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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26841
1-800-FLOWERS.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 STEWART AVENUE, WESTBURY, NEW YORK 11590
--------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 237-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $0.01 par value
(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 |_| No |X|
Indicate by check mark 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting common stock held by non-affiliates of
the Registrant, based on the closing price of the Class A common stock on
September 20, 1999 as reported on the Nasdaq National Market, was approximately
$181,969,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The Registrant does not have any
non-voting common equity outstanding.
21,375,472
(Number of shares of class A common stock outstanding as of September 20, 1999)
40,246,205
(Number of shares of class B common stock outstanding as of September 20, 1999)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders (the Definitive Proxy Statement), to be
filed with the SEC within 120 days of June 27, 1999, are incorporated by
reference into Part III of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 27, 1999
INDEX
PART I
ITEM 1. Business 1
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 21
ITEM 6. Selected Financial Data 24
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 26
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 35
ITEM 8. Financial Statements and Supplementary Data 36
ITEM 9. Changes in and disagreements with Accountants on Accounting and Financial
Disclosure 36
PART III
ITEM 10. Directors and Executive Officers of the Registrant 36
ITEM 11. Executive Compensation 36
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 36
ITEM 13. Certain Relationships and Related Transactions 36
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37
SIGNATURES 39
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM,
INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. 1-800-FLOWERS.COM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, AS MORE FULLY DESCRIBED ELSEWHERE IN THIS REPORT. 1-800-FLOWERS.COM
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR
ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN
THE FUTURE.
ITEM 1. BUSINESS
THE COMPANY
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral
products and gifts, gourmet foods and home and garden merchandise, in terms of
number of customers and revenue. As of June 27, 1999, we had sold our products
to approximately 7.8 million customers, of which 2.8 million had made a purchase
from us in the previous twelve months. Our total net revenues for the year ended
June 27, 1999 were $295.9 million. We provide our customers the choice of
purchasing our products online, by calling us toll-free or by visiting our owned
or franchised retail stores. The Internet is our fastest growing sales channel.
For the year ended June 27, 1999, online revenues were $52.9 million,
representing an increase of 97.7% over the prior year.
We offer more than 1,500 varieties of fresh-cut and seasonal flowers,
plants and floral arrangements and more than 6,000 stock keeping units, or SKUs,
of gifts, gourmet foods and home and garden products, including garden
accessories and casual lifestyle furnishings. We are committed to providing our
individual and corporate customers the best possible shopping experience through
superior service and a 100% satisfaction guarantee.
In May 1999, 1-800-FLOWERS.COM completed a private placement of
preferred stock. The private placement yielded us net proceeds of $101.6
million, which we intend to use together with the net proceeds of approximately
$115.7 million from the Company's August 1999 initial public offering (IPO), to
further our strategy of becoming the leading e-commerce provider of flowers,
gifts, gourmet foods and home and garden merchandise.
In 1992, Teleway, Inc. was formed under the laws of the State of
Delaware and acquired a majority of the outstanding shares of the common stock
of 800-FLOWERS, Inc., a Texas corporation; under which entity the telemarketing
business was operated. In 1995, Teleway, Inc. changed its name to 1-800-FLOWERS,
Inc. and in 1996, 800-FLOWERS, Inc. was merged into 1-800-FLOWERS, Inc.
Subsequently, in 1999, 1-800-FLOWERS, Inc. changed its name to
1-800-FLOWERS.COM, Inc. References in this Annual Report on Form 10-K to
"1-800-FLOWERS.COM", "we", "our", "us" and the "Company" refer to
1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's principal offices
are located at 1600 Stewart Avenue, Westbury, New York, 11590 and its telephone
number at that location is (516) 237-6000.
THE ORIGINS OF 1-800-FLOWERS.COM
Our business began when James F. McCann, our Chairman and Chief
Executive Officer, acquired a single retail florist in New York City, which he
subsequently expanded to a 14 store chain. Thereafter, we modified our business
strategy to take advantage of the rapid emergence of toll-free calling. We
acquired the right to use the toll-free telephone number 1-800-FLOWERS, adopted
it as our corporate identity and began to aggressively build a national brand
around it. We believe we were one of the first companies to embrace this new way
of conducting business.
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To support the growth of our toll-free business and to provide superior
customer service, we began developing an operating infrastructure that
incorporated the best available technologies. Over time, we implemented:
o a sophisticated transaction processing system that facilitated
rapid order entry and fulfillment;
o an advanced telecommunications system; and
o multiple customer service centers to handle increasing call
volume.
To enable us to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, we
created BloomNet, a nationwide network of approximately 1,500 independent local
florists selected by us for their high-quality products, superior customer
service and order fulfillment and delivery capabilities.
In the early 1990s, we recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
medium. By taking advantage of our previous investments in our infrastructure,
we were able to quickly develop and implement an online presence. As a result,
we were one of the first companies to market products online through CompuServe
beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In April 1995,
we opened our fully functional, e-commerce Web site (WWW.1800FLOWERS.COM) and
subsequently entered into strategic relationships with AOL, Excite and Microsoft
Network, among others, to build our online brand and customer base.
Our online presence has enabled us to expand the number and types of
products we can effectively offer. Since 1995, we have expanded our online
product offerings of flowers, gourmet foods and gifts and added complementary
home and garden merchandise through our April 1998 acquisition of The Plow &
Hearth, Inc. ("Plow & Hearth"). As a result, we have developed relationships
with customers who purchase products not only for gifting occasions but also for
everyday consumption.
1-800-FLOWERS.COM TODAY
We believe our success in selling floral, gift, gourmet food and home and garden
products is attributable to the following key elements of our business:
BRAND. We believe that 1-800-FLOWERS is one of the most recognized
brands in the floral industry. The strength of our brand has enabled us to
extend our product offerings to complementary products, including gifts, gourmet
foods and home and garden merchandise, and to attract a significant number of
customers to our Web site. We continue to invest heavily in building our brand
through strategic online relationships and extensive marketing, advertising and
public relations programs. We believe our brand is characterized by:
o Convenience. Our customers may purchase floral, gift, gourmet
food and home and garden products online or by calling our
toll-free telephone number from the home or office 24 hours a
day, seven days a week. We offer a variety of delivery
options, including same-day or next-day service throughout the
United States.
o Quality. High-quality products are critical to our continued
brand strength. We offer our customers a 100% satisfaction
guarantee on all of our products.
o Selection. Over the course of a year, we offer more than 1,500
varieties of fresh-cut and seasonal flowers, plants and floral
arrangements, and more than 6,000 SKUs of gifts, gourmet foods
and home and garden products, including garden accessories and
casual lifestyle furnishings.
o Customer Service. We ensure a high level of customer service
by training our agents to assist our customers over the
telephone and online to select the appropriate flowers or
gifts and to monitor order fulfillment.
PRODUCT SELECTION. We continuously expand our product offerings to
provide a better shopping experience for
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our customers. Our merchandising team works closely with manufacturers and
suppliers to select and design our principal floral, gift, gourmet food and home
and garden merchandise as well as other products that meet the seasonal and
other special needs of our customers.
Because we offer a wide selection of products, we create the
opportunity to have a relationship with customers who purchase products not only
for gifting occasions but also for everyday consumption.
CUSTOMER RELATIONSHIPS. Through our direct contact with our customers,
we collect information and maintain a database about our customers. This
information includes the customer's name, address, e-mail address, telephone
number, demographic information, individual preferences, shopping and buying
patterns and other key attributes. We use this information to improve our
customers' experience with us by offering products that meet their needs, to
target promotional offers, to identify future consumption and giving occasions
and to send gift reminders and e-mail messages, including our electronic
newsletter. As of June 27, 1999, our total database of customers numbered
approximately 7.8 million. We also gather information about the recipients of
our products, including their name, address, telephone number and the products
received.
We market our products to businesses for gifting, incentive and reward
programs. We currently provide many of our large corporate customers with an
account manager, a team of floral and gifting coordinators and a customized,
password-protected area of our Web site. In addition, each employee of our
corporate customers is entitled to receive special offers and discounts on
personal purchases.
TECHNOLOGY INFRASTRUCTURE. We believe we have been and continue to be a
leader in implementing new technologies and systems to give our customers the
best possible experience with us, whether online or over the telephone. Our Web
site has been designed to be secure, fast and easy to use. To serve our
telephone customers, we have implemented a centrally managed telecommunications
network.
We process both online and telephonic orders through the same
transaction processing system. This system selects the florist or other vendor
to fulfill a customer's order, electronically transmits the order for
fulfillment and captures the customer's profile and purchasing history. In
addition, our customer service representatives are electronically linked to this
system, enabling them to facilitate placement of an order and subsequently track
customer and order information.
FULFILLMENT CAPABILITIES. Fresh-cut and seasonal flowers and floral
arrangements are perishable and often sent as gifts. A majority of our
customers' purchases of floral and floral-related gift products are fulfilled
through the BloomNet network of approximately 1,500 independent florists or one
of our owned or franchised retail stores. This allows us to deliver our floral
products on a same-day or next-day basis to ensure freshness and to meet our
customers' need for prompt delivery. In addition, we are better able to ensure
consistent product quality and presentation and offer a greater variety of
arrangements, which we believe creates a better experience for our customers and
gift recipients. We select BloomNet members for their high-quality products,
superior customer service and order fulfillment and delivery capabilities.
To ensure reliable and efficient communication of online and telephonic
orders to the BloomNet members, we created BloomLink, a proprietary
Internet-based communications system. At June 27, 1999, approximately one-half
of the BloomNet members had adopted BloomLink since its introduction in January
1998. We also have the ability to arrange for delivery of floral products
internationally through independent wire services.
We fulfill most of our gift basket and gourmet food items primarily
through members of BloomNet or third-party suppliers that ship products directly
to the customer by next-day or other delivery method chosen by the customer. We
select our third-party vendors based upon the quality of their products, their
reliability and their ability to meet our volume requirements.
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We package and ship our home and garden products from our advanced
300,000 square foot fulfillment center located in Madison, Virginia by next-day
or other delivery method chosen by the customer.
OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers,
gifts, gourmet foods and products for the home and garden. The key elements of
our strategy to achieve this objective are:
AGGRESSIVELY EXTEND OUR BRAND. Our goal is to make the
1-800-FLOWERS.COM brand synonymous with flowers, gifts, gourmet foods and home
and garden products. To do this, we intend to invest in building our brand and
in communicating the benefits and convenience of shopping with
1-800-FLOWERS.COM. We intend to significantly increase our marketing
expenditures to:
o maintain and develop new strategic relationships with Internet
companies;
o expand our Internet advertising and promotion;
o broaden our television, radio, print and outdoor advertising
campaigns; and
o increase our public relations programs, such as community
events, radio and television demonstrations and trade
conferences.
We intend to market other high-quality brands in addition to
1-800-FLOWERS.COM. We may accomplish this through internal development,
co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses.
EXPAND OUR OFFERINGS OF GIFTS AND HOME AND GARDEN PRODUCTS. To broaden
our relationships with our existing customers, we intend to offer more products
designed for everyday occasions and sentiments, as well as products for the home
and garden. To do this, we intend to expand our relationships with product
manufacturers or acquire businesses with complementary product lines.
ENHANCE OUR CUSTOMER RELATIONSHIPS. We intend to enhance our
relationships with our customers, encouraging more frequent and more extensive
use of our Web site, by introducing enhanced product-related content and
interactive features. We will also continue to personalize the features of our
Web site and increase our use of both customer and recipients' information to
target product promotions, remind our customers of upcoming occasions and convey
other marketing messages. In addition, we are committed to continuing to make
shopping and visiting WWW.1800FLOWERS.COM an easy, secure and pleasurable
experience for our customers.
We believe we have a significant opportunity to expand our corporate
accounts. We intend to focus greater resources on developing customized programs
for our corporate customers to meet their gifting needs and those of their
employees.
INCREASE THE NUMBER OF ONLINE CUSTOMERS. Our goal is to increase the
number of customers placing orders through our Web site. To achieve this goal,
we intend to:
o actively promote our Web site through Web portals and online
networks;
o aggressively expand our online affiliate program, in which
independent Web sites link directly to our Web site;
o aggressively market our Web site in our advertising campaigns;
o promote our Web site to our existing telephonic customers; and
o facilitate access to our Web site for our corporate customers
by developing direct links from their internal corporate
networks.
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CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE. We will continue to
make significant investments and use the best available technologies in order to
improve the functionality of our Web site and our underlying operations. In
particular, we intend to:
o continue to improve the speed and ease of use of our Web site;
o improve our transaction processing system to facilitate order
tracking and to enhance the interface with our accounting and
financial systems;
o enhance our ability to analyze our database of customer
information and conduct personalized one-to-one marketing; and
o further expand the functionality and features of BloomLink.
CONTINUE TO IMPROVE OUR FULFILLMENT CAPABILITIES. We intend to improve
our fulfillment capabilities to make our operations more efficient by:
o strengthening our relationships with BloomNet member florists
and increasing the number of BloomLink installations in their
stores;
o evaluating and implementing alternative means of fulfillment,
including centralized production and logistics partnering; and
o continuing to improve our operations that support our gift,
gourmet food and home and garden product lines.
OUR PRODUCTS
We offer a wide range of products, including fresh-cut and seasonal
flowers, floral arrangements, gifts, gourmet foods and home and garden
merchandise. In addition to selecting our core products, our merchandising team
works closely with manufacturers and suppliers to select and design products
that meet the seasonal and other special needs of our customers. For the years
ended June 29, 1997, June 28, 1998 and June 27, 1999, the flowers and plants
products category represented 92.1%, 86.9% and 71.8% of total net revenues,
respectively.
Over the course of a year, our product selection consists of:
FLOWERS AND PLANTS. We offer more than 1,300 varieties of fresh-cut and
seasonal flowers and floral arrangements for all occasions and holidays. We also
offer more than 200 varieties of popular plants for the home and garden.
GIFTS. We offer more than 200 SKUs of gifts, including gift baskets,
dolls, plush toys, balloons, bath and spa items, wreaths and ornaments.
GOURMET FOODS. We offer more than 100 SKUs in the gourmet food
category, including candies, chocolates, nuts, cookies and fruits.
HOME. We offer more than 2,500 SKUs for the home, including candles and
lighting, vases, kitchen items and accents, casual lifestyle furniture and home
accessories.
