
---------------- ---------------- ----------------
Total revenues . . . . . . . . . . . . . . . 100 100 100
---------------- ---------------- ----------------
Cost of revenues:
Products. . . . . . . . . . . . . . . . . . 74 83 81
Advertising . . . . . . . . . . . . . . . . 1 1 2
---------------- ---------------- ----------------
Total cost of revenues . . . . . . . . . . . 75 84 83
---------------- ---------------- ----------------
Gross profit. . . . . . . . . . . . . . . . . 25 16 17
Operating expenses:
Marketing and sales . . . . . . . . . . . . 172 247 180
Technology, content and product development 45 59 89
General and administrative. . . . . . . . . 45 55 91
Depreciation and amortization . . . . . . . 14 11 16
Amortization of deferred compensation . . . 7 12 6
Restructuring and other activities .. . 6 -- --
Total operating expenses . . . . . . . . . . 289 384 382
---------------- ---------------- ----------------
Operating loss. . . . . . . . . . . . . . . . (264) (368) (365)
Other income and expense. . . . . . . . . . . 14 15 15
---------------- ---------------- ----------------
Net loss. . . . . . . . . . . . . . . . . . . (250)% (353)% (350)%
================ ================ ================
</TABLE>
21
<PAGE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES
Products. Product revenues consist of product sales to customers and
charges to customers for shipping. Revenues are recorded net of promotional
discounts and coupons. Product returns are recorded as a reduction of revenues.
Product revenues increased 174% to $13.6 million, or 87% of total revenues, for
the fiscal year ended June 30, 2000 from $5.0 million, or 92% of total revenues,
for the fiscal year ended June 30, 1999. Product revenues increased primarily
as a result of the 180% growth in the Company's customer base, which the Company
believes was primarily influenced by increased marketing activities, expanded
product offerings and enhancements to the features and functionally of the
garden.com Web site.
Advertising. Advertising revenues increased 338% to $1.9 million, or 13%
of total revenues, for the fiscal year ended June 30, 2000 from $442,000, or 8%
of total revenues, for the fiscal year ended June 30, 1999. Advertising
revenues increased primarily due to the focus of an internal advertising sales
department established in February 1999, and a 76% increase in page views on the
Web sites to 170.4 million for the fiscal year ended June 30, 2000 from 96.9
million for the fiscal year ended June 30, 1999.
GROSS PROFIT
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. Gross profit increased to $3.9 million for the
fiscal year ended June 30, 2000 from $854,000 for the fiscal year ended June 30,
1999. Gross margin increased to 25% of total revenues for the fiscal year ended
June 30, 2000 from 16% of total revenues for the fiscal year ended June 30,
1999. 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, 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
fiscal year ended June 30, 1999. The Company may at times use discounting and
other promotional activities to promote customer purchases that would negatively
affect gross margins.
OPERATING EXPENSES
Marketing and Sales. 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 to $26.7 million, or 172% of total revenues, for the fiscal year ended
June 30, 2000 from $13.3 million, or 247% of total revenues, for the fiscal year
ended June 30, 1999. Marketing and sales expenses increased in absolute dollars
primarily due to an
22
<PAGE>
increase in the Company's advertising and promotional expenditures, and
increases in payroll costs associated with its marketing and Customer Solutions
departments. Marketing and sales expenses decreased as a percentage of revenue
due to the significant increase in total revenues.
Technology, Content and Product Development. Technology, 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 Company's personnel involved in these efforts produce
gardening related stories, graphics and photographs that appear in the Company's
Web site. In addition personnel involved in technology, content and product
development support the Company's Web site infrastructure and product
merchandising efforts, which involve the management of supplier relationships
and product demand planning. Technology, content and product development
expenses increased to $6.9 million, or 45% of total revenues, for the fiscal
year ended June 30, 2000 from $3.2 million, or 59% of total revenues, for the
fiscal year ended June 30, 1999. The increase in technology, 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 site. As a percent of total
revenues, technology, content and product development expenses decreased due to
the increase in total revenues during the period.
General and Administrative. 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. Supplier operations support includes costs such as travel and
computer related expenses incurred when consulting with new and existing
suppliers. For example, the Company configures computer software and hardware
located on the premises of its suppliers to ensure consistent and reliable
shipping performance from those suppliers. General and administrative expenses
increased to $7.1 million, or 45% of revenues, for the fiscal year ended June
30, 2000 from $2.9 million, or 55% of revenues, for the fiscal year ended June
30, 1999. 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. As a percent of total revenues, general
and administrative expenses decreased due to the increase in total revenues
during the period.
Depreciation and Amortization. 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. Depreciation and amortization
expenses increased to $2.1 million, or 14% of total revenues, for the fiscal
year ended June 30, 2000 from $610,000, or 11% of total revenues, for the fiscal
year ended June 30, 1999. 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.
23
<PAGE>
Amortization of Deferred Compensation. Deferred stock compensation is
amortized to expense over the vesting periods of the applicable stock options.
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 increased to
$1.1 million for the fiscal year ended June 30, 2000 from $674,000 for the
fiscal year ended June 30, 1999. 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>
Restructuring and other activities. In June 2000, the Company's management
initiated a restructuring effort that resulted in the Company incurring a
restructuring charge of $888,000. This charge includes asset write-offs on
discontinued Company initiatives, including prepaid costs for a landscaping
product test, severance related to an internal restructuring and a note
receivable from a European based internet gardening company.
OTHER INCOME AND EXPENSE
Other income and expense consists of interest earned on cash and cash
equivalents and short-term investments offset by interest expense on borrowings.
Other income and expense increased to $2.1 million for the fiscal year ended
June 30, 2000 from $784,000 for the fiscal year ended June 30, 1999 due to nine
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.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
REVENUES
Products. Product revenues increased 286% to $5.0 million, or 92% of total
revenues, for the fiscal year ended June 30, 1999 from $1.3 million, or 96% of
total revenues, for the fiscal year ended June 30, 1998. Product revenues
increased primarily as a result of the 293% growth in the Company's customer
base, which the Company believes was primarily influenced by increased marketing
activities, expanded product offerings and enhancements to the features and
functionality of the garden.com Web site.
Advertising. Advertising revenues increased 689% to $442,000, or 8% of
total revenues, for the fiscal year ended June 30, 1999 from $56,000, or 4% of
total revenues, for the fiscal year ended June 30, 1998. Advertising revenues
increased primarily due to a 163% increase in page views on the Web sites to
96.9 million for the fiscal year ended June 30, 1999 from 36.9 million for the
fiscal year ended June 30, 1998.
24
<PAGE>
GROSS PROFIT
Gross profit consists of total revenues minus cost of total revenues.
Gross profit increased to $854,000 for the fiscal year ended June 30, 1999 from
$231,000 for the fiscal year ended June 30, 1998. Gross margin decreased to 16%
of total revenues for the fiscal year ended June 30, 1999 from 17% of total
revenues for the fiscal year ended June 30, 1998 due primarily to a one-time
promotional activity in the latter period designed to attract first-time
customers, which was partially offset by an increase in higher margin
advertising revenues. This one-time promotional activity decreased gross profit
by $79,000 for the fiscal year ended June 30, 1999.
OPERATING EXPENSES
Marketing and Sales. Marketing and sales expenses increased to $13.3
million, or 247% of total revenues, for the fiscal year ended June 30, 1999 from
$2.4 million, or 180% of total revenues, for the fiscal year ended June 30,
1998. Marketing and sales expenses increased primarily due to increases in
expenses related to advertising to promote the Company's brand and to acquire
new customers as well as increases in payroll and related costs used to hire
additional marketing, sales, and Customer Solutions personnel.
Technology, Content and Product Development. Technology, content and
product development expenses increased to $3.2 million, or 59% of total
revenues, for the fiscal year ended June 30, 1999 from $1.2 million, or 89% of
total revenues, for the fiscal year ended June 30, 1998. The increase in
technology, 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
site. As a percent of total revenues, content and product development expenses
decreased due to the increase in total revenues during the period.
General and Administrative. General and administrative expenses increased
to $2.9 million, or 55% of revenues, for the fiscal year ended June 30, 1999
from $1.2 million, or 91% of revenues, for the fiscal year ended June 30, 1998.
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. As a percent of total revenues, general and
administrative expenses decreased due to the increase in total revenues during
the period.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $610,000, or 11% of total revenues, for the fiscal year ended June
30, 1999 from $219,000, or 16% of total revenues, for the fiscal year ended June
30, 1998. The increase in depreciation and amortization expense in absolute
dollars 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.
25
<PAGE>
Amortization of Deferred Compensation. In the fiscal years ended June 30,
1999 and 1998, the Company recorded total deferred stock compensation of
$2,739,000 and $314,000, respectively, in connection with stock options granted
during the period. Such amounts resulted in expenses of $674,000 and $73,000
for the fiscal years ended June 30, 1999 and 1998.
OTHER INCOME AND EXPENSE
Other income increased to $784,000 for the fiscal year ended June 30, 1999
from $193,000 for the fiscal year ended June 30, 1998 as a result of interest
earned on the net proceeds from the sale of the Company's preferred stock in
June 1998, April 1999 and May 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of preferred stock, its initial public offering and, to a
lesser extent, from revenues generated by operations. As of June 30, 2000, the
Company had approximately $9.0 million in cash and cash equivalents and $18.6
million in short-term investments.
Net cash used in operating activities increased to $32.8 million for the
fiscal year ended June 30, 2000 from $18.5 million for the fiscal year ended
June 30, 1999. The increase in net cash used in operating activities can be
substantially attributed to the increased net loss.
Net cash used in investing activities increased to $23.8 million for the
fiscal year ended June 30, 2000 from $6.3 million for the fiscal year ended June
30, 1999. The increase in net cash used in investing activities resulted
primarily from the purchase of securities for investment purposes and from the
purchase of property and computer equipment. Cash available for investment
purposes increased substantially during the fiscal year ended June 30, 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 increased to $50.3 million for
the fiscal year ended June 30, 2000 from $21.1 million for the fiscal year ended
June 30, 1999. The increase in net cash provided by financing activities
resulted primarily from net proceeds from the issuance of common stock in the
Company's initial public offering.
At June 30, 2000, approximately $20,000 was outstanding under the Company's
line of credit term note. The facility bears interest at the bank's prime rate
plus 1%. The assets purchased with the proceeds from the line of credit term
note secure the borrowings under this line of credit term note. These assets
consist primarily of purchased computer equipment.
The Company believes that its current cash and marketable securities and
investments balances will be sufficient to meet its anticipated cash needs until
December 31, 2000. Any projections of future cash needs and cash flows are
subject to substantial uncertainty. The Company's capital requirements depend
on several factors, including:
26
<PAGE>
- the effect of the Restructuring Plan on the Company's ability to continue
to expand its customer base and increase revenues;
- the rate of market acceptance of the Company's online solution;
- the Company's level of expenditures for marketing and sales;
- purchases of equipment and software;
- the cost of Web site upgrades;
- costs associated with the staffing and development of the TRELLIS
division; and
- other factors, including unforeseen factors and developments.
It is imperative that the Company complete a significant financing during
the quarter ending December 31, 2000. Although the Company has been attempting
to raise additional equity financing since the quarter ended June 30, 2000, the
Company has not been able to obtain financing on acceptable terms as of October
13, 2000. The Company has retained the investment bank of Robertson Stephens to
aid the Company in evaluating strategic alternatives and to assist the Company
with ongoing fund-raising efforts.
If additional funds are raised through the sale of additional equity or
convertible debt securities, the Company's stockholders could experience
additional dilution. Debt financing, if available, may involve restrictive
covenants that could restrict the Company's operations or finances. The Company
may also issue new equity securities with rights, preferences or privileges
senior to the Common Stock. There can be no assurance that financing will be
available in amounts or on terms acceptable to the Company, if at all. The
Company will need additional financing during the quarter ending December 31,
2000 to meet its future capital requirements and execute on its business
strategy. If the Company cannot raise funds on acceptable terms or complete an
alternative strategic transaction, the Company may not be able to continue its
operations, develop or enhance its Web site, develop its TRELLIS division, 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 MAY AFFECT FUTURE RESULTS
Some of the statements in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Item 1 - Business" and
elsewhere in this report constitute forward-looking statements. These
statements involve known and unknown risks, uncertainties, and other factors
that may cause the Company's actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual
27
<PAGE>
events or results may differ materially. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable, the
Company cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither the Company nor any other person assumes
responsibility for the accuracy and completeness of such statements. The
Company is under no duty to update any of the forward-looking statements after
the date of this report to conform such statements to actual results.
In addition to the factors discussed elsewhere in this report, the
following additional factors may affect the Company's future results.
THE COMPANY WILL NEED ADDITIONAL FINANCING DURING THE QUARTER ENDING DECEMBER
31, 2000 TO MEET ITS FUTURE CAPITAL REQUIREMENTS AND EXECUTE ON ITS BUSINESS
STRATEGY. IF THE COMPANY CANNOT RAISE FUNDS ON ACCEPTABLE TERMS OR COMPLETE AN
ALTERNATIVE STRATEGIC TRANSACTION, THE COMPANY MAY NOT BE ABLE TO CONTINUE ITS
OPERATIONS, DEVELOP OR ENHANCE ITS WEB SITE, DEVELOP ITS TRELLIS DIVISION, GROW
MARKET SHARE, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES OR RESPOND TO COMPETITIVE
PRESSURES OR UNANTICIPATED REQUIREMENTS.
It is imperative that the Company complete a significant financing during
the quarter ending December 31, 2000. Although the Company has been attempting
to raise additional equity financing since the quarter ended June 30, 2000, the
Company has not been able to obtain financing on acceptable terms as of October
13, 2000. The Company intends to continue to seek to raise equity or debt
financing. The Company also has retained the investment bank of Robertson
Stephens to aid the Company in evaluating strategic alternatives and to assist
the Company with ongoing fund-raising efforts. No assurance can be given that
the Company will be able to obtain additional financing on favorable terms, if
at all. The Company's capital requirements depend upon several factors,
including the effect of the Restructuring Plan, the rate of market acceptance of
the Company's products and services, the Company's level of expenditures for
marketing and sales, the cost of Web site upgrades, costs associated with the
staffing and development of the TRELLIS division and other factors. If the
Company's capital requirements vary materially from those currently planned, the
Company may require more financing during fiscal 2001 than currently
anticipated. 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.
If the Company cannot raise funds on acceptable terms or complete an alternative
strategic transaction, the Company may not be able to continue its operations,
develop or enhance its Web site, develop its TRELLIS division, 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.
THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED BY REDUCTIONS IN EXPENSES
PURSUANT TO THE RESTRUCTURING PLAN AND BY THE COMPANY'S WELL-PUBLICIZED NEED FOR
ADDITIONAL FINANCING.
28
<PAGE>
The Company's need to raise additional financing has been well-publicized
based on public disclosures to stockholders and numerous news stories regarding
the need for Internet companies to raise additional capital, some of which have
mentioned Garden.com. The Company also announced its Restructuring Plan on
September 28, 2000, with the intent of lowering ongoing operating expenses and
reducing future capital requirements. Pursuant to the Restructuring Plan, the
Company reduced its total workforce and terminated or materially amended
multiple marketing initiatives, including the Company's relationships with
iVillage, Excite and PRIMEDIA. The Company expects that the reduced
expenditures contemplated by the Restructuring Plan and the Company's limited
cash, cash equivalent and investment balances may create a number of
difficulties for the Company, including:
- difficulties with the Company's supplier base, Federal Express and other
third-party vendors as these vendors may be unwilling to continue to
supply Garden.com with necessary products and services to implement the
Company's strategy or may require prepayments or deposits to continue
doing business with the Company;
- challenges in employee retention and recruitment, particularly in light of
a very strong market for high technology workers in Austin, Texas, where
the Company's headquarters are located;
- the inability to fund marketing expenditures which may impede the
development of the Garden.com brand and the attraction of users to the
Company's Web site;
- the potential that the Company may have insufficient resources to invest
in necessary hardware or software; and
- challenges in launching the TRELLIS division as potential customers may be
reluctant to purchase software and support services in the face of
uncertainty in the Company's financial condition.
It is expected that the Restructuring Plan will cost the Company between
$2.5 million and $2.8 million. At this time, however, such amount is uncertain
and may ultimately be more than currently anticipated.
The Company is actively seeking financing to stabilize its financial
position in order to permit it to address the factors identified above and
pursue its business strategy. If the Company is unable to obtain additional
financing or complete an alternative strategic transaction, the Company will
probably not be able to address these issues.
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.
29
<PAGE>
The Company incurred net losses of $4.7 million in fiscal 1998, $19.1
million in fiscal 1999 and $38.7 million in fiscal 2000. As of June 30, 2000,
the Company has incurred cumulative net losses of $68.6 million. The Company
expects to experience operating losses and negative cash flow for the
foreseeable future. The Company does not have sufficient cash to continue to
sustain these operating losses in fiscal 2001. Even if the Company is able to
obtain additional financing during fiscal 2001 to allow it to continue its
operations, the Company still will need to generate significant revenues to fund
anticipated development and marketing costs and to achieve and maintain
profitability. 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. In addition, the Company has received a report from its
independent auditors for its fiscal year ended June 30, 2000 containing an
explanatory paragraph that describes the uncertainty regarding the Company's
ability to continue as a going concern due to the Company's historical negative
cash flow and because, as of the date they rendered their opinion, the Company
did not have access to sufficient committed capital to meet its projected
operating needs for at least the next 12 months.