GARDEN. We offer more than 3,000 SKUs for the garden, including outdoor
furniture, tools and accessories, pottery, nature-related products, clothing and
footwear.
OUR WEB SITE
We offer floral, gift, gourmet food and home and garden products
through our 1-800-FLOWERS.COM Web
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site (WWW.1800FLOWERS.COM). Customers may come to our Web site directly or may
be referred to us by a Web site with which we have a strategic relationship. Our
online partners include AOL, Excite and Microsoft Network and more than 6,000
members of our online affiliate program, which we initiated in February 1999. In
addition, our customers can shop at our AOL store (keyword: flowers). We also
offer home and garden products through the Plow & Hearth Web site
(WWW.PLOWHEARTH.COM). As of June 27, 1999, approximately 700,000 customers had
made a purchase through our Web site or our AOL store in the previous twelve
months.
Our Web site allows customers to easily browse and purchase our
products, promotes brand loyalty and encourages repeat purchases by providing an
inviting customer experience. Our Web site offers customers detailed product
information, complete with photographs, contests, home decorating and how-to
tips, information on floral trends, gift-giving suggestions and information
about special events and offers. We have designed our Web site to be fast,
secure and easy to use and to enable customers to order products with minimal
effort. Our Web site includes the following key features:
SEARCHING. We have incorporated sophisticated search capabilities,
which enable customers to search for products by category, occasion, price,
flower type or keyword. We also have a "Gift Center" section that provides
popular gift ideas for each occasion.
PERSONALIZATION. We utilize our Web site to enhance the direct
relationship with our customers. The "My Assistant" area of our site enables
customers to establish their floral and gift preferences, which personalizes and
simplifies their visits. "My Assistant" members are also provided with an online
address book of names and addresses of their gift recipients, access to their
purchasing history and e-mail notification of specials and events at our local
retail stores. Our customers can also register for our "Gift Reminder Program,"
in which we send them an e-mail reminder a few days prior to an occasion to
remind them of the occasion and to recommend specific flowers and gifts.
SECURITY. We use secure server software to encrypt the customer's
credit card number prior to transmitting it over the Internet.
DELIVERY. We offer customers a variety of delivery and shipping
options, including same-day or next-day delivery by the fulfilling local florist
and a number of delivery options through Federal Express, United Parcel Service,
the United States Postal Service and other common carriers.
CUSTOMER SERVICE. Through our six customer service centers, we offer
service and support to our customers 24 hours a day, seven days a week over the
telephone. We also provide real-time online messaging and e-mail support to our
customers. We intend to enhance our ability to provide a high level of customer
service through the use of new Internet-based technologies.
PRIVACY. We recognize the importance of maintaining the privacy of our
customers. We use the information gathered from our customers and others who
have registered on our Web site from time to time to send our own promotional
materials. We periodically make information available to selected third parties
for direct marketing purposes. However, customers may elect not to receive our
promotional information or instruct us not to make their information available
to third parties. We also gather information concerning how visitors use and
navigate our Web site. We use this information only internally to better allow
us to serve our customers. Our current online privacy policy is set forth on our
Web site.
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MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to strengthen our
1-800-FLOWERS.COM brand, build customer loyalty, increase the number of online
and telephonic customers, encourage repeat purchases and develop additional
product revenue opportunities. We also intend to develop and market other
high-quality brands in addition to 1-800-FLOWERS.COM through internal
development, co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses. We market and promote our brand and products as
follows:
OUR STRATEGIC ONLINE RELATIONSHIPS. We promote our products through
strategic relationships with leading Web portals and online networks. Our key
relationships include:
o America Online. We have worked with AOL since 1994 and
maintain a separate online 1-800-FLOWERS.COM store for the
convenience of AOL's subscribers. We recently entered into an
agreement which expanded the term of the relationship until
August 31, 2003 and its scope by adding the CompuServe
Service, Netscape Netcenter (starting February 2000), the ICQ
Service and Digital City to the AOL Service and AOL.com. On
the AOL Service and AOL.com we are the exclusive marketer of
fresh-cut flowers and plants during the term, and of fresh-cut
flowers on CompuServe, Netscape Netcenter, ICQ Service and
Digital City for a period of three years. For a one-year
period during the term, we are the exclusive marketer of
gardening products on all six properties. Under the agreement,
the term "exclusive marketer" means that AOL will not promote,
market or advertise these products on the aforementioned
properties on behalf of any entity other than
1-800-FLOWERS.COM during the respective exclusivity periods.
In addition, we are to be prominently promoted through banner
and other advertisements across these AOL properties.
o Microsoft Network. Our products, advertisements and links to
our Web site are prominently featured on Microsoft Network's
online shopping channel. Our agreement with Microsoft Network
extends through September 1999.
o Excite. Our products and links to our Web site are also
prominently featured on Excite's shopping channel. Our
agreement with Excite extends through June 2000.
o StarMedia Network. Through our relationship with StarMedia
Network, we are developing Spanish and Portuguese language
versions of our Web site.
OUR ONLINE AFFILIATE PROGRAM. In addition to securing alliances with
frequently visited Web sites, in February 1999 we established an affiliate
network that has grown to more than 6,000 Web sites operated by third parties.
Affiliates may join this program through our Web site and their participation
may be terminated by them or by us at any time. To date, this program has not
generated a significant amount of revenue. These Web sites earn commissions by
referring customers from their sites to our Web site. Affiliates include AT&T
WorldNet, Earthlink/Sprint, Gateway 2000, HomeArts, About.com and PCWorld
Online.
TRADITIONAL MEDIA. We utilize traditional media, including television,
radio, print and outdoor advertising, to market our brand and products.
Traditional media allows us both to reach a large number of customers and to
target particular market segments.
DIRECT MAIL AND CATALOGS. We use our direct mail promotions and
catalogs to increase the number of new customers and to introduce additional
products to our existing customers. Through the use of PLOW & HEARTH'S catalogs,
we intend to cross-promote our floral and gift products to our home and garden
customers as well as home and garden products to our floral and gift customers.
For the year ended June 27, 1999, we mailed a total of approximately 36.2
million catalogs, including PLOW & HEARTH and AMERICAN COUNTRY HOME. We believe
these catalogs will attract
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additional customers to our WWW.1800FLOWERS.COM and WWW.PLOWHEARTH.COM Web
sites.
CO-MARKETING AND PROMOTIONS. We have established a number of
co-marketing relationships and promotions to advertise our products. For
example, we have established co-marketing arrangements with United, American and
Delta airlines as well as American Express, VISA and MasterCard, among others.
We established the American and Delta airlines relationships in the third
quarter of fiscal 1999. To date, none of these relationships have generated a
significant amount of revenue.
FULFILLMENT OPERATIONS
Our customers primarily place orders for our products online or over
the telephone. Fulfillment of products is as follows:
FLOWERS AND PLANTS. A majority of our floral orders are fulfilled
through the BloomNet network of approximately 1,500 independent florists or one
of our owned or franchised retail stores. We select retail florists for the
BloomNet network based upon the historical volume of floral purchases in a
particular geographic area, the number of BloomNet florists currently serving
the area and the florist's design staff, facilities, quality of floral
processing, ability to fulfill orders in sufficient volume and delivery
capabilities. To join BloomNet, a retail florist must submit an application to
1-800-FLOWERS.COM and be approved by our internal selection committee.
By fulfilling floral orders through BloomNet or one of our owned or
franchised stores, we are able to deliver floral products on a same-day or
next-day basis to ensure freshness and to meet our customers' need for prompt
delivery. Because we select these florists and receive customer feedback on
their performance in fulfilling orders, we are able to ensure consistent product
quality and presentation and offer a greater variety of arrangements, which we
believe creates a better experience for our customers and gift recipients.
Our relationships with our BloomNet members are non-exclusive. Many
florists, including many BloomNet florists, also are members of other floral
fulfillment organizations. The BloomNet agreements generally are cancellable by
either party with ten days notification and do not guarantee any orders, dollar
amounts or exclusive territories from us to the florist.
Of the BloomNet member florists and our owned or franchised stores,
approximately one-half are connected to us electronically via BloomLink, an
Internet-based electronic communications system. Where we are not connected to
the BloomNet partners or our owned and franchised stores via BloomLink, we
utilize the communication system of an independent wire service to transmit an
order to the fulfilling florist. In addition, we also ship to the customer
directly from growers.
We own and operate 36 retail stores, located primarily in the New York
and Los Angeles metropolitan areas. In addition, we have 87 franchised stores,
located primarily in California. Our owned stores serve as local points of
fulfillment and enable us to test new products and marketing programs. We do not
expect to materially increase the number of owned or franchised retail stores in
the foreseeable future.
GIFTS AND GOURMET FOODS. Our gift and gourmet food products are shipped
directly to the customer by members of BloomNet or third-party product suppliers
using next-day or other delivery method selected by the customer. Our business
is not dependent on any one of these third-party suppliers.
HOME AND GARDEN. We fulfill purchases of home and garden merchandise
from our Madison, Virginia fulfillment center or by third-party product
suppliers using next-day or other delivery method selected by the customer. In
fiscal 1999, we shipped approximately 800,000 packages from this facility.
Construction has recently been completed whereby we expanded this facility from
185,000 square feet to approximately 300,000 square feet. This facility employs
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advanced technology for receiving, packaging, shipping and inventory control.
TECHNOLOGY INFRASTRUCTURE
We believe we have an advanced technology platform. Our technology
infrastructure, primarily consisting of our Web site, transaction processing,
customer databases and telecommunications systems, is built and maintained for
reliability, security and flexibility. In addition, our infrastructure is
scalable, allowing it to grow with our business. To minimize the risk of service
interruptions from unexpected component or telecommunications failure,
maintenance and upgrades, we have built full back-up into those components of
our systems that we have identified as critical. In recent years we have
installed an Oracle-based order processing and database management system,
developed BloomLink, and upgraded our telecommunications network, including our
call management system. We plan to continue to invest in technologies that will
improve and expand our e-commerce and telecommunication capabilities.
Our Web site and BloomLink are hosted and maintained by Fry Multimedia,
a hosting and online services company headquartered in Ann Arbor, Michigan. Fry
Multimedia provides development, maintenance and hosting services to us under an
agreement that extends through June 2001, which automatically renews for
successive two-year periods unless we terminate the agreement. The Fry agreement
may be terminated by either party upon the other's material breach. In addition
to Fry Multimedia's two hosting facilities, we also intend to co-locate the
hosting of our Web site and BloomLink with a third-party vendor to provide
additional back-up and system redundancy.
Our transaction processing system selects the florist or vendor to
fulfill the order and captures customer profile and history in a customized
Oracle database. Through the use of customized software applications, we are
able to retrieve, sort and analyze customer information to enable us to better
serve our customers and target our product offerings. We expect to develop or
license additional software applications to expand our ability to analyze and
use this information.
Our six customer service centers and many of our third party product
suppliers are connected electronically to our transaction processing system to
permit the rapid transmission of, and access to, critical order and customer
information. In addition, BloomLink electronically connects us to approximately
one-half of the retail stores in our floral retail fulfillment network.
Our operation center is located in our headquarters in Westbury, New
York. We provide comprehensive facility management services, including human and
technical monitoring of all production servers, 24 hours per day, seven days per
week.
COMPETITION
The growing popularity and convenience of e-commerce has given rise to
mass merchants on the Internet. In addition to selling their products over the
Internet, many of these retailers sell their products through a combination of
channels by maintaining a Web site, a toll-free phone number and physical
locations. These mass merchants offer an expanding variety of products and are
attracting an increasing number of customers. Some of these merchants have
expanded their offerings to include competing products and may continue to do so
in the future. These mass merchants, as well as other potential competitors, may
be able to:
o undertake more extensive marketing campaigns for their brands
and services;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees,
distribution partners and retailers.
In addition, we face intense competition in each of our individual
product categories. In the floral industry, there are many other providers of
floral products, none of which is dominant. Our competitors include:
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o retail floral shops, some of which maintain toll-free
telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are
highly competitive. Each of these categories encompasses a wide range of
products, is highly fragmented and is served by a large number of companies in
addition to us, none of which is dominant. Products in these categories may be
purchased from a number of outlets, including mass merchants, telemarketers,
retail specialty shops, online retailers and mail-order catalogs.
We believe our brand strength, product selection, customer
relationships, technology infrastructure and fulfillment capabilities position
us to compete effectively against our current and potential competitors in each
of our product categories. However, increased competition could result in:
o price reductions, decreased revenues and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors may adversely impact our business
and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Internet is rapidly evolving and there are few laws or regulations
directly applicable to e-commerce. Legislatures are considering an increasing
number of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
o user privacy;
o pricing;
o content;
o connectivity;
o intellectual property;
o distribution;
o taxation;
o liabilities;
o antitrust; and
o characteristics and quality of products and services.
Further, the growth and development of the market for online services
may prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of any
additional laws or regulations may impair the growth of the Internet or
commercial online services. This could decrease the demand for our services and
increase our cost of doing business. Moreover, the applicability to the Internet
of existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on our
business, financial condition and results of operations.
States or foreign countries might attempt to regulate our business or
levy sales or other taxes relating to our activities. Because our products and
services are available over the Internet anywhere in the world, multiple
jurisdictions may claim that we are required to do business as a foreign
corporation in one or more of those jurisdictions. Our failure
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to qualify as a foreign corporation in a jurisdiction where we are required to
do so could subject us to taxes and penalties. States or foreign governments may
charge us with violations of local laws.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to our success. We have applied
for or received trademark and/or service mark registration for, among others,
the marks "1-800-FLOWERS.COM", "1-800-FLOWERS", and "Plow & Hearth". We also
have rights to numerous domain names, including WWW.1800FLOWERS.COM,
WWW.FLOWERS.COM and WWW.PLOWHEARTH.COM. In addition, we have developed a
transaction processing system and operating systems as well as marketing data,
including customer information databases.
We rely on trademark, unfair competition and copyright law, trade
secret protection and contracts such as confidentiality and license agreements
with our employees, customers, partners and others to protect our proprietary
rights. Despite our precautions, it may be possible for competitors to obtain
and/or use our proprietary information without authorization or to develop
technologies similar to ours and independently create a similarly functioning
infrastructure. Furthermore, the protection of proprietary rights in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect proprietary rights to the same extent as do the
laws of the United States. Our means of protecting our proprietary rights in the
United States or abroad may not be adequate.