THE COMPANY HAS A LIMITED OPERATING HISTORY IN ITS CONSUMER BUSINESS 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 and technology. 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 site,
provide superior customer service, respond to competitive developments and
attract, retain and motivate qualified personnel. The Company also plans to
focus its advertising expenditures to a greater degree on seasonal, branded
catalogs and direct mail. The Company has limited experience in catalog and
direct mail advertising and such methods may prove to be less effective in
expanding the Company's customer base than the Company's previous marketing
strategy. 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.
30
<PAGE>
THE COMPANY HAS NO OPERATING HISTORY OR EXPERIENCE IN ITS NEW TECHNOLOGY AND
SERVICES BUSINESS AND THE COMPANY EXPECTS THAT THIS LACK OF EXPERIENCE MAKES THE
PROSPECTS FOR THIS BUSINESS ESPECIALLY DIFFICULT TO PREDICT.
The Company launched its new TRELLIS division in September 2000. The
Company has no operating history or experience in providing technology and
services to businesses. The Company can make no assurance that it will be able
to commercialize TRELLIS and establish a successful revenue producing business.
The Company expects that it will face significant challenges in establishing
this business, including the need for additional financing to launch this new
business, intense competition in this market, possible reluctance by potential
customers to purchase software and support services from the Company in the face
of uncertainty in the Company's financial condition and the need to develop a
new brand by the Company.
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 in the gardening industry, 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 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 THE MARKET PRICE OF ITS COMMON STOCK AND 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 has experienced significant fluctuations in its quarterly
operating results due to a variety of factors, many of which are outside its
control. The Company has also experienced significant volatility in the market
price of its Common Stock. The market price of the Company's common stock has
declined from a 52-week closing high of $20.813 on September 21, 1999 to $0.625
on October 9, 2000. The Company
31
<PAGE>
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 site 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.
THE COMPANY FACES SIGNIFICANT COMPETITION FROM ESTABLISHED TRADITIONAL GARDENING
RETAILERS, MAIL ORDER CATALOGS, ONLINE RETAILERS AND OTHERS.
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
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.
32
<PAGE>
The Company believes that its TRELLIS division will face intense
competition as the Company attempts to commercialize internally developed
technology. Competitors to the TRELLIS division could include Yantra, Optum,
AtlasCommerce and Order Trust. The Company believes that its lack of experience
in commercializing technology and its limited resources may put the TRELLIS
division at a competitive disadvantage as compared to its competitors.
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 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 FACES SIGNIFICANT CHALLENGES IN CONTINUING TO ATTRACT, RETAIN AND
MOTIVATE HIGHLY SKILLED EMPLOYEES.
The Company's ability to execute its strategy and be successful depends on
its continuing ability to attract, retain and motivate highly skilled employees.
Competition for personnel throughout the Internet industry is intense. The
Company has faced particular challenges recently in light of its well publicized
liquidity issues, its low stock price which has fallen below the exercise price
of many of the stock options granted to employees and a very competitive labor
market for high technology workers in Austin, Texas, where the Company's
headquarters are located. Recently, a significant number of the Company's
employees have been terminated in cost cutting efforts or voluntarily departed
to pursue other opportunities. The Company may be unable to retain its key
employees or attract, assimilate or retain other highly qualified employees in
the future. If the Company does not succeed in retaining and motivating its
current personnel, its business will be seriously harmed.
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
33
<PAGE>
suppliers do not guarantee the availability of merchandise, establish guaranteed
prices or provide for the continuation of particular pricing practices. As a
result of reduced expenses contemplated by the Restructuring Plan and the
Company's limited cash, cash equivalent and investment balances, the Company may
experience problems with its supplier base. The Company's suppliers may be
unwilling to continue to supply Garden.com with the products or services
necessary to successfully implement its strategy or may require other terms and
conditions adverse to the Company. In addition the Company may not be able to
attract new suppliers because of concerns regarding the Company's ability to
continue to operate its business. If the 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 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. As a result of reduced expenses
contemplated by the Restructuring Plan and the Company's limited cash, cash
equivalent and investment balances, the Company may experience problems in its
relationship with Federal Express. Federal Express may be unwilling to continue
its relationship with the Company 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
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 HAS RECENTLY TERMINATED OR MATERIALLY AMENDED ITS AGREEMENTS WITH A
NUMBER OF ONLINE SERVICES, SEARCH ENGINES AND DIRECTORIES. AS A RESULT, THE
COMPANY MAY EXPERIENCE REDUCED TRAFFIC TO ITS WEB SITE.
34
<PAGE>
The Company has relied on relationships with various online services,
search engines and directories to provide content and advertising banners that
hyperlink to the Company's Web site and on search engines, directories and other
navigational tools to direct traffic to the Company's Web site. During the
first quarter of fiscal 2001, the Company terminated or materially amended a
number of these relationships, including with iVillage and Excite. The
Company's business, operating results and financial condition could be
negatively affected by these new arrangements. The Company may experience
reduced online traffic and revenues.
ESTABLISHING THE GARDEN.COM BRAND QUICKLY AND COST-EFFECTIVELY IS ESSENTIAL FOR
THE COMPANY TO BE SUCCESSFUL. IF THE COMPANY DOES NOT EFFECTIVELY ESTABLISH THE
GARDEN.COM BRAND, 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 site 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 site 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, particularly in view of the Company's reduced marketing
expenses and work force reductions.
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;
35
<PAGE>
- 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 has derived 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 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.
36
<PAGE>
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.
THE COMPANY MAY NOT BE ABLE TO CONTINUE TO OFFER NEW AND EXPANDED PRODUCTS AND
SERVICES.
The Company has relied on new and expanded products and services and new
relationships with third parties in order to generate additional revenues,
attract more consumers, increase market share and respond to competition. As a
result of the reduced expenditures contemplated by the Restructuring Plan and
the Company's limited cash, cash equivalent and investment balances, the Company
may be unable to provide sufficient levels of new and expanded products and
services offerings to consumers. This reduction in products and services could
harm the appeal of Garden.com's Web site and result in reduced online traffic
and reduced product and advertising revenue levels.
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.
THE COMPANY'S OPERATING RESULTS DEPEND ON ITS WEB SITE, NETWORK INFRASTRUCTURE
AND TRANSACTION-PROCESSING SYSTEMS.
37
<PAGE>
The satisfactory performance, reliability and availability of the Company's
Web site, 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 site 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. As a result of
reduced expenses contemplated by the Restructuring Plan and the Company's
limited cash, cash equivalent and investment balances, the Company may
experience problems related to operations and technology development. The
Company may be unable to retain or attract employees with the required
technological skills. In addition, the Company may have insufficient resources
to invest in the hardware or software products necessary to successfully
implement its strategy.
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 site 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 site. 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 two
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
38
<PAGE>
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.
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.
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:
39
<PAGE>
- 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 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 SITE 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 site 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;
40
<PAGE>
- 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.
As a result of reduced expenses contemplated by the Restructuring Plan and
the Company's limited cash, cash equivalent and investment balances, the Company
may be unable to respond to technological advances or adapt its Web site,
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. The development of Web sites and
other proprietary technology also entails significant technical and business
risks and requires substantial expenditures and lead time.
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
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 SITE, 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 site, 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
41
<PAGE>
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 recently enacted Internet laws regarding children's
privacy, copyrights, taxation and transmission of sexually explicit material and
the European Union recently 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 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.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS LISTING ON THE NASDAQ NATIONAL
MARKET.
The Company's Common Stock is currently listed on the Nasdaq National
Market. The Company must satisfy a number of requirements to maintain its
listing on the Nasdaq National Market, including maintaining a minimum bid price
for the Common Stock of either $1.00 per share or $5.00 per share, depending on,
among other things, whether the net tangible assets of the
42
<PAGE>
Company is greater than $4 million. As of June 30, 2000, the Company had net
tangible assets of $34.4 million. The amount of the Company's net tangible
assets will continue to decrease unless the Company achieves profitability or
the Company is able to complete a new equity financing. If the Company is
unable to maintain net tangible assets of at least $4 million, the Company could
no longer use the $1.00 minimum bid test. In addition, the Company's Common
Stock has recently had trading days below the minimum $1.00 bid price which
could result in the delisting of the Common Stock or require a reverse stock
split to maintain the listing. If the Common Stock loses its Nasdaq National
Market status, the Common Stock would trade either on the Nasdaq SmallCap Market
or on the Over the Counter Bulletin Board, both of which are viewed by most
investors as less desirable, less liquid marketplaces. Loss of the Company's
Nasdaq National Market listing would also complicate compliance with state blue
sky laws and could make it more difficult to complete a financing transaction.
ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND DELAWARE LAW
COULD PREVENT OR DELAY A CHANGE IN CONTROL OF THE COMPANY.