We intend to continue to license technology from third parties,
including Oracle, Microsoft and AT&T, for our communications technology and the
software that underlies our business systems. The market is evolving and we may
need to license additional technologies to remain competitive. We may not be
able to license these technologies on commercially reasonable terms or at all.
In addition, we may fail to successfully integrate licensed technology into our
operations.
Third parties have in the past infringed or misappropriated our
intellectual property or similar proprietary rights. We believe infringements
and misappropriations will continue to occur in the future. We intend to police
against infringement or misappropriation. However, we cannot guarantee we will
be able to enforce our rights and enjoin the alleged infringers from their use
of confusingly similar trademarks, servicemarks, telephone numbers and domain
names.
In addition, third parties may assert infringement claims against us.
We cannot be certain that our technologies or marks do not infringe valid
patents, trademarks, copyrights or other proprietary rights held by third
parties. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business. Intellectual property litigation is expensive and time-consuming and
could divert management resources away from running our business.
EMPLOYEES
As of June 27, 1999, we had a total of 2,100 full-time and part-time
employees. During peak periods, we substantially increase the number of customer
service and retail and fulfillment personnel. Our personnel are not represented
under collective bargaining agreements and we consider our relations with our
employees to be good.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS WOULD LIKELY SUFFER.
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE WHICH MAY REDUCE
THE TRADING PRICE OF OUR CLASS A COMMON STOCK. We expect to incur significant
operating and capital expenditures in order to:
o expand the 1-800-FLOWERS.COM brand through marketing and other
promotional activities;
o enter into strategic relationships with Internet companies;
o increase the number of products we offer; and
o enhance our technological infrastructure and order fulfillment
capabilities.
Although we have been profitable in the past, we expect to incur losses
for the foreseeable future as a result of these expenditures. In order to
achieve and maintain profitability, we will need to generate revenues
significantly above historical levels. We cannot assure you that we will achieve
sufficient revenues for profitability. Even if we do achieve profitability, we
may not sustain or increase profitability on a quarterly or annual basis in the
future.
OUR QUARTERLY OPERATING RESULTS MAY SIGNIFICANTLY FLUCTUATE AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS. Our future
revenues and results of operations may fluctuate significantly due to a
combination of factors, many of which are outside of our control. The most
important of these factors include:
o seasonality;
o the timing and effectiveness of our marketing programs;
o the timing and effectiveness of capital expenditures;
o our ability to enter into or renew marketing agreements with
Internet companies; and
o competition.
We may be unable to adjust spending quickly enough to offset any
unexpected revenue shortfall. If we have a shortfall in revenue in relation to
our expenses, our operating results will suffer. Our operating results for any
particular quarter may not be indicative of future operating results. You should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. It is possible that, in future periods,
our results of operations may be below the expectations of public market
analysts and investors. This could cause the trading price of our Class A common
stock to fall.
Consumer spending on flowers, gifts and other products we sell may vary
with general economic conditions. If general economic conditions deteriorate and
our customers have less disposable income, consumers will likely spend less on
our products and our quarterly operating results will suffer.
OUR OPERATING RESULTS WILL SUFFER IF SALES DURING OUR PEAK SEASONS DO
NOT MEET OUR EXPECTATIONS. Sales of our products are seasonal, concentrated in
the second calendar quarter, due to Mother's Day, Secretaries' Week and Easter,
and the fourth calendar quarter, due to the Thanksgiving and Christmas holidays.
In anticipation of increased sales activity during these periods, we hire a
significant number of temporary employees to supplement our permanent staff and
we significantly increase our inventory levels. If sales during these periods do
not meet our expectations, we may not generate sufficient revenue to offset
these increased costs and our operating results will suffer.
IF OUR CUSTOMERS DO NOT FIND OUR EXPANDED PRODUCT LINES APPEALING, OUR
REVENUES MAY NOT GROW AND OUR NET INCOME WILL DECREASE. Our business
historically has focused on offering floral and gift products. We have expanded
our product lines in the gift, gourmet food and home and garden categories,
particularly with our acquisition of Plow & Hearth in April 1998, and we expect
to incur significant costs in marketing these new products. If our customers do
not
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find our expanded product lines appealing, we may not generate sufficient
revenue to offset their related costs and our net income will decrease.
IF WE FAIL TO DEVELOP AND MAINTAIN OUR BRAND, WE WILL NOT INCREASE OR
MAINTAIN OUR CUSTOMER BASE OR OUR REVENUES. We must develop and maintain the
1-800-FLOWERS.COM brand to expand our customer base and our revenues. In
addition, we may introduce or acquire other brands in the future. We believe
that the importance of brand recognition will increase as we expand our product
offerings. Many of our customers may not be aware of the non-floral products we
offer. We intend to substantially increase our expenditures for creating and
maintaining brand loyalty and raising awareness of our additional product
offerings. However, if we fail to advertise and market our products effectively,
we may not succeed in establishing our brands, we will lose customers and our
revenues will decline.
Our success in promoting and enhancing the 1-800-FLOWERS.COM brand will
also depend on our success in providing our customers high-quality products and
a high level of customer service. If our customers do not perceive our products
and services to be of high quality, the value of the 1-800-FLOWERS.COM brand
would be diminished, we will lose customers and our revenues will decline.
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC ONLINE RELATIONSHIPS THAT
GENERATE A SIGNIFICANT AMOUNT OF TRAFFIC COULD LIMIT THE GROWTH OF OUR BUSINESS.
We expect that in the future a significant portion of our online customers will
purchase our products at our AOL online store or come to our Web site from third
party Web sites with which we have strategic relationships, including AOL,
Excite and the Microsoft Network. If these third-parties do not attract a
significant number of visitors, we will not receive a significant number of
online customers from these relationships and our revenues will decrease or not
grow. In addition, we plan to enter into more of these relationships and we may
pay significant fees to do so. There is strong competition to establish
relationships with leading Internet companies, and we may not successfully enter
into additional relationships, or renew existing ones. We may also be required
to pay significant fees to maintain and expand existing relationships. Our
online revenues will suffer if we fail to enter into new relationships or
maintain existing relationships or if these relationships do not result in
traffic sufficient to justify their cost.
IF LOCAL FLORISTS AND OTHER THIRD-PARTY VENDORS DO NOT FULFILL ORDERS
TO OUR CUSTOMERS' SATISFACTION, OUR CUSTOMERS MAY NOT SHOP WITH US AGAIN. Floral
orders placed by our customers are fulfilled by local florists, a majority of
which are either part of the BloomNet network of approximately 1,500 independent
florists or are stores that we own or franchise. Except for the stores we own,
we do not directly control any of these florists. In addition, many of the
non-floral products we sell are manufactured and delivered to our customers by
independent third-party vendors. If customers are dissatisfied with the
performance of the local florist or other third-party vendors, they may not
utilize our services when placing future orders and our revenues will decrease.
IF A FLORIST DISCONTINUES ITS RELATIONSHIP WITH US, OUR CUSTOMERS MAY
EXPERIENCE DELAYS IN SERVICE OR DECLINES IN QUALITY AND MAY NOT SHOP WITH US
AGAIN. Many of our arrangements with local florists for order fulfillment,
including arrangements with BloomNet florists, are not formalized in writing. Of
those relationships which have been formalized in writing, including
arrangements with BloomNet florists, most may be terminated with 10 days notice.
If a florist discontinues its relationship with us, we will be required to
obtain a suitable replacement located in the same area, which may cause delays
in delivery or a decline in quality, leading to customer dissatisfaction and
loss of customers.
IF A SIGNIFICANT AMOUNT OF CUSTOMERS ARE NOT SATISFIED WITH THEIR
PURCHASE, WE WILL BE REQUIRED TO INCUR SUBSTANTIAL COSTS TO ISSUE REFUNDS,
CREDITS OR REPLACEMENT PRODUCTS. We offer our customers a 100% satisfaction
guarantee on our products. If customers are not satisfied with the products they
receive, we will either send the customer another product or issue the customer
a refund or a credit. Our net income could decrease if a significant number of
customers request replacement products, refunds or credits.
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INCREASED SHIPPING COSTS AND LABOR STOPPAGES MAY ADVERSELY AFFECT
SALES OF OUR NON-FLORAL PRODUCTS. Our non-floral products are delivered to
customers either directly from the manufacturer or from our warehouse in
Virginia. We have established relationships with the United States Postal
Service, Federal Express, United Parcel Service and other common carriers for
the delivery of these products. If these carriers were to raise the prices
they charge to ship our goods, our customers might choose to buy comparable
products locally to avoid shipping charges. In addition, these carriers may
experience labor stoppages, which could impact our ability to deliver
products on a timely basis to our customers and adversely affect our customer
relationships.
IF WE FAIL TO CONTINUOUSLY IMPROVE OUR WEB SITE, WE WILL NOT ATTRACT OR
RETAIN CUSTOMERS. If our potential or existing customers do not find our Web
site a convenient place to shop, we will not attract or retain customers and our
sales will suffer. To encourage the use of our Web site, we must continuously
improve its accessibility, content and ease of use. If our competitors' Web
sites are perceived as easier to use or better able to satisfy customer needs,
our customer traffic and our business would be adversely affected.
COMPETITION IN THE FLORAL, GIFT, GOURMET FOOD AND HOME AND GARDEN
INDUSTRIES IS INTENSE AND A FAILURE TO RESPOND TO COMPETITIVE PRESSURE COULD
RESULT IN LOST REVENUES. There are many companies that offer products in the
floral, gift, gourmet food and home and garden categories. In the floral
category, our competitors include:
o retail floral shops, some of which maintain toll-free
telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are
highly competitive. Each of these categories encompasses a wide range of
products and is highly fragmented. Products in these categories may be purchased
from a number of outlets, including mass merchants, retail specialty shops,
online retailers and mail-order catalogs.
Competition is intense and we expect it to increase. Increased
competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect our
results of operations.
IF WE DO NOT ACCURATELY PREDICT CUSTOMER DEMAND FOR OUR PRODUCTS, WE
MAY LOSE CUSTOMERS OR EXPERIENCE INCREASED COSTS. In the past, we did not need
to maintain significant inventory of products. However, as the volume of
non-floral products we offer has expanded, we intend to increase inventory
levels and the number of products maintained in our warehouses. Because we have
limited experience offering many of our non-floral products through our Web
site, we may not predict inventory levels accurately. If we overestimate
customer demand for our products, excess inventory and outdated merchandise
could accumulate, tying up working capital and potentially resulting in reduced
warehouse capacity and inventory losses due to damage, theft and obsolescence.
If we underestimate customer demand, we will disappoint customers who may turn
to our competitors. Moreover, the strength of the 1-800-FLOWERS.COM brand could
be diminished due to misjudgments in merchandise selection.
IF THE SUPPLY OF FLOWERS FOR SALE BECOMES LIMITED, THE PRICE OF FLOWERS
WILL RISE OR FLOWERS MAY BE UNAVAILABLE AND OUR REVENUES AND GROSS MARGINS COULD
DECLINE. A variety of factors affect the supply of flowers in the United States
and the price of our floral products. If the supply of flowers available for
sale is limited due to weather conditions or other factors, prices for flowers
will likely rise and customer demand for our floral products may be reduced,
causing our revenues and gross margins to decline. Alternatively, we may not be
able to obtain high quality flowers in an amount
14
sufficient to meet customer demand. Even if available, flowers from alternative
sources may be of lesser quality and/or may be more expensive than those
currently offered by us.
Most of the flowers sold in the United States are grown by farmers
located abroad, primarily in Colombia, Ecuador and Holland, and we expect that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and
disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation
against foreign trade practices.
Most of the flowers sold in the United States are grown by farmers
located abroad, primarily in Colombia, Ecuador and Holland, and we expect that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including import duties
and quotas; agricultural limitations and restrictions to manage pests and
disease; changes in trading status; economic uncertainties and currency
fluctuations; severe weather; work stoppages; foreign government regulations and
political unrest; and trade restrictions, including United States retaliation
against foreign trade practices.
A FAILURE TO MANAGE OUR INTERNAL OPERATING AND FINANCIAL FUNCTIONS
COULD LEAD TO INEFFICIENCIES IN CONDUCTING OUR BUSINESS AND SUBJECT US TO
INCREASED EXPENSES. Our expansion efforts have significantly strained our
operational and financial systems. To accommodate our growth, we recently
implemented new or upgraded operating and financial systems, procedures and
controls. Any failure to integrate these initiatives in an efficient manner
could adversely affect our business. In addition, our systems, procedures and
controls may prove to be inadequate to support our future operations.
OUR FRANCHISEES MAY DAMAGE OUR BRAND OR INCREASE OUR COSTS BY FAILING
TO COMPLY WITH OUR FRANCHISE AGREEMENTS OR OUR OPERATING STANDARDS. As of June
27, 1999, we franchised 87 flower shops through 54 franchisees. Our franchise
business is governed by our Uniform Franchise Offering Circular, franchise
agreements and applicable franchise law. If our franchisees do not comply with
our established operating standards or the terms of the franchise agreements,
the 1-800-FLOWERS.COM brand may be damaged. We may incur significant additional
costs, including time-consuming and expensive litigation, to enforce our rights
under the franchise agreements. Additionally, we are the primary tenant on 56
leases, which the franchisees sublease from us. If a franchisee fails to meet
its obligations as subtenant, we could incur significant costs to avoid a
default under the primary lease. Furthermore, as a franchisor we have
obligations to our franchisees. Franchisees may challenge the performance of our
obligations under the franchise agreements and subject us to costs in defending
these claims and, if the claims are successful, costs in connection with their
compliance.
IF THIRD PARTIES ACQUIRE RIGHTS TO USE SIMILAR DOMAIN NAMES OR PHONE
NUMBERS OR IF WE LOSE THE RIGHT TO USE OUR PHONE NUMBERS, OUR BRAND MAY BE
DAMAGED AND WE MAY LOSE SALES. Our Internet domain names are an important aspect
of our brand recognition. We cannot practically acquire rights to all domain
names similar to WWW.1800FLOWERS.COM. If third parties obtain rights to similar
domain names, these third parties may confuse our customers and cause our
customers to inadvertently place orders with these third parties, which would
result in lost sales for us and could damage our brand.
Likewise, the phone number that spells 1-800-FLOWERS is important to
our brand and our business. While we
15
have obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS
and 1-877-FLOWERS, as well as common "FLOWERS" misdials, we may not be able to
obtain rights to use the FLOWERS phone number as new toll-free prefixes are
issued, or the rights to all similar and potentially confusing numbers. If third
parties obtain the phone number which spells "FLOWERS" with a different prefix
or a toll-free number similar to FLOWERS, these parties may also confuse our
customers and cause lost sales for us and potential damage to our brand. In
addition, under applicable FCC rules, ownership rights to telephone numbers
cannot be acquired. Accordingly, the FCC may rescind our right to use any of our
phone numbers, including 1-800-FLOWERS.
IF WE DO NOT CONTINUE TO RECEIVE REBATES FROM WIRE SERVICES, OUR
RESULTS OF OPERATIONS COULD SUFFER. We have entered into arrangements with
independent wire service companies that provide us with rebates when we settle
our customers' floral orders utilizing their service. If we cannot renew these
arrangements or enter similar arrangements on commercially reasonable terms, our
results of operations could suffer. In addition, these companies may eliminate
or modify the rebate structure they have in place with us. Any adverse
modification to these rebate structures could also cause our results of
operations to suffer.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE
SIGNIFICANT CREDIT CARD FRAUD. A failure to adequately control fraudulent credit
card transactions would reduce our net sales and our gross margins because we do
not carry insurance against this risk. We have developed technology to help us
to detect the fraudulent use of credit card information. Nonetheless, to date,
we have suffered losses as a result of orders placed with fraudulent credit card
data even though the associated financial institution approved payment of the
orders. Under current credit card practices, we are liable for fraudulent credit
card transactions because we do not obtain a cardholder's signature.
A FAILURE TO INTEGRATE THE SYSTEMS AND OPERATIONS OF ANY ACQUIRED
BUSINESS, INCLUDING PLOW & HEARTH, WITH OUR OPERATIONS MAY DISRUPT OUR BUSINESS.
We have acquired complementary businesses and may continue to do so in the
future. We are currently in the process of integrating the operations, systems
and personnel of Plow & Hearth. In particular, we will migrate Plow & Hearth's
transaction processing system to our transaction processing system, automate
fulfillment by the Madison, Virginia fulfillment center of home and garden
merchandise ordered from us and migrate the internal operating and financial
functions of Plow & Hearth to those of 1-800-FLOWERS.COM. If we are unable to
fully integrate Plow & Hearth or any future acquisition, our business and
operations could suffer, our management will be distracted and our expenses may
increase.
OUR REVENUES WILL NOT GROW IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM
FOR COMMERCE. We expect to derive an increasing amount of our revenue from
electronic commerce, and intend to extensively market our non-floral products
online. If the Internet is not accepted as a medium for commerce, our revenues
will not grow as we expect and our business will suffer. A number of factors may
inhibit Internet usage, including:
o inadequate network infrastructure;
o consumer concerns for Internet privacy and security;
o inconsistent quality of service; and
o lack of availability of cost-effective, high speed service.
If Internet usage grows, the infrastructure may not be able to support
the demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the Internet infrastructure. If these interruptions continue,
Internet usage may decline.
A LACK OF SECURITY OVER THE INTERNET MAY CAUSE INTERNET USAGE TO
DECLINE AND CAUSE US TO EXPEND CAPITAL AND RESOURCES TO PROTECT AGAINST SECURITY
BREACHES. A significant barrier to electronic commerce over the Internet has
been the need for secure transmission of confidential information and
transaction information. Internet usage could decline if any well-publicized
compromise of security occurred. As a result, we may be required to expend
capital and resources to protect against or to alleviate these problems.
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UNEXPECTED SYSTEM INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN
REDUCED REVENUE AND HARM TO OUR REPUTATION. In the past, particularly during
peak holiday periods, we have experienced significant increases in traffic on
our Web site and in our toll-free customer service centers. Our operations are
dependent on our ability to maintain our computer and telecommunications systems
in effective working order and to protect our systems against damage from fire,
natural disaster, power loss, telecommunications failure or similar events.
Our systems have in the past, and may in the future, experience:
o system interruptions;
o long response times; and
o degradation in our service.
We cannot assure you that we will adequately implement systems to
improve the speed, security and availability of our Internet and
telecommunications systems. Because our business depends on customers making
purchases on our systems, our revenues will decrease and our reputation could be
harmed if we experience frequent or long system delays or interruptions or if a
disruption occurs during a peak holiday season.
IF FRY MULTIMEDIA AND AT&T DO NOT ADEQUATELY MAINTAIN OUR WEB SITE AND
TELEPHONE SERVICE, WE MAY EXPERIENCE SYSTEM FAILURES AND OUR REVENUES WILL
DECREASE. We are dependent on Fry Multimedia to host and maintain our Web site
and on AT&T to provide telephone services to our customer service centers. If
Fry Multimedia or AT&T experience system failures or fail to adequately maintain
our systems, we would experience interruptions and our customers might not
continue to utilize our services. If we do not maintain our Web site or our
telephone service, we will be unable to generate revenue. Our future success
depends upon these third-party relationships because we do not have the
resources to maintain our Web site or our telephone service without these or
other third parties. We may not be able to maintain these relationships or
replace them on financially attractive terms. Failure to do so may disrupt our
operations or require us to incur significant unanticipated costs.
INTERRUPTIONS IN FTD'S MERCURY SYSTEM OR A REDUCTION IN OUR ACCESS TO
THIS SYSTEM MAY DISRUPT ORDER FULFILLMENT AND CREATE CUSTOMER DISSATISFACTION. A
significant portion of our customers' orders were communicated to the fulfilling
florist through FTD's Mercury system. The Mercury system is an order processing
and messaging network used to facilitate the transmission of floral orders
between florists. The Mercury system has in the past experienced interruptions
in service. If the Mercury system experiences interruptions in the future, we
would experience difficulties in fulfilling our customers' orders and many of
our customers might not continue to shop with us.
In addition, we have been engaged in discussions with FTD regarding
decreasing our level of access to the Mercury system. FTD is one of our
competitors, and any material decrease or elimination of our access to Mercury
by FTD would adversely impact our ability to fulfill orders in a timely fashion
during peak periods and may result in lost revenues and customers.
IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL, OUR BUSINESS AND
GROWTH WILL SUFFER. Our success is dependent on our ability to hire, retain and
motivate highly qualified personnel. In particular, our success depends on the
continued efforts of our Chairman and Chief Executive Officer, James F. McCann,
and our Senior Vice President, Christopher G. McCann. In addition, we have
recently hired several new members of our senior management team to help manage
our growth and we will need to recruit, train and retain a significant number of
additional employees, particularly employees with technical backgrounds. These
individuals are in high demand and we are not certain we will be able to attract
the personnel we need. The loss of the services of any of our executive
management or key personnel, our failure to integrate any of our new senior
management into our operations or our inability to attract qualified additional
personnel could cause our growth to suffer and force us to expend time and
resources in locating and training additional personnel.
17
MANY GOVERNMENTAL REGULATIONS MAY IMPACT THE INTERNET, WHICH COULD
AFFECT OUR ABILITY TO CONDUCT BUSINESS.
Any new law or regulation, or the application or interpretation of existing
laws, may decrease the growth in the use of the Internet or our Web site. We
expect there will be an increasing number of laws and regulations pertaining to
the Internet in the United States and throughout the world. These laws or
regulations may relate to liability for information received from or transmitted
over the Internet, online content regulation, user privacy, taxation and quality
of products and services sold over the Internet. Moreover, the applicability to
the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. This could
decrease the demand for our products, increase our costs or otherwise adversely
affect our business.
REGULATIONS IMPOSED BY THE FEDERAL TRADE COMMISSION MAY ADVERSELY
AFFECT THE GROWTH OF OUR INTERNET BUSINESS OR OUR MARKETING EFFORTS. The Federal
Trade Commission has proposed regulations regarding the collection and use of
personal identifying information obtained from individuals when accessing Web
sites, with particular emphasis on access by minors. These regulations may
include requirements that we establish procedures to disclose and notify users
of privacy and security policies, obtain consent from users for collection and
use of information and provide users with the ability to access, correct and
delete personal information stored by us. These regulations may also include
enforcement and redress provisions. Moreover, even in the absence of those
regulations, the Federal Trade Commission has begun investigations into the
privacy practices of other companies that collect information on the Internet.
One investigation resulted in a consent decree under which an Internet company
agreed to establish programs to implement the principles noted above. We may
become a party to a similar investigation, or the Federal Trade Commission's
regulatory and enforcement efforts may adversely affect our ability to collect
demographic and personal information from users, which could adversely affect
our marketing efforts.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY
DAMAGE OUR BRAND. Unauthorized use of our intellectual property by third parties
may damage our brand and our reputation and will likely result in a loss of
customers. It may be possible for third parties to obtain and use our
intellectual property without authorization. Third parties have in the past
infringed or misappropriated our intellectual property or similar proprietary
rights. We believe infringements and misappropriations will continue to occur in
the future. Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries are uncertain or do not protect
intellectual property rights to the same extent as do the laws of the United
States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE
EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR ABILITY TO CONDUCT
BUSINESS. We cannot be certain that our products do not or will not infringe
valid patents, trademarks, copyrights or other intellectual property rights held
by third parties. We may be a party to legal proceedings and claims relating to
the intellectual property of others from time to time in the ordinary course of
our business. We may incur substantial expense in defending against these
third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt our ability to conduct business.
IF STATES BEGIN IMPOSING STATE SALES AND USE TAXES, WE MAY LOSE SALES
OR INCUR SIGNIFICANT EXPENSES IN SATISFACTION OF THESE OBLIGATIONS. At present,
except for our retail operations, we do not collect sales or other similar taxes
in respect of sales and shipments of our products in states other than New York,
Texas, Arizona, Florida, Georgia and Virginia. However, various states have
sought to impose state sales tax collection obligations on out-of-state direct
marketing companies such as ours. A successful assertion by one or more of these
states that we should have collected or be collecting sales tax on the sale of
our products could result in additional costs and corresponding price increases
to our customers. Any imposition of state sales and use taxes on our products
sold over the Internet may decrease customers' demand for our products and our
revenue. The U.S. Congress has passed legislation limiting for three years the
ability of states to impose taxes on Internet-based transactions. Failure to
renew this legislation could result in the broad imposition of state taxes on
e-commerce.
18
PRODUCT LIABILITY CLAIMS MAY SUBJECT US TO INCREASED COSTS. Several of
the products we sell, including perishable food products, may expose us to
product liability claims in the event that the use or consumption of these
products results in personal injury. Although we have not experienced any
material losses due to product liability claims to date, we may be a party to
product liability claims in the future and incur significant costs in their
defense. Product liability claims often create negative publicity, which could
materially damage our reputation and our brand. Although we maintain insurance
against product liability claims, our coverage may be inadequate to cover any
liabilities we may incur.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY,
PARTICULARLY BECAUSE WE HAVE INTERNET OPERATIONS. The price at which our class A
common stock will trade may be highly volatile and may fluctuate substantially.
The stock market has from time to time experienced significant price and volume
fluctuations that have affected the market prices of securities, particularly
securities of companies with Internet operations. As a result, investors may
experience a material decline in the market price of our class A common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. We may
become involved in this type of litigation in the future. Litigation of this
type is often expensive and diverts management's attention and resources.
19
ITEM 2. PROPERTIES
Our headquarters and one of our customer service centers are located in
approximately 71,000 square feet office space in Westbury, New York, under a
lease that expires in May 2005. In addition, we own an approximately 300,000
square foot fulfillment center in Madison, Virginia, and lease an approximately
27,000 square foot local distribution center in Phoenix, Arizona and an
approximately 24,000 square foot local distribution center in Denver, Colorado.
We lease a total of approximately 53,000 square feet for our customer service
centers in Westbury, New York; Marietta, Georgia; San Antonio, Texas; Phoenix,
Arizona; Madison, Virginia; and Bethpage, New York.
As of June 27, 1999, we leased approximately 239,000 gross square feet
for our owned or franchised retail stores. Most of the existing stores are
leased by 1-800-FLOWERS.COM with lease terms typically ranging from five to 20
years. Most of our leases provide for a minimum rent plus a percentage rent
based upon sales after certain minimum thresholds are achieved. The leases
generally require us to pay insurance, utilities, real estate taxes and repair
and maintenance expenses.
The Company believes that its current facilities, combined with
anticipated additions and improvements currently under construction, are
adequate for all present and foreseeable future uses.
ITEM 3. LEGAL PROCEEDINGS
There are various claims, lawsuits, and pending actions against
1-800-FLOWERS.COM and its subsidiaries incident to the operations of its
businesses. It is the opinion of management, after consultation with counsel,
that the ultimate resolution of such claims, lawsuits and pending actions will
not have a material adverse effect on 1-800-FLOWERS.COM's consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 12, 1999, the stockholders of the Company adopted by written
consent a resolution changing the name of the Company to "1-800-FLOWERS.COM,
Inc."
On May 18, 1999, the stockholders of the Company adopted by written
consent a resolution approving the Second Amended and Restated Certificate of
Incorporation and the Third Amended and Restated Certificate of Incorporation.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
1-800-FLOWERS.COM's Class A common stock began trading on the Nasdaq
National Market under the symbol "FLWS" on August 3, 1999. There is no
established public trading market for the Company's Class B common stock.
Accordingly, none of the Company's common equity securities were publicly
traded during the fiscal year ended June 27, 1999. On September 20, 1999, the
last reported sale price of the Class A common stock on the Nasdaq National
Market was $16.375.
RIGHTS OF COMMON STOCK
Holders of Class A common stock generally have the same rights as
the holders of Class B common stock, except that holders of Class A common
stock have one vote per share and holders of Class B common stock have 10
votes per share on all matters submitted to the vote of stockholders. Holders
of Class A common stock and Class B common stock generally vote together as a
single class on all matters presented to the stockholders for their vote or
approval, except as may be required by Delaware law. Class B common stock may
be converted into Class A common stock at any time on a one-for-one basis and
each share of Class B common stock will automatically convert into one share
of Class A common stock upon its transfer, with limited exceptions.