The Company's Restated Certificate of Incorporation and Amended and
Restated By-Laws may discourage, delay or prevent a merger or acquisitions that
a stockholder may consider favorable by:
- authorizing the issuance of "blank check" preferred stock;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and notes thereto are
filed under this item beginning on page F-1 of this report.
43
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited statement of income data
for the eight quarters ended June 30, 2000, both in dollar amounts and as a
percentage of total revenues. This data should be read in conjunction with the
audited financial statements for the fiscal years ended June 30, 2000 and 1999
and related notes included elsewhere in this report.
44
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sep. 30, June 30, March 31, Dec. 31, Sep. 30,
2000 2000 1999 1999 1999 1999 1998 1998
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products . . . . . . . . $ 6,489 $ 2,600 $ 3,317 $ 1,159 $ 2,637 $ 856 $ 1,125 $ 333
Advertising. . . . . . . 838 556 291 253 247 83 87 25
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total revenues. . . . . . 7,327 3,156 3,608 1,412 2,884 939 1,212 358
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Cost of revenues:
Products . . . . . . . . 5,651 2,109 2,609 1,049 2,446 763 898 359
Advertising. . . . . . . 49 90 21 44 20 8 32 13
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total cost of revenues 5,700 2,199 2,630 1,093 2,466 771 930 372
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Gross profit . . . . . . . 1,627 957 978 319 418 168 282 (14)
Operating expenses:
Marketing and sales. . . 10,616 8,435 4,904 2,699 6,239 3,686 1,246 2,133
Technology, content
and product
development . . . . . . 2,095 1,768 1,648 1,408 1,001 928 599 640
General and
administrative. . . . . 2,075 2,002 1,667 1,308 1,061 803 572 504
Depreciation and
amortization . . . . . 719 577 464 347 233 142 124 112
Amortization of deferred
compensation. . . . . . 214 250 298 374 370 117 82 105
Restructuring and other
activities. . . . . . . 888 -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total operating
expenses . . . . . . 16,607 13,032 8,981 6,136 8,904 5,676 2,623 3,494
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Operating loss . . . . . . (14,980) (12,075) (8,003) (5,817) (8,486) (5,508) (2,341) (3,508)
Other income and expense . 475 636 791 249 220 124 192 248
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Net loss . . . . . . . . . $ (14,505) $ (11,439) $ (7,212) $ (5,568) $ (8,266) $ (5,384) $ (2,149) $ (3,260)
========== =========== ========== ========== ========== =========== ========== ==========
Percentage of Total Revenues
-----------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sep. 30, June 30, March 31, Dec. 31, Sep. 30,
2000 2000 1999 1999 1999 1999 1998 1998
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Revenues:
Products . . . . . . . . 89% 82% 92% 82% 91% 91% 93% 93%
Advertising. . . . . . . 11 18 8 18 9 9 7 7
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total revenues. . . . 100 100 100 100 100 100 100 100
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Cost of revenues:
Products . . . . . . . . 77 67 72 74 85 81 74 100
Advertising. . . . . . . 1 3 1 3 1 1 3 4
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total cost of revenues . . 78 70 73 77 86 82 77 104
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Gross profit . . . . . . . 22 30 27 23 14 18 23 (4)
Operating expenses:
Marketing and sales. . . 145 267 136 191 216 392 103 596
Technology, content
and product
development. . . . . . 28 56 46 100 35 99 50 179
General and
administrative. . . . . 28 63 46 93 37 86 47 141
Depreciation and
amortization. . . . . . 10 18 13 25 8 15 10 31
Amortization of deferred
compensation. . . . . . 3 8 8 26 13 12 6 29
Restructuring and other
activities. . . . . . . 12 -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Total operating expenses . 226 412 249 435 309 604 216 976
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Operating loss . . . . . . (204) (382) (222) (412) (295) (586) (193) (980)
Other income and expense . 6 20 22 18 8 13 16 69
---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Net loss . . . . . . . . . (198)% (362)% (200)% (394)% (287)% (573)% (177)% (911)%
========== =========== ========== ========== ========== =========== ========== ==========
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers and directors of the Company
is incorporated herein by reference to the discussions under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders which will
be filed on or before October 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders which will be filed on or before October 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the discussion under "Security
Ownership" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders which will be filed on or before October, 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the discussions under "Executive
Compensation--Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders which will be filed on or before October 28, 2000.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements. The following financial statements of the
---------------------
Company are included in Item 8 of this report.
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets - as of June 30, 2000 and 1999.
Statements of Operations - for the years ended June 30, 2000, 1999 and
1998.
46
<PAGE>
Statements of Changes in Common Stock and Stockholders' Equity
(Deficit) - for the years ended June 30, 2000, 1999 and 1998.
Statements of Cash Flows - for the years ended June 30, 2000, 1999 and
1998.
Notes to financial statements.
2. Financial Statement Schedules:
-------------------------------
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
3. Exhibits:
--------
<TABLE>
<CAPTION>
EXHIBIT NUMBER DOCUMENT DESCRIPTION
--------------- --------------------------------------------------------------------
<S> <C>
3.1A Restated Certificate of Incorporation. (1)
3.1B Amended and Restated By-Laws. (1)
4.1 Specimen Common Stock Certificate. (2)
10.1 Form of Indemnification Agreement between the Company and each
of its directors and officers. (2)
10.2A Amended and Restated 1996 Stock Option/Stock Issuance Plan. (2)(3)
10.2B Form of Option Agreement under the Amended and Restated 1996
Stock Option/Stock Issuance Plan. (2)(3)
10.2C Form of Restricted Stock Purchase Agreement under the Amended
and Restated 1996 Stock Option/Stock Issuance Plan. (2)(3)
10.3 1999 Employee Stock Purchase Plan. (2)(3)
10.4 Fourth Amended and Restated Stockholders Agreement, dated as of
April 13, 1999, among the Company and the stockholders of the
Company listed on the signature page thereto. (2)
10.5 Fourth Amended and Restated Registration Rights Agreement, dated
as of April 13, 1999, among the Company and the stockholders of the
Company listed on the signature page thereto. (2)
47
<PAGE>
10.6 Letter Agreement, dated May 24, 1999, between the Company and
Scripps Howard Broadcasting Company d/b/a Home & Garden
Television. (2)
10.7 Shopping Channel Promotional Agreement, dated as of October 2,
1998, between the Company and America Online, Inc. (2)(4)
10.8 License Agreement, dated as of April 13, 1998, between the Company
and Time Life Inc. (2)
10.9A Employment Agreement, dated July 12, 1999, between the Company
and Clifford A. Sharples. (2)(3)
10.9B Employment Agreement, dated July 12, 1999, between the Company
and James N. O'Neill. (2)(3)
10.9C Employment Agreement, dated July 12, 1999, between the Company
and Lisa W.A. Sharples. (2)(3)
10.10 Sublease Agreement, dated as of February 24, 1999, between the
Company and Hart Graphics, Inc. (2)
10.11 Employment Agreement, dated as of March 1, 1996, between the
Company and Andrew R. Martin. (2)(3)
10.12 Buy-Sell Agreement, dated February 27, 1997, among the Company,
Clifford A. Sharples, James N. O'Neill, Lisa W.A. Sharples and
Andrew R. Martin. (2)
10.13 Content License Agreement, dated as of November 2, 1999, between
the Company and iVillage Inc. (4)(5)
10.14 Online Merchant Agreement, dated as of October 15, 1999, between
the Company and iVillage Inc. (4)(5)
21 Subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney (see Page 50).
27 Financial Data Schedule.
_______________
<FN>
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 (File No. 0-26265).
48
<PAGE>
(2) Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-79487).
(3) Management contract or compensatory plan or arrangement.
(4) The Company has request confidential treatment of certain portions of this
Exhibit.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 (File No. 0-26265).
</TABLE>
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June 30,
2000.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules.
None.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GARDEN.COM, INC.
By /s/ Clifford A. Sharples
--------------------------------------------
Clifford A. Sharples, Chief Executive Officer
Date: October 13, 2000
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Clifford A.
Sharples and Jana D. Wilson, and each of them individually, his or her true and
lawful attorney-in-fact, with power to act with or without the other and with
full power of substitution and resubstitution, in any and all capacities, to
sign any or all amendments to the Form 10-K and file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Clifford A. Sharples President, Chief Executive October 13, 2000
------------------------ Officer (Principal Executive
Clifford A. Sharples Officer) and Director
/s/ Jana D. Wilson Chief Financial Officer (Principal October 13, 2000
------------------------ Financial and Accounting
Jana D. Wilson Officer)
/s/ Steven J. Dietz Director October 13, 2000
------------------------
Steven J. Dietz
/s/ Gerald R. Gallagher Director October 13, 2000
------------------------
Gerald R. Gallagher
/s/ James N. O'Neill Director October 13, 2000
------------------------
James N. O'Neill
/s/ Lisa W.A. Sharples Director October 13, 2000
------------------------
Lisa W.A. Sharples
/s/ Douglas R. Stern Director October 13, 2000
------------------------
Douglas R. Stern
/s/ John D. Thornton Director October 13, 2000
------------------------
John D. Thornton
</TABLE>
50
<PAGE>
GARDEN.COM, INC.