HOLDERS
As of September 20, 1999, there were approximately 60 shareholders of
record of the Company's Class A common stock, although the Company believes that
there is a significantly larger number of beneficial owners. As of September 20,
1999, there were approximately 41 shareholders of record of the Company's Class
B common stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Class
A or Class B common stock, and intends to retain future earnings, if any, to
provide funds to finance the expansion of its business. As a result, the
Company does not anticipate paying any cash dividends in the foreseeable future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
The effective date of the Company's registration statement (File #
333-78985) filed on Form S-1 under the Securities Act of 1933, as amended,
relating to the Company's initial public offering of Class A common stock was
August 2, 1999. In its initial public offering, the Company sold 6,000,000
shares of its Class A common stock to an underwriting syndicate led by Goldman,
Sachs & Co., Credit Suisse First Boston Corporation and Wit Capital Corporation.
The offering commenced on August 3, 1999 and closed on August 6, 1999; resulting
in aggregate proceeds of $126 million. The Company's net proceeds from the
offering were $115.7 million. Approximately $8.8 million of offering expenses
was attributable to underwriting discounts.
Upon closing of the Company's IPO, a portion of the proceeds was used
as follows:
o $18.0 million to repay a term loan with Chase Bank that was
used to fund our acquisition of Plow & Hearth;
o $3.0 million to repay a draw on our line of credit with Chase
Bank that was used for working capital and general corporate
purposes; and
o $8.4 million to redeem all outstanding common stock of our
Plow & Hearth subsidiary not held by us and Plow & Hearth
stock options.
As of June 27, 1999, we had not made any specific expenditure plans
with respect to the remaining proceeds of this offering. While we cannot specify
with certainty the particular uses for such proceeds, we currently intend to use
the
21
remaining proceeds over time:
o to fund our marketing activities;
o to enhance our infrastructure;
o to enter into strategic relationships with Internet companies;
o to expand our product offerings;
o for other general corporate purposes, and
o to expand our current business through strategic acquisitions.
Unused proceeds of the offering are currently invested in money market
funds with portfolios of investment grade corporate and U.S. government
securities.
RECENT SALE OF UNREGISTERED SECURITIES
During the fiscal year ended June 27, 1999, the Company issued the
following securities:
o on May 20, 1999, the Company issued 1,127,546 shares of
preferred stock to 11 investors for an aggregate amount of
$117.6 million. The preferred stock automatically converted to
Class A common stock upon the consummation of the initial
public offering.
o options to purchase 712,000 shares of class B common stock.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act. The recipients of securities in each
of these transactions represented their intention to acquire the securities for
investment only and not with view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationship with the Company, to information
about the Company.
ADDITIONAL ISSUANCES OF SECURITIES
Additional securities of the Company may be issued as follows:
o 1,237,500 shares of Class B common stock upon the exercise of
options outstanding as of September 20, 1999 at a weighted
average exercise price of $1.73 per share;
o 1,323,000 shares of Class A common stock upon the exercise of
options outstanding as of September 20, 1999 at a weighted
average exercise price of $19.87, and up to 8,577,000
additional shares of Class A common stock that could be issued
under our 1999 stock incentive plan; and
o 2,371,040 shares of Class A common stock upon the exercise of
an outstanding warrant with a nominal exercise price.
RESALES OF SECURITIES
55,621,677 shares of Class A and Class B common stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market from time to time only if
registered or if they qualify for an exemption from registration under Rule 144
or 701 under the Securities Act. As of September 20, 1999, 2,307,930 shares of
our common stock could be sold in the public market pursuant to Rule 144. Sales
of a large number of these shares could have an adverse effect on the market
price of our Class A common stock by increasing the number of shares available
on the public market.
22
We have entered into an investors' rights agreement with certain of our
stockholders, including Waelinvest, SOFTBANK, Benchmark, Chase, James F. McCann
and Christopher G. McCann. Under this agreement, these parties will have the
right to require us to register shares of Class A common stock they own on
various occasions. An aggregate of 53,269,757 shares of Class A common stock can
be registered under the agreement. One year after the completion of the IPO, a
majority in interest of the parties to the agreement other than Messrs. McCann
and the Company will have the right to require us on one occasion to register
their stock. In addition, one year after the IPO, these investors, as well as
Messrs. McCann, have the right to require us to register their shares of stock
at any time we propose to register any of our common stock for offerings to the
public. The investors and Messrs. McCann can also require us to register their
shares on a registration statement on Form S-3 up to two times per year. These
registration rights expire on the earlier of the third anniversary of the IPO or
the date on which all shares held by these parties can be sold under Rule 144
under the Securities Act of 1933, as amended, and have customary limitations. We
have agreed to pay the offering expenses in connection with the registration of
these shares, other than underwriters' commission.
23
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA).
The selected consolidated statement of operations data for the years
ended June 29, 1997, June 28, 1998 and June 27, 1999 and the consolidated
balance sheet data as of June 28, 1998 and June 27, 1999 have been derived from
the Company's audited consolidated financial statements included elsewhere in
this Annual Report on Form 10-K. The selected consolidated statement of
operations data for the years ended July 2, 1995 and June 30, 1996 and the
selected consolidated balance sheet data as of July 2, 1995, June 30, 1996 and
June 29, 1997 are derived from the Company's audited consolidated financial
statements which are not included in this Annual Report on Form 10-K.
The following tables summarize the Company's consolidated statement of
operations and balance sheet data. The Company acquired The Plow & Hearth, Inc.
in April 1998 and the financial data reflect the results of operations of this
subsidiary since its date of acquisition. You should read this information
together with the discussion in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" and the Company's consolidated
financial statements and notes to those statements included elsewhere in this
Annual Report on Form 10-K.
YEARS ENDED
------------------------------------------------------------------------
JULY 2, JUNE 30, JUNE 29, JUNE JUNE
1995 1996 1997 28, 1998 27, 1999
------------- -------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues:
Telephonic $100,826 $127,920 $145,295 $161,874 $203,885
Online 4,470 9,936 16,092 26,748 52,886
Retail fulfillment 11,511 15,272 25,043 31,970 39,102
------------- -------------- -------------- -------------- -------------
Total net revenues 116,807 153,128 186,430 220,592 295,873
Cost of revenues 64,657 92,820 115,078 136,966 179,697
------------- -------------- -------------- -------------- -------------
Gross profit 52,150 60,308 71,352 83,626 116,176
Operating expenses:
Marketing and sales 38,564 42,952 47,464 55,417 92,147
Technology and development 626 851 1,411 1,794 8,067
General and administrative 10,035 11,556 12,338 15,832 15,748
Depreciation and amortization 1,364 2,247 3,287 4,168 8,385
------------- -------------- -------------- -------------- -------------
Total operating expenses 50,589 57,606 64,500 77,211 124,347
------------- -------------- -------------- -------------- -------------
Operating income (loss) 1,561 2,702 6,852 6,415 (8,171)
Other income (expense), net (131) (209) 674 1,654 (1,183)
------------- -------------- -------------- -------------- -------------
Income (loss) before income taxes
and minority interests 1,430 2,493 7,526 8,069 (9,354)
Provision (benefit) for income taxes 300 1,255 3,135 3,181 (2,715)
------------- -------------- -------------- -------------- -------------
Income (loss) before minority
interests 1,130 1,238 4,391 4,888 (6,639)
Minority interests - 59 (4) 186 (207)
------------- -------------- -------------- -------------- -------------
Net income (loss) 1,130 1,297 4,387 5,074 (6,846)
Redeemable Class C common stock
dividends (293) (1,029) (1,462) (1,608) (5,215)
------------- -------------- -------------- -------------- -------------
Net income (loss) applicable to
common stockholders $837 $268 $2,925 $3,466 $(12,061)
============= ============== ============== ============== =============
Net income (loss) per common share
applicable to common stockholders:
Basic $0.02 $0.01 $0.07 $0.08 $(0.27)
============= ============== ============== ============== =============
Diluted $0.02 $0.01 $0.06 $0.07 $(0.27)
============= ============== ============== ============== =============
Shares used in the calculation of net
income (loss) per common share:
Basic 48,600 47,050 44,140 44,120 44,035
============= ============== ============== ============== =============
Diluted 49,780 49,420 46,740 46,610 44,035
============= ============== ============== ============== =============
24
AS OF
------------ ------------ ------------ ------------ ------------
JULY 2, JUNE 30, JUNE 29, JUNE 28, JUNE 27,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents $10,775 $6,639 $11,443 $8,873 $99,183
Working capital (deficit) 2,822 (2,452) 1,975 1,950 85,619
Total assets 35,483 36,884 44,130 81,746 182,355
Long-term liabilities 14,959 17,804 9,456 35,359 37,766
Redeemable class C common stock 10,293 14,622 16,084 17,692 -
Total stockholders' equity (deficit) (3,316) (5,615) (2,670) 672 109,003
The following selected unaudited pro forma combined financial data gives effect
to the Company's acquisition of Plow & Hearth in April 1998 as if the
acquisition was completed on June 30, 1997. The selected unaudited pro forma
combined financial data do not purport to be indicative of what actual results
of operations would have been if the acquisition was completed at the assumed
times and the interim period financial data do not purport to be indicative of
future operations and should not be construed as representative of future
operations.
YEAR ENDED
JUNE 28, 1998
--------------
PRO FORMA
(IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
--------------
COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues:
Telephonic $197,303
Online 26,748
Retail fulfillment 33,696
--------------
Total net revenues 257,747
Cost of revenues 157,084
--------------
Gross profit 100,663
Operating expenses:
Marketing and sales 67,819
Technology and development 2,126
General and administrative 20,369
Depreciation and amortization 5,188
--------------
Total operating expenses 95,502
--------------
Operating income 5,161
Other income, net 521
--------------
Income before income taxes and minority interests 5,682
Provision for income taxes 2,548
--------------
Income before minority interests 3,134
Minority interests 330
--------------
Net income 3,464
Redeemable Class C common stock dividends (1,608)
--------------
Net income applicable to common stockholders $1,856
==============
Net income per common share applicable to common stockholders:
Basic $0.04
==============
Diluted $0.04
==============
Shares used in the calculation of net income per common share:
Basic 44,120
==============
Diluted 46,610
==============
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters and subject areas discussed in this Annual
Report on Form 10-K contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 (the "Exchange Act"). All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, as more fully described under the
caption "Risk Factors that May Affect Future Results" and elsewhere in this
Annual Report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof. The forward-looking statements
made in this Annual Report on Form 10-K relate only to events as of the date on
which the statements are made. The Company undertakes no obligation to publicly
update any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
OVERVIEW
The Company is a leading provider of floral products, gifts, gourmet
foods and home and garden merchandise. Approximately 95% of our total net
revenues consist of the selling price of merchandise and service and shipping
charges, net of returns and credits.
A majority of our floral and floral-related gift products are fulfilled
by members of the BloomNet network of approximately 1,500 independent florists
or one of our owned or franchised stores. We transmit our orders either through
BloomLink, our proprietary Internet-based electronic communication system, or
the communication system of a third-party. Remittance to the fulfilling florist
is processed either through a third-party wire service that reconciles and
effects payments between sending and fulfilling florists, called a
clearinghouse, or is directly paid by the Company. Consistent with industry
practice, we remit 80% of the value of the merchandise sold to a wire service
for settlement with the fulfilling florist. It is customary for the wire service
to retain a 7% fee for its services. Additionally, when settling directly with
the fulfilling florist, we remit between 71% and 74% of the value of the
merchandise sold. It is also industry practice for the clearinghouse to credit
back to the originating florist a rebate for payments processed through the
clearinghouse.
Our home and garden merchandise and non-floral related gift products
and gourmet foods are shipped by the Company, members of BloomNet or third
parties directly to the customer. We ship non-floral gift items by Federal
Express, United Parcel Service, United States Postal Service or other common
carriers. Most of our home and garden products are fulfilled from its Madison,
Virginia fulfillment center.
The Company's retail fulfillment operations primarily consist of 36
owned stores and 87 franchised stores. Retail fulfillment revenues also include
revenues attributable to the Company's wholesale business, fees paid to us by
members of the BloomNet network and royalties, fees and sublease payments paid
to the us by our franchised stores. Company owned stores serve as local points
of fulfillment and enable us to test new products and marketing programs. A
majority of the revenues derived from Company owned stores represent fulfillment
of our floral orders and are eliminated as intercompany revenues.
26
In April 1998, we acquired 88% of the issued and outstanding capital
stock of The Plow & Hearth, Inc., a catalog company specializing in home and
garden merchandise. We also acquired an advanced distribution facility, which
was recently expanded to approximately 300,000 square feet. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed based on fair
values at the date of acquisition. The purchase price, consisting of $16.1
million in cash and a management put liability of $6.3 million, exceeded the
estimated fair values of the net assets acquired by $19.6 million. This excess
has been recorded as goodwill and is being amortized over 20 years. We borrowed
$14.7 million of the purchase price through our bank credit facility. Upon
closing of our initial public offering in August 1999, we used a portion of the
proceeds to repay amounts then outstanding under its credit facility and to
acquire all of the remaining outstanding shares of Plow & Hearth common stock
and stock options from the minority stockholders for $8.4 million, thereby
satisfying its obligation under the management put liability.
In fiscal 1999, the Company determined that its online revenues were
likely to become the key revenue and profitability drivers of its business going
forward. In fiscal 1999, online revenues had reached $52.9 million, or 17.9% of
total net revenues. This represented an increase of 97.7% over online revenues
of $26.7 million in fiscal 1998. Online revenues in fiscal 1998 represented an
increase of 66.2% over online revenues of $16.1 million in fiscal 1997, which in
turn represented an increase of 62.0% over online revenues of $9.9 million in
fiscal 1996. Conversely, the rate of increase of revenue originating through the
telephonic channel was 26.0% in fiscal 1999, which included a full year
contribution of revenue by Plow & Hearth which was acquired in April 1998,
compared to a growth rate of 11.4% in fiscal 1998 and 13.6% in fiscal 1997. In
addition, because opening new retail stores involved significant capital
investments, management attention and operating losses until the new stores
reached profitability, the Company determined that its retail stores should be a
complement to an Internet-focused distribution strategy.
Although the Company has been profitable in the past, the
Company expects to incur losses for the foreseeable future as a result of the
significant operating and capital expenditures required to achieve its
objectives. In order to achieve and maintain profitability, the Company will
need to generate revenues significantly above historical levels. The Company's
prospects for achieving profitability must be considered in light of the risks,
uncertainties, expenses, and difficulties encountered by companies in the
rapidly evolving market of online commerce.
27
RESULTS OF OPERATIONS
The following table provides items from the Company's consolidated
statements of operations expressed as a percentage of total net revenues for the
periods indicated:
Years ended
------------------------------------
JUNE 29, JUNE 28, JUNE 27,
1997 1998 1999
----------- ---------- -----------
Net revenues:
Telephonic 78.0% 73.4% 68.9%
Online 8.6 12.1 17.9
Retail fulfillment 13.4 14.5 13.2
----------- ---------- -----------
Total net revenues 100.0 100.0 100.0
Cost of revenues 61.7 62.1 60.7
----------- ---------- -----------
Gross profit 38.3 37.9 39.3
----------- ---------- -----------
Operating expenses:
Marketing and sales 25.4 25.1 31.1
Technology and development 0.8 0.8 2.7
General and administrative 6.6 7.2 5.3
Depreciation and amortization 1.8 1.9 2.8
----------- ---------- -----------
Total operating expenses 34.6 35.0 41.9
----------- ---------- -----------
Operating income (loss) 3.7 2.9 (2.6)
----------- ---------- -----------
Other income (expense), net 0.4 0.8 (0.5)
Income taxes (benefit) 1.7 1.4 (0.8)
----------- ---------- -----------
Net income (loss) 2.4% 2.3% (2.3%)
=========== ========== ===========
YEAR ENDED JUNE 27, 1999 COMPARED TO THE YEAR ENDED JUNE 28, 1998
NET REVENUES. Net revenues consist primarily of the selling price of
merchandise and service and shipping charges, net of returns and credits.
Total net revenues increased 34.1%, from $220.6 million for the year ended
June 28, 1998 to $295.9 million for the year ended June 27, 1999. Telephonic
revenues increased 26.0%, from $161.9 million for the year ended June 28,
1999 to $203.9 million for the year ended June 27, 1999, primarily as a
result of the April 1998 acquisition of Plow & Hearth. Online revenues
increased 97.7%, from $26.7 million for the year ended June 28, 1998 to $52.9
million for the year ended June 27, 1999. Retail fulfillment revenues
increased 22.3%, from $32.0 million for the year ended June 28, 1998 to $39.1
million for the year ended June 27, 1999, primarily due to the growth in the
number of owned retail stores from 23 to 36. The Company does not expect to
materially increase the number of owned retail stores in the foreseeable
future.
COST OF REVENUES. Cost of revenues consists primarily of fees paid to
clearinghouses, net of rebates, and the cost of merchandise sold, including
inbound freight and outbound shipping. Additionally, cost of revenues
includes labor and facility expenses related to the Company's wholesale
operations and facility costs related to properties that are sublet to the
Company's franchisees. Cost of revenues increased 31.2%, from $137.0 million
for the year ended June 28, 1999 to $179.7 million for the year ended June
27, 1999. For the same period, gross margin increased 1.4 percentage points
to 39.3%. The improvement in gross margin was primarily attributable to the
April 1998 acquisition of Plow & Hearth, whose product line carries a higher
margin than floral products.
28
MARKETING AND SALES EXPENSES. Marketing and sales expenses consist primarily
of advertising and promotional expenditures, catalog costs, fees paid to
establish and maintain strategic relationships with Internet companies, costs
associated with retail store, customer service center and fulfillment center
operations and the operating expenses of the Company's departments engaged in
marketing, selling and merchandising activities. Marketing and sales expenses
increased 66.3%, from $55.4 million, or 25.1% of total net revenues, for the
year ended June 28, 1998, to $92.1 million, or 31.1% of total net revenues, for
the year ended June 27, 1999. The increase was primarily attributable to an
additional $15 million of catalog printing and circulation expenditures
resulting from the Plow & Hearth acquisition, a $5.8 million increase in the
Company's online and traditional media advertising campaigns and a $9.3 million
increase in payroll in support of increased order fulfillment and customer
service activities. We expect marketing and sales expenses to increase
significantly in future periods as the Company implements its strategy to expand
its base of strategic relationships with Internet companies and to pursue an
aggressive branding and marketing campaign.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
consist primarily of payroll and operating expenses of our information
technology group, costs associated with its Web site, including design,
development and third-party hosting, and maintenance, support and licensing
costs pertaining to our order entry, customer service, fulfillment and database
systems. Technology and development expenses increased from $1.8 million for the
year ended June 28, 1998 to $8.1 million for the year ended June 27, 1999. The
increase was primarily attributable to a $1.4 million increase in payroll and
related expenses for staff additions to the technology team and a $4.9 million
increase in development costs incurred to enhance the content and functionality
of the Company's Web site and transaction processing system and web hosting
fees. We believe that continued investment in technology and development is
critical to attaining its strategic objectives and, as a result, we expect
technology and development costs to continue to increase significantly,
particularly in the areas of Web site development and database management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and other expenses in support of the Company's executive,
finance & accounting, legal, human resources and other administrative functions,
as well as professional fees and other general corporate expenses. General and
administrative expenses decreased 0.5%, from $15.8 million, or 7.2% of total net
revenues, for the year ended June 28, 1998 to $15.7 million, or 5.3% of total
net revenues, for the year ended June 27, 1999. The decrease as a percentage of
total net revenues was attributable to a $1.6 million benefit related to the
reduction in the Plow & Hearth put liability. We expect that general and
administrative expenses will increase in the future due to increased staffing
required to support our growth strategy and the incremental costs expected to be
incurred as a public company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$4.2 million for the year ended June 28, 1998 to $8.4 million for the year ended
June 27, 1999. The increase was primarily due to additional capital expenditures
in short-lived information systems hardware and software, as well as the
increase in depreciable assets acquired and goodwill created by the Plow &
Hearth acquisition.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense attributable to the Company's credit facility, promissory
notes issued to sellers in acquisitions, and leases, offset by interest income
on the Company's cash and short-term investments and dividend income. For the
year ended June 27, 1999, the Company recorded a net expense of $1.2 million due
primarily to the financing of the Plow & Hearth acquisition. For the year ended
June 28, 1998, the Company realized other net income of $1.7 million, which
consisted primarily of a $1.5 million dividend from a minority investment.
INCOME TAXES. For the year ended June 27, 1999, the Company incurred a loss
that provided a tax benefit of $2.7 million at an effective rate of 29.0%. The
effective tax rate differed from the combined statutory rate primarily as a
result of the non-deductibility of certain goodwill amortization and the
provision of a valuation allowance on state tax benefits. For the year ended
June 28, 1998, the Company provided for taxes of $3.2 million at an effective
rate of 39.4%. The Company anticipates incurring significant losses in the
foreseeable future. After accounting for recoverable income taxes due to
allowable tax carry-back claims, the Company intends to provide a full valuation
allowance on the
29
related deferred tax asset to reflect the uncertainty of its realization in the
future.
YEAR ENDED JUNE 28, 1998 COMPARED TO THE YEAR ENDED JUNE 27, 1997
NET REVENUES. Total net revenues increased 18.3%, from $186.4 million for
fiscal 1997 to $220.6 million for fiscal 1998. Telephonic revenues increased
11.4%, from $145.3 million in fiscal 1997 to $161.9 million in fiscal 1998. The
increase was primarily due to the Company's April 1998 acquisition of Plow &
Hearth, which contributed $11.4 million in net revenues in the fourth quarter.
Online revenues increased 66.2%, from $16.1 million in fiscal 1997 to $26.7
million in fiscal 1998. Retail fulfillment revenues increased 27.7%, from $25.0
million in fiscal 1997 to $32.0 million in fiscal 1998, primarily as a result of
the Company's July 1997 acquisition of a wholesale supplier of fresh-cut flowers
and floral arrangements to the supermarket industry, which generated $5.0
million in net revenues in fiscal 1998.
COST OF REVENUES. Cost of revenues increased 19.0%, from $115.1 million in
fiscal 1997 to $137.0 million in fiscal 1998. The increase was in line with the
increase in total net revenues. Gross margin decreased 0.4 percentage points
from 38.3% to 37.9% due to an increase in the percentage of total net revenue
from lower margin wholesale operations.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 16.8%,
from $47.5 million, or 25.5% of total net revenues, for fiscal 1997 to $55.4
million, or 25.1% of total net revenues, for fiscal 1998. The additional
spending was primarily attributable to a $5.5 million increase in payroll in
support of order fulfillment and customer service activities, $2.6 million of
catalog expenditures resulting from the Plow & Hearth acquisition and an
increase of $1.8 million resulting from the expansion of the Company's online
presence through an online marketing agreement with AOL. These increases were
offset, in part, by a $3.0 million decrease in traditional marketing that
contributed to the decrease as a percentage of net revenues.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased 27.1%, from $1.4 million in fiscal 1997 to $1.8 million in fiscal 1998
as a result of an increase in web hosting fees of $340,000. In addition to
recognized product development expenses, the Company capitalized $5.2 million of
software development costs in fiscal 1998 in accordance with SOP 98-1,
reflecting increased investments in infrastructure. This compares to $828,000 of
capitalized development costs in fiscal 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 28.3%, from $12.3 million, or 6.6% of total net revenues, for fiscal
1997 to $15.8 million, or 7.2% of total net revenues, for fiscal 1998. The
increase in general and administrative expenses was primarily due to an $856,000
increase in professional fees related to retail fulfillment operations,
successful trademark defense costs and a charge to earnings in June 1998 of $1.6
million related to an increase in the Plow & Hearth put liability.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$3.3 million in fiscal 1997 to $4.2 million in fiscal 1998. The increase relates
to the higher level of depreciable assets in fiscal 1998 as well as the
depreciable assets acquired and goodwill created by the Plow & Hearth
acquisition.
OTHER INCOME (EXPENSE), NET. Other income, net increased from $674,000 for
fiscal 1997 to $1.7 million for fiscal 1998. The increase was primarily
attributable to a $1.5 million dividend from a minority investment partially
offset by increased interest expense related to borrowings incurred to finance
the acquisition of Plow & Hearth.
INCOME TAXES. Income taxes increased from $3.1 million for fiscal 1997 to
$3.2 million for fiscal 1998. The effective tax rate decreased 2.3 percentage
points, from 41.7% for fiscal 1997 to 39.4% for fiscal 1998. The reduction in
rate was caused by receipt of a $1.5 million dividend taxed at more favorable
rates, offset in part by the effect of higher non-deductible goodwill related to
the Plow & Hearth acquisition.
30
QUARTERLY RESULTS OF OPERATIONS
The following table provides unaudited quarterly statement of
consolidated operations for each quarter of fiscal 1998 and 1999. The Company
believes this unaudited information has been prepared substantially on the same
basis as the annual audited financial statements and all necessary adjustments,
consisting of only normal recurring adjustments, have been included in the
amounts stated below to present fairly the Company's results of operations. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
SEPT. DEC. 28, MAR. 29, JUNE 28, SEPT. DEC. 27, MAR. 28, JUNE
28, 1997 1997 1998 1998 27, 1998 1998 1999 27, 1999
(IN THOUSANDS)
Net revenues:
Telephonic $28,601 $40,041 $38,499 $54,733 $34,370 $67,972 $43,903 $57,640
Online 3,276 5,938 7,095 10,439 6,258 10,771 13,219 22,638
Retail fulfillment 5,638 7,610 9,519 9,203 6,946 10,061 10,168 11,927
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Total net revenues 37,515 53,589 55,113 74,375 47,574 88,804 67,290 92,205
Cost of revenues 23,499 33,361 34,913 45,193 29,793 51,847 42,098 55,959
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Gross profit 14,016 20,228 20,200 29,182 17,781 36,957 25,192 36,246
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Operating expenses:
Marketing and sales 9,792 14,689 13,608 17,328 14,455 33,065 19,684 24,943
Technology and development 409 185 534 666 1,127 1,807 2,273 2,860
General and administrative 3,280 3,730 3,305 5,517 2,348 3,273 4,907 5,220
Depreciation and amortization 905 905 958 1,400 1,871 2,015 2,157 2,342
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Total operating expenses 14,386 19,509 18,405 24,911 19,801 40,160 29,021 35,365
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Operating income (loss) (370) 719 1,795 4,271 (2,020) (3,203) (3,829) 881
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Other income (expense), net 1,724 (13) 56 73 (227) (623) (378) (162)
Income taxes (benefit) 524 273 718 1,666 (677) (1,071) (1,178) 211
---------- ---------- ---------- ---------- ---------- ----------- ----------- ---------
Net income (loss) $830 $433 $1,133 $2,678 $ (1,570) $(2,755) $(3,029) $508
========== ========== ========== ========== ========== =========== =========== =========
The Company's quarterly results may experience seasonal fluctuations.
Historically, revenues have been highest in the fourth fiscal quarter, due to a
number of major floral gifting occasions, including Mother's Day, Secretaries'
Week and Easter. Due to the acquisition of Plow & Hearth, which generates more
revenues in the second fiscal quarter due to Christmas and Thanksgiving, the
Company's second fiscal quarter revenues in fiscal 1999 increased significantly
from historical levels. The Company expects its second fiscal quarter revenues
to represent a larger proportion of its total revenues in the future.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1999, our cash and equivalents balance was $99.2 million,
compared to $8.9 million at June 28, 1998. On May 20, 1999, we completed a
private placement of preferred stock, yielding net proceeds of $101.6 million.
Additionally, on August 3, 1999, we completed an initial public offering of
6,000,000 shares of our Class A common stock generating net proceeds of
approximately $115.7 million. In addition, to finance prior acquisitions, we
issued promissory notes to sellers and entered into a credit agreement with a
bank that provides for an $18.0 million term loan
31
and a $5.0 million revolving credit facility, as amended. Additionally, we have
a $4.5 million revolving credit line with another bank. At June 27, 1999, in
addition to the $18.0 million outstanding under the term loan, approximately
$4.0 million was outstanding under the revolving credit facility and other
credit lines.
We used $5.3 million in cash to fund operations during the year ended
June 27, 1999, principally to fund our net loss as well as increases in accounts
receivable, inventories and deferred charges related to the America Online, Inc.
("AOL") agreement. This use of cash was offset in part by increases in accounts
payable and accrued expenses, due primarily to our revenue growth. We generated
$10.7 million and $9.5 million in cash from operations in fiscal 1997 and 1998,
respectively.