TABLE OF CONTENTS
--------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors. F-2
Balance Sheets . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . F-5
Statements of Changes in Common Stock and
Stockholders' Equity (Deficit) . . . . . . . . . F-6
Statements of Cash Flows . . . . . . . . . . . . . F-7
Notes to Financial Statements. . . . . . . . . . . F-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Garden.com, Inc.
We have audited the accompanying balance sheets of Garden.com, Inc. as of
June 30, 2000 and 1999, and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garden.com, Inc. at June 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses and negative cash flows from
operations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. (Management's plans in regard to these
matters are also described in Note 1.) The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
July 28, 2000, except for Note 10
as to which the date is September 28, 2000.
Austin, Texas
/s/ Ernst & Young LLP
F-2
<PAGE>
GARDEN.COM, INC.
BALANCE SHEETS
JUNE 30, 2000 AND 1999
(in Thousands)
---------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 9,047 $15,340
Investments. . . . . . . . . . . . . . . . . . . . . . 18,612 3,710
Prepaid advertising. . . . . . . . . . . . . . . . . . 1,869 988
Other prepaid expenses and current assets. . . . . . . 2,143 1,086
Inventory. . . . . . . . . . . . . . . . . . . . . . . 898 522
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . 32,569 21,646
-------- --------
PROPERTY AND EQUIPMENT:
Equipment. . . . . . . . . . . . . . . . . . . . . . . 660 480
Leasehold improvements . . . . . . . . . . . . . . . . 779 456
Computers and software . . . . . . . . . . . . . . . . 9,537 2,111
Furniture and fixtures . . . . . . . . . . . . . . . . 867 440
-------- --------
Total property and equipment . . . . . . . . . . . . . . 11,843 3,487
Accumulated depreciation . . . . . . . . . . . . . . . . (2,697) (828)
-------- --------
Property and equipment, net. . . . . . . . . . . . . . 9,146 2,659
OTHER ASSETS:
Net of accumulated amortization of $333 and $110 as of
June 30, 2000 and 1999, respectively . . . . . . . . 780 917
-------- --------
TOTAL ASSETS:. . . . . . . . . . . . . . . . . . . . . . $42,495 $25,222
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
GARDEN.COM, INC.
BALANCE SHEETS (CONTINUED)
JUNE 30, 2000 AND 1999
(in Thousands)
---------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) 2000 1999
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 4,282 $ 2,052
Accrued expenses and other liabilities. . . . . . . . . . . . 3,057 956
Unearned revenue. . . . . . . . . . . . . . . . . . . . . . . 187 188
Current portion of long-term debt . . . . . . . . . . . . . . 20 127
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . 7,546 3,323
--------- ---------
Long-term debt, less current portion. . . . . . . . . . . . . . -- 20
Redeemable convertible preferred stock. . . . . . . . . . . . -- 48,215
Warrants to purchase redeemable convertible
preferred stock . . . . . . . . . . . . . . . . . . . . . . -- 24
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock--$.01 par value: 50,000 authorized, 17,737
and 1,157 actual shares issued and outstanding on June 30,
2000 and 1999, respectively . . . . . . . . . . . . . . . . 177 12
Additional paid-in capital. . . . . . . . . . . . . . . . . . 104,499 5,768
Deferred stock compensation . . . . . . . . . . . . . . . . . (1,169) (2,305)
Retained deficit. . . . . . . . . . . . . . . . . . . . . . . (68,558) (29,835)
--------- ---------
Total stockholders' equity (deficit). . . . . . . . . . . . . . 34,949. (26,360)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,495 $25,222.
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(in Thousands, except share and per share data)
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,564 $ 4,952 $ 1,283
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . 1,938 442 56
------------ ----------- -----------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . 15,502 5,394 1,339
------------ ----------- -----------
COST OF REVENUES:
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . 11,416 4,466 1,086
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . 205 74 22
------------ ----------- -----------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . 11,621 4,540 1,108
------------ ----------- -----------
GROSS PROFIT: . . . . . . . . . . . . . . . . . . . . . . . . 3,881 854 231
------------ ----------- -----------
OPERATING EXPENSES:
Marketing and sales . . . . . . . . . . . . . . . . . . . . . 26,654 13,305 2,411
Technology, content and product development . . . . . . . . . 6,918 3,167 1,188
General and administrative. . . . . . . . . . . . . . . . . . 7,052 2,941 1,218
Depreciation and amortization . . . . . . . . . . . . . . . . 2,107 610 219
Amortization of deferred compensation . . . . . . . . . . . . 1,136 674 73
Restructuring and other activities. . . . . . . . . . . . . . 888 -- --
------------ ----------- -----------
Total operating expenses. . . . . . . . . . . . . . . . . . . 44,755 20,697 5,109
------------ ----------- -----------
OPERATING LOSS: . . . . . . . . . . . . . . . . . . . . . . . (40,874) (19,843) (4,878)
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . . . . . . 2,158 804 227
Interest expense. . . . . . . . . . . . . . . . . . . . . . . (7) (20) (33)
------------ ----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (38,723) $ (19,059) $ (4,684)
============ =========== ===========
Less: Beneficial conversion feature and insubstance dividend -- (2,700) --
------------ ----------- -----------
Net loss applicable to common stockholders. . . . . . . . . . $ (38,723) $ (21,759) $ (4,684)
============ =========== ===========
Basic net loss per share. . . . . . . . . . . . . . . . . . . $ (2.74) $ (20.48) $ (4.68)
============ =========== ===========
Shares used in computing basic net loss per share . . . . . . 14,149,167 1,062,696 1,000,820
============ =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CHANGES IN COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(in Thousands)
---------------
<TABLE>
<CAPTION>
TOTAL
REDEEMABLE
CONVERTIBLE
PREFERRED
DEFERRED STOCK
REDEEMABLE CONVERTIBLE ADDITIONAL STOCK AND
PREFERRED STOCK COMMON STOCK PAID-IN COMPEN- RETAINED STOCKHOLDERS'
SHARES AMOUNT WARRANTS SHARES PAR VALUE CAPITAL SATION DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 10, 1997. . . 4,158 7,879 23 1,160 12 29 -- (3,106) 4,837
Issuance of Series D
Redeemable Convertible
Preferred Stock and
warrants, net of issuance
costs of $1,177 . . . . . . 4,255 18,823 1 -- -- -- -- -- 18,824
Dividends accrued for
Series A, B, C Preferred
Stock . . . . . . . . . . . -- -- -- -- -- -- -- (286) (286)
Conversion of cumulative
dividend to Series D
Redeemable Convertible
Preferred Stock . . . . . . 58 273 -- -- -- -- -- -- 273
Repurchase of Common
Stock . . . . . . . . . . . -- -- -- (160) (2) (26) -- -- (28)
Deferred stock compensation . -- -- -- -- -- 313 (313) -- --
Amortization of deferred
compensation. . . . . . . . -- -- -- -- -- -- 72 -- 72
Exercise of stock options . . -- -- -- 7 0 6 -- -- 6
Net loss. . . . . . . . . . . -- -- -- -- -- -- -- (4,684) (4,684)
-------- -------- --------- ------- ----------- --------- -------- --------- ---------
Balance at June 30, 1998. . . 8,471 26,975 24 1,007 10 322 (241) (8,076) 19,014
Issuance of Series E
Redeemable Convertible
Preferred Stock, net of
issuance costs of $1,398. . 3,166 21,240 -- -- -- -- -- -- 21,240
Beneficial conversion feature
and in substance dividend . -- -- -- -- -- 2,700 -- (2,700) --
Deferred stock compensation . -- -- -- -- -- 2,738 (2,738) -- --
Amortization of deferred
compensation. . . . . . . . -- -- -- -- -- -- 674 -- 674
Exercise of stock options . . -- -- -- 150 2 8 -- -- 10
Net loss. . . . . . . . . . . -- -- -- -- -- -- -- (19,059) (19,059)
-------- -------- --------- ------- ----------- --------- -------- --------- ---------
Balance at June 30, 1999. . . 11,637 48,215 24 1,157 12 5,768 (2,305) (29,835) 21,879
======== ======== ========= ======= =========== ========= ======== ========= =========
Conversion of redeemable
convertible preferred
stock and warrants to
common stock. . . . . . . . (11,637) (48,215) (24) 11,637 116 48,123 -- -- --
Exercise of common stock
warrants. . . . . . . . . . -- -- -- 69 1 213 -- -- 214
Issuance of common stock,
net of issuance costs
of $2,071 . . . . . . . . . -- -- -- 4,650 46 49,766 -- -- 49,812
Amortization of deferred
compensation. . . . . . . . -- -- -- -- -- -- 1,136 -- 1,136
Exercise of stock options . . -- -- -- 88 1 26 -- -- 27
Stock issued to Employee
Stock Purchase Plan . . . . -- -- -- 116 1 359 -- -- 360
Acquisition of catalog assets -- -- -- 20 0 206 -- -- 206
Common stock options
issued to charitable
organization. . . . . . . . -- -- -- -- -- 38 -- -- 38
NET LOSS. . . . . . . . . . . -- -- -- -- -- -- -- (38,723) (38,723)
Balance at June 30, 2000. . . -- -- -- 17,737 $ 177 $104,499 $(1,169) $(68,558) $ 34,949
======== ======== ========= ======= =========== ========= ======== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(In Thousands)
---------------
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(38,723) $(19,059) $(4,684)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,884 517 219
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 93 --
Amortization of deferred stock compensation . . . . . . . . . . . . 1,136 674 73
Expense related to non-employee option issuance . . . . . . . . . . 38 -- --
Changes in operating assets and liabilities:
Prepaid advertising . . . . . . . . . . . . . . . . . . . . . . . . (881) (610) (374)
Other prepaid expenses and current assets . . . . . . . . . . . . . (1,057) (1,039) 8