We used $6.4 million in cash for investing activities during the year
ended June 27, 1999. We used $4.2 million and $25.5 million in cash for
investing activities in fiscal 1997 and 1998, respectively. In each period, cash
used for investing activities related primarily to the purchase of property,
equipment and investments in systems infrastructure and, in fiscal 1998, the
acquisition of Plow & Hearth. For the year ended June 27, 1999, we generated
cash by liquidating investments yielding proceeds of $5.4 million. In fiscal
1998, we used $15.2 million, net of cash acquired, related to the Plow & Hearth
acquisition.
We generated $102.0 million in cash from financing activities during
the year ended June 27, 1999 and $13.4 million in fiscal 1998. For the year
ended June 27, 1999, financing activities included net proceeds of $101.6
million resulting from the May 1999 private placement of preferred stock.
Concurrent with this transaction, we also used $4.3 million to redeem our
existing class C common stock from our principal shareholder. Financing
activities for the year ended June 27, 1999 also included net borrowings of $7.3
million under our credit facility and revolving lines of credit, offset in part
by repayments of capital lease obligations. In fiscal 1998, we borrowed $15.5
million to finance the Plow & Hearth acquisition, offset in part by repayments
of capital leases and seller acquisition notes and the purchase into treasury of
$133,000 of outstanding class A and B common stock. In fiscal 1997, we used $1.7
million in financing activities related to the repayment of capital leases and
promissory notes issued to sellers.
Our material capital commitments consist of:
o an aggregate of $21.0 million outstanding at June 27, 1999
under our credit agreement that bears interest at LIBOR plus
2.25% per annum (7.31% at June 27, 1999). This obligation was
repaid in August from the proceeds of our initial public
offering;
o promissory notes issued to sellers in connection with prior
acquisitions by us in the aggregate principal amount of $4.5
million, which bear interest at rates ranging from 6.5% to 12%
per annum and mature at dates ranging from September 1999 to
November 2004, all of which are secured by either the stock or
assets of various subsidiaries of 1-800-FLOWERS.COM;
o obligations outstanding under capital and operating leases;
and
o online marketing agreements with America Online, Inc. ("AOL").
Under an agreement with AOL, we were required to pay a minimum
of $11,500,000 over a four-year period commencing July 1,
1997. Such online marketing costs are capitalized and
amortized over the greater of the ratio of the number of
impressions delivered over the total number of contracted
impressions, or a straight-line basis over the term of the
agreement. Through June 27, 1999, we had paid $7,500,000 to
AOL under these agreements. Of the remaining $4,000,000,
$3,000,000 was paid in July 1999 and $500,000 was to be
payable during each of the fiscal years ending June 2000 and
2001. In September 1999, we expanded both the term and scope
of our strategic relationship with AOL. Pursuant to the terms
of the new agreement, we will pay AOL $37,000,000 over the new
four-year term of the agreement which extends through fiscal
2003.
32
Additionally, during the first two years of the new agreement, we
are required to share a portion of revenue derived from such online
marketing agreements. Such amount is expensed as the related
revenue is recognized. Our remaining payment obligations to AOL
under the previous agreements were cancelled upon the effectiveness
bhof the new agreement.
At June 27, 1999, our known commitments for the subsequent twelve
months totaled approximately $28.3 million and were comprised of fees related to
online marketing agreements (including the new AOL agreement), co-marketing fees
related to airline frequent flier programs, expenses under our operating leases,
interest expense and the current portion of long term debt, excluding the credit
facility repaid from the proceeds of the initial public offering.
We believe that cash and equivalents at June 27, 1999, together with
net proceeds from the August IPO will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. In addition, we may, from
time to time, consider the acquisition of or investment in complementary
businesses, products, services and technologies, which might impact our
liquidity requirements or cause us to issue additional equity or debt
securities. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
THE COMPANY'S STATE OF READINESS
We have made a preliminary assessment of the state of its operating and
administrative systems, including its telecommunications systems, its order
processing and data collection systems and its Internet-related systems, to
assess its state of Year 2000 readiness. Our assessment plan consists of:
o evaluating its date dependent code, software and hardware and
evaluating external dependencies;
o quality assurance testing of its internally developed software
and systems; and
o obtaining assurances or warranties from third-party vendors
and licensors of material hardware, software and services that
are related to the delivery of our services.
As part of our effort to assess its Year 2000 readiness, we identified
our material suppliers and vendors, sent letters requesting Year 2000 compliance
statements, recorded their responses, and investigated alternative products and
services for those suppliers not prepared for Year 2000.
Our critical systems fall into six categories: transaction processing,
call management, telecommunications, fulfillment, finance and interactive
applications. The core transaction processing and infrastructure systems are
internally maintained and hosted. Interactive-based applications, which our Web
site and BloomLink, are hosted at Fry Multimedia. To date, the Company's
assessment has determined that these critical business systems are all Year 2000
compliant, except our call routing system, which we expect to be fully Year 2000
compliant by October 1999.
33
1-800-FLOWERS.COM's non-critical and non-information technology
systems, which include security and mailing systems, mail room facilities for
automated postage, fire and backup generator systems and company-wide paging and
alert systems, have been tested and/or represented to us as Year 2000 compliant.
The non-information technology systems of Plow & Hearth, including
those used for picking, packing, shipping, receiving and security, were upgraded
as part of an overall warehouse expansion project in 1998. As a result, all of
these systems have been identified, assessed and found to be Year 2000
compliant.
All material commercial software and hardware on which we depend is
either Year 2000 compliant or will be upgraded to be compliant in the normal
course of business through the installation of upgrades or replacements. Our
material hardware, software and service vendors have informed us that the
products we use, or will be using as upgrades or replacements, to support the
our operations are Year 2000 compliant. Our Web site hosting service, Fry
Multimedia, has represented to us that our hardware and software systems are
Year 2000 compliant. Our internal critical business systems are dependent on the
software and hardware products of four vendors: Oracle, Sun, Microsoft and AT&T.
Oracle and Sun have represented to us that their products are Year 2000
compliant. We are in the process of migrating our current Microsoft software
applications to Year 2000 compliant software released by Microsoft, which we
expect to complete by October 1999. We expect our AT&T products to be upgraded
for compliance by October 1999, with the exception of AT&T's dynamic call
routing software, which we expect to replace by October 1999 with other call
routing software, which has been represented to us as Year 2000 compliant.
We are in the process of contacting our major suppliers of fresh
products (flowers and plants) and hard goods for their Year 2000 compliance. We
expect to complete our assessment of these suppliers by October 1999. Our
business is not dependent on any one supplier. If one or more of these suppliers
are not Year 2000 compliant, we will obtain our fresh products and hard goods
from alternative suppliers that are Year 2000 compliant.
Approximately one-half of BloomNet florists use the BloomLink web-based
order processing system, which is Year 2000 compliant. The remaining BloomNet
florists are being approached to implement BloomLink. By the end of 1999 we
expect our fulfilling florists to be electronically linked to 1-800-FLOWERS.COM
either through BloomLink or one of the other available Year 2000 compliant
communication systems. Our business is not dependent on any one florist or wire
service. To the extent one or more BloomNet florists are not so linked, then we
may use an alternative fulfilling florist.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, we have not incurred any significant costs attributable to
Year 2000 compliance. Our recent information technology investments have been in
support of our expanding operating and decision support requirements and to the
extent they involved a replacement of an existing system, also accommodated Year
2000 compliance. We do, however, expect to incur approximately $1.0 million to
make our call routing system Year 2000 compliant. Other than these costs, we are
not currently aware of any material operational issues or costs associated with
preparing our systems for the Year 2000. Nonetheless, we may experience material
unexpected costs caused by undetected errors or defects in the technology used
in our systems or because of the failure of a material vendor to be Year 2000
compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a
material system or vendor, or the Internet generally, to be Year 2000 compliant
could harm the operation of our systems or have other unforeseen, material
adverse consequences to us. We may also experience external Year 2000-related
failures or disruptions that might generally affect industry and commerce, such
as utility or transportation company Year 2000 compliance failures and related
service interruptions. All of these factors could materially adversely affect
our business.
34
CONTINGENCY PLANS
We are engaged in an ongoing Year 2000 assessment and have not
developed a contingency plan to address situations that might occur if
technologies on which we depend are not Year 2000 compliant.
We intend to develop a contingency plan, which we expect to complete by
October 1999. The results of our Year 2000 assessment and testing, and the
responses received from third-party vendors and service providers will be taken
into account in determining the need for and nature and extent of any
contingency plans.
Based on our assessment done to date, we believe that the reasonable
likely worst-case scenario with respect to Year 2000 issues could be the
difficulty for customers to place orders in the event of disruption of power or
communication facilities. Although these events could have an adverse effect on
our business in the short-term, we do not believe that Year 2000 issues will
materially and adversely affect our business, results of operations or financial
condition over the long-term. No assurances can be given that these expectations
will be realized.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows are subject to fluctuations due to changes in
interest rates primarily from its investment of available cash balances in money
market funds with portfolios of investment grade corporate and U.S. government
securities and, secondarily, its long-term debt arrangements. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ANNUAL FINANCIAL STATEMENTS: See Part IV, Item 14 of this Annual Report
on Form 10-K. SELECTED QUARTERLY FINANCIAL DATA: See Part II, Item 7 of
this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Proposal 1-Election of Directors," "Additional Information"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Executive Compensation" and "Additional
Information-Compensation of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Security Ownership by Management and Principal
Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Certain Relationships and Related Transactions."
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K.
Upon written request, the Company will provide, without charge, a copy
of this Annual Report on Form 10-K, including the consolidated financial
statements, financial statement schedule and any exhibits for the Company's most
recent fiscal year. All requests should be sent to:
1-800-FLOWERS.COM, Inc.
Investor Relations
1600 Stewart Avenue
Westbury, New York 11590
(516) 237-6000
(a) List of Documents Filed as a Part of this Annual Report on Form 10-K:
(1) Index to Consolidated Financial Statements:
Page
Report of Independent Auditors F-1
Consolidated Balance Sheets as of June 28, 1998 and June 27, 1999 F-2
Consolidated Statements of Operations for the years ended June 29,
1997, June 28, 1998 and June 27, 1999 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended June 29, 1997, June 28, 1998 and June 27, 1999 F-4
Consolidated Statements of Cash Flows for the years ended
June 27, 1997, June 28, 1998 and June 27, 1999 F-5
Notes to Consolidated Financial Statements F-6
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other information and financial statement schedules are omitted
because they are not applicable, or not required, or because the
required information is included in the financial statements or notes
thereto.
(3) Index to Exhibits
The following exhibits are required to be filed with this Report by
Item 14. Other than exhibits 10.22, 21.1, 23.1 and 27.1, which are filed
herewith, the following exhibits are incorporated by reference to the exhibits
of same number contained in the Company's registration statement on Form S-1
(No. 333-78985), dated August 2, 1999.
NUMBER DESCRIPTION
------ -----------
3.1 Third Amended and Restated Certificate of Incorporation.
3.2 Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation.
3.3 Amended and Restated By-laws.
4.1 Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
4.3 Form of Warrant.
10.1 Lease, commencing on May 15, 1998, between 1600 Stewart
Avenue, L.L.C and 800-FLOWERS, Inc.
37
10.2 Investment Agreement, dated as of January 16, 1995, among
Chemical Venture Capital Associates, Teleway, Inc. and James
F. McCann.
10.3 Consent and Amendment No. 1 to Investment Agreement, dated as
of May 20, 1999, among Chase Capital Partners,
1-800-FLOWERS.COM, Inc. and James F. McCann.
10.4 Credit Agreement, dated as of March 19,1999, between
1-800-FLOWERS, Inc. and The Chase Manhattan Bank.
10.5 Reserved
10.6 Reserved
10.7 * E-Commerce Merchant Agreement for The Plaza on MSN, with a
term start date of October 21, 1997, between The Microsoft
Network, L.L.C. and 800-FLOWERS, Inc., as amended.
10.8 * Sponsorship Agreement, dated as of May 1, 1998, between
Excite, Inc. and 800-FLOWERS, Inc.
10.9 Development and Hosting Agreement, dated as of June 18, 1999,
between Fry Multimedia, Inc. and 800-Gifthouse, Inc.
10.10 1997 Stock Option Plan, as amended.
10.11 Stockholders' Agreement, dated as of April 3, 1998, among The
Plow & Hearth, Inc., 1-800-FLOWERS, Inc. and the Persons Set
Forth on Schedule A thereto.
10.12 Amendments to Stockholders' Agreement, dated as of May 17,
1999, among The Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc.
and the Persons Set Forth on Schedule A thereto.
10.13 Employment Agreement, effective as of January 4, 1999, between
John W. Smolak and 1-800-FLOWERS, Inc.
10.14 Employment Agreement, effective as of April 3, 1998, between
Peter G. Rice and 1-800-FLOWERS, Inc.
10.15 Employment Agreement, effective as of January 18, 1999,
between Kerry W. Coin and 1-800-FLOWERS, Inc.
10.16 Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann
and the persons designated as Investors on the signature pages
thereto.
10.17 Stock Purchase Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc., James F. McCann, Christopher G.
McCann and the Investors listed on Schedule A thereto.
10.18 1999 Stock Incentive Plan.
10.19 Employment Agreement, effective as of July 1, 1999, between
James F. McCann and 1-800-FLOWERS.COM, Inc.
10.20 Employment Agreement, effective as of July 1, 1999, between
Christopher G. McCann and 1-800-FLOWERS.COM, Inc.
10.21 First Amendment to Credit Agreement Waiver and Consent,
entered into as of May 20, 1999, between 1-800-FLOWERS.COM,
Inc. and The Chase Manhattan Bank.
10.22 # Amended and Restated Interactive Marketing Agreement, made
and entered into on September 1, 1999, by and between America
Online, Inc. and 800-FLOWERS.COM, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included in the signature page)
27.1 Financial Data Schedule for the year ended June 27, 1999.
- ----------
* Confidential treatment granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
# Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 24b-2 promulgated under the Exchange Act.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June 27, 1999
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 24, 1999 1-800-FLOWERS.COM, Inc.