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (376) (364) (134)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 (738) (7)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 2,230 1,141 675
Accrued expenses and other liabilities. . . . . . . . . . . . . . . 2,101 819 47
Unearned revenue. . . . . . . . . . . . . . . . . . . . . . . . . . (1) 92 80
--------- --------- --------
Net cash used in operating activities. . . . . . . . . . . . . . . . . . (32,764) (18,474) (4,097)
--------- --------- --------
INVESTING ACTIVITIES:
Proceeds from sale of investments . . . . . . . . . . . . . . . . . 31,065 11,083 --
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . (45,967) (14,792) --
Purchase of property and equipment. . . . . . . . . . . . . . . . . (8,349) (2,577) (422)
Purchase of other assets. . . . . . . . . . . . . . . . . . . . . . (564) (9) (262)
--------- --------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (23,815) (6,295) (684)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . -- -- 200
Repayments of long-term debt. . . . . . . . . . . . . . . . . . . . (127) (182) (115)
Proceeds from issuance of common stock, net of issuance costs
of $2,071) . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,812 -- --
Repurchase of common stock. . . . . . . . . . . . . . . . . . . . . -- -- (28)
Proceeds from issuance of Series D Redeemable Convertible
Preferred Stock and warrants, net of issuance costs of $1,177. . -- -- 18,824
Proceeds from issuance of Series E Redeemable Convertible
Preferred Stock and warrants, net of issuance costs of $1,398. . -- 21,240 --
Exercises of stock options. . . . . . . . . . . . . . . . . . . . . 27 9 6
Proceeds from exercises of warrants. . . . . . . . . . . . . . . . 214 -- --
Proceeds from common stock issued to Employee Stock Purchase
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 -- --
Dividend paid on Series A, B and C Redeemable Convertible
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . -- -- (12)
--------- --------- --------
Net cash provided by financing activities. . . . . . . . . . . . . . . . 50,286 21,067 18,875
--------- --------- --------
CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . (6,293) (3,702) 14,094
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . . . . 15,340 19,042 4,948
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . $ 9,047 $ 15,340 $19,042
========= ========= ========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 22 $ 31
========= ========= ========
Beneficial conversion and insubstance dividend (see Note 6) . . . . -- $ 2,700 --
</TABLE>
See accompanying notes.
F-7
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
1. ORGANIZATION
The Company was originally incorporated in Texas on October 2, 1995 as The
Asbury Group, Inc. On November 30, 1995, The Asbury Group, Inc. incorporated a
wholly-owned subsidiary, Garden Escape, Inc., in Delaware. Effective December
11, 1995, The Asbury Group, Inc. was merged into Garden Escape, Inc. in a
transaction accounted for at historical cost. In February 1999, the Company
changed its name to Garden.com, Inc. The Company is an online destination
integrating gardening and gardening-related commerce, content and community.
All of the Company's sales are conducted via its Web sites, garden.com and
virtualgarden.com.
The Company has incurred recurring operating losses and negative cash flows
from operations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. In regard to these matters, management
announced a corporate restructuring with the intent of lowering ongoing
operating expenses and reducing future capital requirements, reduced its
workforce on September 28, 2000 by 93 employees and terminated or materially
amended multiple marketing initiatives. Additionally, the Company also
announced that it had engaged the investment bank of Robertson Stephens to aid
the Company in evaluating strategic alternatives and to assist the Company with
ongoing fund-raising efforts.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences could be material to the financial statements.
REVENUE RECOGNITION
Revenues for products and shipping charges are recognized when the products
are shipped to the customer. Substantially all product sales are shipped
directly from various product suppliers to the customer. The Company takes
title to all goods and, accordingly, has the risks and rewards of ownership for
such shipments. Revenues are recorded net of promotional discounts and coupons.
Product returns are recorded as a reduction of revenues. The Company records
unearned revenue for customer orders received and paid for that have not been
shipped.
F-8
<PAGE>
Advertising revenues consist of sponsorships, banners and print
advertising. Advertising revenues are recognized in proportion to the number of
impressions delivered under each contract or proportionately over the period of
time covered by a contract if impressions are not used. The Company has certain
contracts under which it generates a minimum number of click-throughs and has
historically met these guarantees.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less. Cash and cash equivalents are
recorded at cost, which approximates fair value due to the short maturity of
these instruments.
INVESTMENTS
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such designation as of each balance sheet date.
Investments as of June 30, 2000 consisted of high-grade commercial paper,
corporate notes, and government securities, are classified as
available-for-sale, and are reported at cost, which approximates fair market
value, using the specific identification method, as of June 30, 2000. All of
these securities mature within one year.
INVENTORY
Inventory, which consists of finished goods, is stated at the lower of cost
or market, with cost determined using the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is based on the useful
lives of the assets, generally three to seven years, and is computed using the
straight-line method. Amortization of leasehold improvements is computed on the
straight-line method over estimated useful lives or lease terms if shorter.
OTHER PREPAID ASSETS AND OTHER ASSETS
Other prepaid assets and other assets include certain prepaid assets, trade
accounts receivable, advertising trade accounts receivable, deposits, goodwill,
and the cost of a web site which are carried at cost less accumulated
amortization. Amortization of the intangible other assets is computed on the
straight-line method over their estimated useful lives of three to four years.
F-9
<PAGE>
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
INTERNAL USE SOFTWARE
In accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" the
Company has capitalized certain internal use software. The Company is
developing a number of new software applications, including a new commerce
platform, and the Company's updated proprietary supplier information system,
TRELLIS. External direct costs of materials and services and payroll related
costs of employees working solely on development of these applications are
capitalized. Capitalized costs will be depreciated when the applications are
placed in service on the straight-line method over a three year estimated useful
life.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the fiscal years
ended June 30, 2000, 1999 and 1998, the Company incurred advertising expenses of
$18,726,000, $10,763,000 and $1,364,000, respectively.
CONTENT LICENSES
The Company licenses certain content from third party providers and records
these expenditures as incurred.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation expense
under APB No. 25, "Accounting for Stock Issued to Employees," and make the
required pro forma disclosures for compensation as required by SFAS No. 123. The
Company uses the intrinsic value method in accounting for its stock-based
employee compensation plans.
F-10
<PAGE>
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Shares associated with stock options and the redeemable
convertible preferred stock are not included because they are antidilutive.
Effective upon the closing of the Company's initial public offering on September
21, 1999, all shares of the redeemable convertible preferred stock automatically
converted into Common Stock and are included in the calculation of weighted
average number of shares as of that date.
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.
SEGMENTS
The Company continues to consider its business activities as a single
segment.
RISKS AND UNCERTAINTIES
For the year ended June 30, 2000, one supplier's products generated
approximately 12% of the Company's revenue.
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been
reclassified to conform to the fiscal year 2000 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") which addresses certain criteria for revenue recognition. SAB 101, as
amended by SAB 101A and SAB 101B, outlines the criteria that must be used to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 is not expected to have a material
impact on the consolidated financial position or results of operations.
On March 31, 2000 the Financial "Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," (the "Interpretation"). The Interpretation provides guidance
related to the implementation of APB No. 25. The Interpretation is to be applied
prospectively to all new awards, modifications to outstanding awards and changes
in employee status on or after July 1, 2000. For changes made
F-11
<PAGE>
after December 15, 1998 to awards that affect exercise prices of the awards, the
Company must prospectively account for the impact of those changes. Management
does not believe the adoption of the Interpretation will have a material impact
on the Company's financial condition or results of operations.
In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities, Deferral of Effective Date of FASB Statement No. 133," was
issued which requires that Statement No. 133 be adopted in the Company's fiscal
year 2001. Management does not anticipate that the adoption of Statement No.
133 will have a material effect on the results of operations or financial
position because the Company's does not currently engage in or plan to engage in
derivative or hedging activities.
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------
2000 1999
------ ------
<S> <C> <C>
Line of credit term note payable to a bank
due October 14, 2000, payable in monthly
installments of $7 with interest at the
prime rate plus 1% (8.89% at June 30,
2000), collateralized by the assets of the
Company. . . . . . . . . . . . . . . . . . . $ 20 $107
Line of credit term note payable to a bank
due December 14, 1999, payable in
monthly installments of $8 with interest at
the prime rate plus 1% (9.04% at June 30,
1999), collateralized by the assets of the
Company. . . . . . . . . . . . . . . . . . . - 41
------ ------
Total long-term debt . . . . . . . . . . . . . 20 148
Less current portion . . . . . . . . . . . . . (20) (128)
------ ------
Long-term debt, net of current portion . . . . $ - $20
====== ======
</TABLE>
As of June 30, 2000 and 1999, all of the Company's outstanding long-term
debt had a variable interest rate, and accordingly, the Company believes the
carrying value of the long-term debt approximates its fair value. No additional
amounts were available to be drawn under these lines of credit as of June 30,
2000.
4. INCOME TAXES
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $67,018,000 and research and development credit carryforwards of
approximately $105,000. The net operating loss carryforwards will begin to
expire in 2011, if not utilized. The research and development credit
carryforwards will begin to expire in 2012, if not utilized.
F-12
<PAGE>
Utilization of the net operating loss and tax credit carryforwards will be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciable assets . . . . . . . . . . . . . $ 691 $ --
--------- --------
Prepaid expenses and other . . . . . . . . . 806 $ 460
--------- --------
Total deferred tax liabilities . . . . . . . 1,497 460
--------- --------
Deferred tax assets:
Depreciable assets . . . . . . . . . . . . . -- 70
--------- --------
Accrued liabilities and other. . . . . . . . 268 53
--------- --------
Tax carryforwards. . . . . . . . . . . . . . 24,901 10,035
--------- --------
Total deferred tax assets . . . . . . . . . . . 25,169 10,158
--------- --------
Net deferred tax assets . . . . . . . . . . . . 23,672 9,698
--------- --------
Valuation allowance for net deferred tax assets (23,672) (9,698)
--------- --------
Net deferred taxes. . . . . . . . . . . . . . . $ -- $ --
========= ========
</TABLE>
The Company has established a valuation allowance equal to the net deferred
tax asset due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings history. The valuation allowance
increased by approximately $13,974,000 during the year ended June 30, 2000.
Approximately $154,000 of the valuation allowance for deferred tax assets
relates to benefits for stock option deductions, which when realized, will be
allocated directly to contributed capital.
F-13
<PAGE>
The Company's provision (benefit) for income taxes differs from the
expected tax expense (benefit) amount computed by applying the statutory federal
income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Federal statutory rate. . . . . . . (34.0)% (34.0)%
State taxes, net of federal benefit (3.0) (3.0)
Change in valuation allowance . . . 36.1 36.0
Other . . . . . . . . . . . . . . . 0.9 1.0
-------- -------
Effective tax rate. . . . . . . . . 0.0% 0.0%
======== =======
</TABLE>
5. COMMITMENTS
Future minimum payments under all operating leases as of June 30, 2000, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ended
June 30,
2001. . . . . . . $269,516
2002. . . . . . . 232,641
2003. . . . . . . 7,560
--------
Total . . . . . . $509,717
========
</TABLE>
Rent expense for the three fiscal years ended June 30, 2000, 1999 and 1998
was approximately $280,000 (offset by sublease income of $108,000), $195,000 and
$114,000, respectively. Future minimum rental income from non-cancelable
subleases consists of approximately $41,000 for the year ended June 30, 2001.
In addition, the Company has entered into strategic relationships with
several Internet portals, including arrangements with iVillage and Excite. The
agreements with iVillage and Excite call for Garden.com to provide and sponsor
gardening content on the respective Web sites. Under terms of these agreements
the Company is required to make certain installment payments, which are expensed
as advertising expense as incurred.
Garden.com and Administaff Company Inc. are parties to a co-employment
agreement, as amended July 1, 1997, pursuant to which Administaff administers
some of the benefits plans of Garden.com. This arrangement is terminable by
either party upon 30 days prior written notice.
F-14
<PAGE>
6. CAPITAL STRUCTURE
Redeemable Convertible Preferred Stock
Upon the close of the Company's initial public offering on September 21,
1999 all shares of redeemable convertible preferred stock were converted to
common stock. The five series of redeemable convertible preferred stock
designated as of June 30, 1999, were as follows:
<TABLE>
<CAPTION>
SHARES ISSUED CONSIDERATION PER
AND SHARE RECEIVED IN
PAR VALUE SHARES AUTHORIZED CONVERTED ISSUANCE
---------- ----------------- ------------- -----------------------
<S> <C> <C> <C> <C>
Redeemable convertible
preferred stock
Series A. . . . . . $ 0.01 750,000 599,998 $ 1.25 cash
Series B. . . . . . 0.01 1,430,000 1,144,000 $ 1.75 cash
Series C. . . . . . 0.01 4,444,138 2,413,791 $ 2.18 cash
Series D. . . . . . 0.01 5,482,330 4,313,514 $ 4.70 cash
Series E. . . . . . 0.01 4,402,731 3,166,094 $7.15 cash and services
----------------- -------------
16,509,199 11,637,397
================= =============
</TABLE>
In connection with the issuance of Series B Redeemable Convertible
Preferred Stock, the Company issued 160,000 shares of common stock to certain
holders of the Series B Redeemable Convertible Preferred Stock. The agreement
under which they were issued stipulated that the Company could repurchase the
common shares from the holders at the issuance price ($1.75) if the Company
completed a qualified financing or sale prior to August 31, 1998. As the
Company met this requirement, the shares were repurchased.
Beginning on January 1, 1998, the Series A, B, and C Redeemable Convertible
Preferred Stock accrued annual dividends equal to 8% of the original purchase
price paid per share. In connection with the Series D financing, the
stockholders elected to terminate their right to receive future cumulative
dividends. Through a noncash financing transaction, $285,893 of accrued
dividends, approximately $0.05 per share, were converted into 58,211 shares of
Series D Preferred Stock based on the accrued amount through June 5, 1998. In
addition, cash dividends of $12,304 were paid based on the accrued amount from
June 5, 1998 through June 11, 1998, the date of the Series D issuance.
The 699,300 shares of Series E Preferred Stock that were sold to a related
party were accounted for as having a beneficial conversion feature which was
deemed to approximate $2.7 million. This amount was accounted for as an
increase in additional paid in capital and an insubstance dividend to the
related preferred shareholders.
F-15
<PAGE>
WARRANTS
In connection with the prior issuances of redeemable convertible preferred
stock, the Company at various times issued warrants to purchase shares of
redeemable convertible preferred stock exercisable at prices equal to the
respective series' per share price. The warrants transferred to common stock
rights upon the close of the Company's initial public offering. Of the warrants,
rights to 29,370 and 39,774 shares were exercised during fiscal year 2000 at
$7.15 and $2.18 per share, respectively. The Company has reserved 515,323 shares
of Common Stock for issuance upon conversion of the remaining warrants. Of the
remaining common stock rights, 442,983 with an exercise price of $2.18 expire on
May 7, 2002 and 72,340 with an exercise price of $4.70 expire on December 31,
2002.
Stock Options
The Company has a stock option plan whereby options for the purchase of
shares of the Company's common stock may be granted to its employees. During
fiscal year ended June 30, 2000, the maximum number of options that may be
granted through the plan was increased from 1,360,000 to 2,500,000 effective
September 1999 and from 2,500,000 to 3,400,000 effective May 2000. The Company
has reserved 3,400,000 shares of common stock for issuance upon conversion of
the options as of June 30, 2000. The shares of common stock reserved for
issuance under the stock option plan automatically increase each year on the
first day of the Company's fiscal year beginning July 2000 in an amount equal to
the lesser of (i) 1,200,000 shares, (ii) 5% of the outstanding shares of common
stock on such date, and (iii) any lesser number of shares determined by the
Board of Directors.
The following represents a summary of the Company's stock option activity,
and related information:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF PRICE PER EXERCISE FAIR
SHARES SHARE PRICE VALUE
----------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1997 343,600 0.01 to 0.11 0.08
Granted below fair value . 211,600 0.01 to 0.94 0.25 1.69
Exercised. . . . . . . . . (6,560) 0.01 to 0.21 0.06
Canceled . . . . . . . . . (18,640) 0.01 to 0.21 0.13
----------- -------------- ---------
Outstanding at June 30, 1998 530,000 0.01 to 0.94 0.15
Granted below fair value . 797,200 0.94 to 12.50 4.71 8.04
Exercised. . . . . . . . . (150,200) 0.01 to 0.94 0.06
Canceled . . . . . . . . . (19,120) 0.01 to 7.15 1.63
----------- -------------- ---------
Outstanding at June 30, 1999 1,157,880 0.01 to 12.50 $ 3.26
=========== ============== =========
Granted. . . . . . . . . . 1,130,000 2.63 to 18.88 8.71 $ 4.78
Exercised. . . . . . . . . (87,894) 0.01 to 3.75 0.33
Canceled . . . . . . . . . (213,410) 0.01 to 13.00 6.95
----------- -------------- ---------
Outstanding at June 30, 2000 1,986,576 $0.01 to 18.88 $ 6.04
=========== ============== =========
</TABLE>
F-16
<PAGE>
The Company recorded deferred compensation for the fiscal years ended June
30, 2000 and 1999 of $0 and $2,738,777, respectively. The amount recorded
represents the difference between the option price and the deemed fair value of
the Company's Common Stock for shares subject to options granted. The
amortization of deferred compensation will be charged to operations over the
vesting period of the options, which is typically five years. Total
amortization recognized was $1,174,218, $673,990 and $72,730 for the fiscal
years ended June 30, 2000, 1999 and 1998, respectively.
The following table summarizes outstanding options at June 30, 2000 by
price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------------------------- --------- ---------------
WEIGHTED- WEIGHTED-AVERAGE WEIGHTED-
NUMBER OF RANGE OF AVERAGE REMAINING CONTRACTUAL NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE LIFE OF OPTIONS IN YEARS OPTIONS EXERCISE PRICE
----------- --------------- --------------- ------------------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
110,120 . . $ 0.01 to 0.01 $ 0.01 6.1 70,680 $ 0.01
159,360 . . 0.18 to 0.21 0.21 7.5 39,240 0.21
237,120 . . 0.94 to 0.94 0.94 8.3 39,435 0.94
153,796 . . 2.63 to 3.88 3.34 9.4 14,666 3.75
121,300 . . 4.00 to 6.00 5.26 6.4 50,000 6.00
906,130 . . 6.13 to 9.13 7.43 9.3 75,080 7.12
288,250 . . 9.53 to 14.13 12.25 9.3 1,840 12.50
10,500. . . 16.00 to 18.88 16.50 9.3 -- --
----------- --------------- --------------- ------------------------ --------- ---------------
1,986,576 . $ 0.01 to 18.88 $ 5.96 8.7 290,941 $ 3.30
=========== =============== =============== ======================== ========= ===============
</TABLE>
Pro forma information regarding net income (loss) per share is required by
Statement No. 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
June 30, 1995 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following weighted-average assumptions for fiscal year
1999 and 1998: weighted-average risk free interest rate was 5.5%, a dividend
yield of 0%, a volatility factor of the expected market price of the Company's
common stock of near zero, and a weighted-average expected life of the option of
five years. For fiscal year 2000 the Black-Scholes method was used with the
following assumptions: weighted-average risk free interest rate of 6.21%, a
dividend yield of 0%, a volatility factor of .90 and a weighted-average expected
life of four years.
Had compensation cost for the Company's stock option plan been determined
consistent with the fair value method as required by SFAS 123, the Company's net
loss and net loss per share would have been $(39.9) million and $(2.82) per
share, respectively.
For pro forma disclosure purposes, the estimated fair value of the
Company's employee stock options is treated as if amortized to expense over the
options' vesting period, therefore the effects of applying SFAS 123 for pro
forma disclosures are not necessarily indicative of future amounts.
F-17
<PAGE>
7. NET LOSS PER SHARE
The following table sets forth the computation of basic net loss per share
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED,
JUNE 30,
--------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
----------------------------------------------
2000 1999 1998
--------------- -------------- -------------
<S> <C> <C> <C>
Numerator:
Net loss. . . . . . . . . . . . . . . . . . . . . $ (38,723) $ (19,059) $ (4,684)
Less: Beneficial conversion feature and
in-substance dividend . . . . . . . . . . . . -- (2,700) --
--------------- -------------- -------------
Net loss applicable to common shareholders. . . . . $ (38,723) $ (21,759) $ (4,684)
=============== ============== =============
Denominator:
Weighted average shares . . . . . . . . . . . . . 14,149,167 1,062,696 1,152,468
Less: contingently issuable shares-issued with
Series B Preferred Stock and subject to
repurchase. . . . . . . . . . . . . . . . . . -- -- (151,648)
--------------- -------------- -------------
Denominator for basic calculation . . . . . . . . . 14,149,167 1,062,696 1,000,820
=============== ============== =============
Net loss per share
Basic . . . . . . . . . . . . . . . . . . . . . . $ (2.74) $ (20.48) $ (4.68)
=============== ============== =============
</TABLE>
8. RELATED PARTIES
The Company incurred expenses of $61,752, $32,343 and $27,552 for the
fiscal years ended June 30, 2000, 1999 and 1998, respectively, for legal
services to Kenneth Sharples, the brother of the Company's President. These
expenses were primarily for intellectual property legal issues. In addition, at
various dates prior to the fiscal year ended June 30, 1999 the Company issued to
Kenneth Sharples options to purchase 6,400 shares of common stock at a
weighted-average purchase price of $0.93 per share.
The E.W. Scripps Company, through its wholly owned subsidiaries, Scripps
Ventures LLC and Scripps Howard Broadcasting Company d/b/a Home & Garden
Television ("HGTV"), beneficially owns 13.6% of the outstanding common stock as
of August 31, 2000 of Garden.com. Douglas R. Stern, a director of Garden.com,
is the President and Chief Executive Officer of United Media, a newspaper
syndication company and wholly-owned subsidiary of The E.W. Scripps Company.
On May 24, 1999, 699,300 shares of the Company's Series E Preferred Stock
were purchased by HGTV for a total purchase price of $5,000,000, or $7.15 per
share. Approximately $1,500,000 of the purchase price was paid in the form of
an advertising credit, of which the Company has used approximately $1,243,000 as
of June 30, 2000.
F-18
<PAGE>
Beginning in March 1998, the Company conducted a national marketing program
with United Media. The agreement with United Media was terminated during the
fiscal year ended June 30, 2000.
The Company made payments of approximately $2,500, $130,000 and $75,000 to
affiliates of The E.W. Scripps Company during the fiscal years ended June 30,
2000, 1999 and 1998, respectively for services related to marketing and sales
expenses and the third-party syndication of the Company's content offerings.
The Company maintains test gardens in Des Moines, Iowa on property owned by
Douglas A. Jimerson, Vice President of Publishing and Editor-in-Chief. The
Company pays for the plants grown in the gardens and for the maintenance of the
gardens. Other than these maintenance expenses, the Company does not pay Mr.
Jimerson rent for the use of the gardens.
9. RESTRUCTURING AND OTHER ACTIVITIES
On January 21, 2000 the Company acquired from a third party all owned
assets, including inventory, related to the production of a catalog. The assets
were purchased through both cash payments and the issuance of common stock. The
excess of the purchase price over inventory value was attributed to goodwill.
In June 2000, the Company's management initiated a restructuring effort
that resulted in the Company incurring a restructuring charge of $888,000. This
charge includes asset write-offs on discontinued Company initiatives, including
prepaid costs for a landscaping product test, severance related to an internal
restructuring and a note receivable from a European based internet gardening
company.
10. SUBSEQUENT EVENTS
On July 21, 2000 the Company issued an employee stock grant of 1.4 million
shares as approved by the Company's Board of Directors. The options have an
exercise price equal to the closing price for the Company's publicly traded
common shares on the date of the option grant, or $1.75 per share. The options
have a vesting period of four years beginning on the date of the option grant.
On September 28, 2000, the Company announced a corporate restructuring (the
"Restructuring Plan") with the intent of lowering ongoing operating expenses and
reducing future capital requirements. It is expected that the Restructuring
Plan will cost the Company between $2.5 million and $2.8 million. Pursuant to
the Restructuring Plan, the Company reduced its workforce on September 28, 2000
by 93 employees. In addition, the Company terminated or materially amended
multiple marketing initiatives, including the Company's relationships with
iVillage, Excite and PRIMEDIA, resulting in both write-offs of prepaid assets
and cash payments to third parties to discontinue certain contractual
obligations.
Simultaneous with its announcement of the Restructuring Plan, the Company
also announced that it had engaged the investment bank of Robertson Stephens to
aid the Company in evaluating strategic alternatives and to assist the Company
with ongoing fund-raising efforts.
F-19