By: /s/ JAMES F. MCCANN
--------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM,
Inc. (the "Company"), hereby severally constitute and appoint James F. McCann
and John W. Smolak, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to them and each of them to sign for us, in our names and in the capacities
indicated below, to sign any and all amendments to this Annual Report, and other
documents in connection therewith, and to file or cause to be filed the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed by the following persons in the capacities
indicated below:
Dated: September 24, 1999 By: /s/ JAMES F. MCCANN
--------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 24, 1999 By: /s/ JOHN W. SMOLAK
--------------------------------
John W. Smolak
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
39
Dated: September 24, 1999 By: /s/ CHRISTOPHER G. MCCANN
--------------------------------
Christopher G. McCann
Director, Senior Vice President
Dated: September 24, 1999 By: /s/ DAVID BEIRNE
--------------------------------
David Beirne
Director
Dated: September 24, 1999 By: /s/ LAWRENCE CALCANO
--------------------------------
Lawrence Calcano
Director
Dated: September 24, 1999 By: /s/ CHARLES R. LAX
--------------------------------
Charles R. Lax
Director
Dated: September 24, 1999 By: /s/ T. GUY MINETTI
--------------------------------
T. Guy Minetti
Director
Dated: September 24, 1999 By: /s/ KEVIN J. O'CONNOR
--------------------------------
Kevin J. O'Connor
Director
Dated: September 24, 1999 By: /s/ JEFFREY C. WALKER
--------------------------------
Jeffrey C. Walker
Director
40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of June 28, 1998 and
June 27, 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended June 27, 1999. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of
1-800-FLOWERS.COM, Inc. and Subsidiaries at June 28, 1998 and June 27, 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 27, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Melville, New York
August 20, 1999, except for
the last paragraph of Note 11,
Commitments and Contingencies-
Leases, as to which the date is
September 1, 1999
F-1
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 28, JUNE 27,
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 8,873 $ 99,183
Short-term investments 5,034 --
Receivables, net 8,432 9,284
Inventories 4,971 7,496
Prepaid and other 1,026 1,307
Recoverable income taxes -- 2,431
Deferred tax assets 1,637 1,504
--------- ---------
Total current assets 29,973 121,205
Property, plant and equipment at cost, net 19,379 27,525
Investments 1,383 984
Capitalized investment in leases 1,837 1,452
Notes receivable, net 902 722
Goodwill, net of accumulated amortization of $534 in 1998 and $1,693 in 1999 22,725 21,362
Investment in licenses, net of accumulated amortization of $1,175 in 1998 and
$1,499 in 1999 3,752 3,428
Other 1,795 5,677
--------- ---------
Total assets $ 81,746 $ 182,355
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,790 $ 23,396
Accrued expenses 3,101 5,543
Current maturities of long-term debt and obligations under capital leases 3,287 6,647
Income taxes payable 845 --
--------- ---------
Total current liabilities 28,023 35,586
Long-term debt and obligations under capital leases 22,463 27,457
Deferred tax liabilities 1,332 183
Deferred rent and other liabilities 2,904 3,826
Management put liability 8,660 6,300
--------- ---------
Total liabilities 63,382 73,352
Redeemable Class C common stock, $.01 par value, shares issued and outstanding:
348,220 in 1998 and none in 1999, stated at liquidation and redemption value 17,692 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued in
1998, 1,127,546 shares issued and outstanding in 1999, stated at liquidation
value -- 117,573
Class A common stock, $.01 par value, 200,000,000 shares authorized, 480,870
and 4,100,012 shares issued in 1998 and 1999, respectively 5 41
Class B common stock, $.01 par value, 200,000,000 shares authorized, 48,849,927
and 45,579,005 shares issued in 1998 and 1999, respectively 488 456
Additional paid-in capital 1,739 6,038
Accumulated other comprehensive income 14 --
Retained earnings (deficit) 1,534 (10,527)
Deferred compensation -- (1,470)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares in 1998
and 1999 (3,108) (3,108)
--------- ---------
Total stockholders' equity 672 109,003
--------- ---------
Total liabilities and stockholders' equity $ 81,746 $ 182,355
========= =========
SEE ACCOMPANYING NOTES.
F-2
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
-------------------------------------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
------------- ------------- -------------
Net revenues $ 186,430 $ 220,592 $ 295,873
Cost of revenues 115,078 136,966 179,697
--------- --------- ---------
Gross profit 71,352 83,626 116,176
Operating expenses:
Marketing and sales 47,464 55,417 92,147
Technology and development 1,411 1,794 8,067
General and administrative 12,338 15,832 15,748
Depreciation and amortization 3,287 4,168 8,385
--------- --------- ---------
Total operating expenses 64,500 77,211 124,347
--------- --------- ---------
Operating income (loss) 6,852 6,415 (8,171)
Other income (expense):
Interest income 1,121 1,290 1,420
Interest expense (912) (1,177) (2,610)
Other, net 465 1,541 7
--------- --------- ---------
Total other income (expense) 674 1,654 (1,183)
--------- --------- ---------
Income (loss) before income taxes and minority interests 7,526 8,069 (9,354)
Provision (benefit) for income taxes 3,135 3,181 (2,715)
--------- --------- ---------
Income (loss) before minority interests 4,391 4,888 (6,639)
Minority interests in operations of consolidated subsidiaries (4) 186 (207)
--------- --------- ---------
Net income (loss) 4,387 5,074 (6,846)
Redeemable Class C common stock dividends (1,462) (1,608) (5,215)
--------- --------- ---------
Net income (loss) applicable to common stockholders $ 2,925 $ 3,466 $ (12,061)
========= ========= =========
Net income (loss) per common share applicable to common
stockholders:
Basic $ 0.07 $ 0.08 $ (0.27)
========= ========= =========
Diluted $ 0.06 $ 0.07 $ (0.27)
========= ========= =========
Shares used in the calculation of net income (loss) per
common share:
Basic 44,140 44,120 44,035
========= ========= =========
Diluted 46,740 46,610 44,035
========= ========= =========
SEE ACCOMPANYING NOTES.
F-3
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 29, 1997, JUNE 28, 1998 AND JUNE 27, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------------------------------
PREFERRED STOCK CLASS A CLASS B
-------------------- ------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ---------- ------ ----------- ------
Balance at June 30, 1996 -- $ -- 480,870 $ 5 48,849,927 $ 488
Accrual of Redeemable Class C common
stock dividends -- -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- -- --
Unrealized gain on marketable
securities -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
--------- -------- ---------- ---- ----------- -----
Balance at June 29, 1997 -- -- 480,870 5 48,849,927 488
Accrual of Redeemable Class C common
stock dividends -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- -- --
Unrealized gain on marketable
securities -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
--------- -------- ---------- ---- ----------- -----
Balance at June 28, 1998 -- -- 480,870 5 48,849,927 488
Accrual of Redeemable Class C common
stock dividends -- -- -- -- -- --
Employee stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Issuance of Series A preferred stock 1,127,546 117,573 -- -- -- --
Issuance of Class A common stock in
connection with redemption of Class C
common stock -- -- 263,452 3 -- --
Issuance of Class B common stock in
connection with redemption of Class C
common stock -- -- -- -- 84,768 1
Conversion of Class B common stock into
Class A common stock -- -- 3,836,560 38 (3,836,560) (38)
Conversion of Class A common stock into
Class B common stock -- -- (480,870) (5) 480,870 5
Comprehensive loss:
Net loss -- -- -- -- -- --
Unrealized loss on marketable
securities -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
--------- -------- ---------- ---- ----------- -----
Balance at June 27, 1999 1,127,546 $117,573 4,100,012 $ 41 45,579,005 $ 456
========= ======== ========== ==== =========== =====
ACCUMULATED TOTAL
ADDITIONAL OTHER RETAINED TREASURY STOCK STOCKHOLDERS'
PAID-IN COMPREHENSIVE EARNINGS DEFERRED ------------------- EQUITY
CAPITAL INCOME (DEFICIT) COMPENSATION SHARES AMOUNT (DEFICIT)
------- ----------- -------- ------------ --------- ------- ---------
Balance at June 30, 1996 $ 1,739 $(15) $ (4,857) $ -- 5,191,400 $(2,975) $ (5,615)
Accrual of Redeemable Class C common
stock dividends -- -- (1,462) -- -- -- (1,462)
Comprehensive income:
Net income -- -- 4,387 -- -- -- 4,387
Unrealized gain on marketable
securities -- 20 -- -- -- -- 20
---------
Total comprehensive income -- -- -- -- -- -- 4,407
------- ---- -------- ------- --------- ------- ---------
Balance at June 29, 1997 1,739 5 (1,932) -- 5,191,400 (2,975) (2,670)
Accrual of Redeemable Class C common
stock dividends -- -- (1,608) -- -- -- (1,608)
Purchase of treasury stock -- -- -- -- 141,400 (133) (133)
Comprehensive income:
Net income -- -- 5,074 -- -- -- 5,074
Unrealized gain on marketable
securities -- 9 -- -- -- -- 9
---------
Total comprehensive income -- -- -- -- -- -- 5,083
------- ---- -------- ------- --------- ------- ---------
Balance at June 28, 1998 1,739 14 1,534 -- 5,332,800 (3,108) 672
Accrual of Redeemable Class C common
stock dividends -- -- (1,584) -- -- -- (1,584)
Employee stock options 1,680 -- -- (1,680) -- -- --
Amortization of deferred compensation -- -- -- 210 -- -- 210
Issuance of Series A preferred stock (1,008) -- -- -- -- -- 116,565
Issuance of Class A common stock in
connection with redemption of Class C
common stock 2,744 -- (2,747) -- -- -- --
Issuance of Class B common stock in
connection with redemption of Class C
common stock 883 -- (884) -- -- -- --
Conversion of Class B common stock into
Class A common stock -- -- -- -- -- -- --
Conversion of Class A common stock into
Class B common stock -- -- -- -- -- -- --
Comprehensive loss:
Net loss -- -- (6,846) -- -- -- (6,846)
Unrealized loss on marketable
securities -- (14) -- -- -- -- (14)
---------
Total comprehensive loss -- -- -- -- -- -- (6,860)
------- ---- -------- ------- --------- ------- ---------
Balance at June 27, 1999 $ 6,038 $-- $(10,527) $(1,470) 5,332,800 $(3,108) $ 109,003
======= ==== ======== ======= ========= ======= =========
SEE ACCOMPANYING NOTES.
F-4
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
-------------------------------------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 4,387 $ 5,074 $ (6,846)
Reconciliation of net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 3,287 4,168 8,385
Deferred income taxes (170) 265 (1,016)
Management put liability -- 1,631 (1,631)
Bad debt expense 553 383 444
Minority interests 4 (186) 207
Amortization of deferred compensation -- -- 210
Loss on disposal of equipment and other -- 313 364
Changes in operating items, excluding the effects
of acquisitions:
Working capital items 2,547 (284) (2,330)
Nonworking capital items 56 (1,864) (3,072)
-------- -------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,664 9,500 (5,285)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (1,057) (15,206) --
Proceeds on sale of retail operations 83 -- --
Capital expenditures, net of noncash
expenditures-$1,114, $561, and $3,009, for fiscal
1997, 1998 and 1999, respectively (1,814) (10,302) (11,960)
Purchases of investments (4,382) (4,050) --
Sales and maturities of available-for-sale investments 3,077 3,754 5,419
Notes receivable, net (97) 341 178
-------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,190) (25,463) (6,363)
FINANCING ACTIVITIES:
Redemption of Class C common stock -- -- (4,347)
Proceeds from issuance of preferred stock, net -- -- 101,636
Payment of deferred offering costs -- -- (1,019)
Proceeds from bank borrowings -- 15,500 35,402
Acquisition of treasury stock -- (133) --
Payments of capital lease obligations (1,408) (1,648) (1,639)
Repayment of notes payable and bank borrowings (262) (326) (28,075)
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,670) 13,393 101,958
-------- -------- ---------
Net change in cash and equivalents 4,804 (2,570) 90,310
Cash and equivalents:
Beginning of year 6,639 11,443 8,873
-------- -------- ---------
End of year $ 11,443 $ 8,873 $ 99,183
======== ======== =========
SEE ACCOMPANYING NOTES.
F-5
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1999
1. DESCRIPTION OF BUSINESS
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading e-commerce
provider of floral products and gifts. Customers can purchase products through
any of three sales channels: online, by calling toll-free and by visiting one of
123 retail stores (owned or franchised) located across the United States.
1-800-FLOWERS.COM has broadened its product lines to include home and garden
merchandise through its acquisition of The Plow & Hearth, Inc. ("Plow & Hearth")
in April 1998 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
1-800-FLOWERS.COM and its wholly-owned and majority-owned subsidiaries and
partnerships. All significant intercompany balances and transactions have been
eliminated in consolidation.
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.
CASH AND EQUIVALENTS
Cash and equivalents consist of demand deposits with banks, highly
liquid money market funds, overnight repurchase agreements and commercial paper
with maturities of three months or less when purchased.
INVESTMENTS
1-800-FLOWERS.COM's investments, consisting primarily of debt and
equity securities, are classified as available-for-sale and are stated at fair
value, with unrealized gains and losses, net of tax, reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in other income. The cost of investments sold is determined using the specific
identification method. Estimated fair values of investments are based on quoted
market prices at the end of each accounting period. Interest, dividends and
other distributions of earnings are included in other income.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method of accounting.
F-6
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Amortization of assets held under
capital leases is calculated using the straight-line method over the estimated
useful life of the asset. Amortization of leasehold improvements is calculated
using the straight-line method over the shorter of the lease terms, including
renewal options expected to be exercised, or estimated useful lives of the
improvements. The useful lives of property, plant and equipment are as follows:
YEARS
-----
Building 40
Leasehold improvements 15-20
Furniture, fixtures and equipment (including computer equipment,
software development costs and telecommunication equipment) 3-5
COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
1-800-FLOWERS.COM follows the provisions of Statement of Position 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE, which requires the capitalization of costs incurred in connection with
developing or obtaining software for internal use. These costs are amortized
over a period of three years, the estimated useful life of the software. The
useful life of Internet and Web site development costs is less than one year
and, accordingly, are expensed as incurred. Capitalized computer software
developed for internal use approximated $828,000, $5,169,000 and $1,770,000 for
the years ended June 29, 1997, June 28, 1998 and June 27, 1999, respectively.
NOTES RECEIVABLE
Notes receivable are principally the result of (i) an acquired entity's
land and building sales; (ii) converting past due franchise receivables into
interest bearing promissory notes; (iii) the sale of 1-800-FLOWERS.COM-owned
stores to new franchisees; (iv) the resale of franchises and (v) license fees
associated with termination agreements designed to compensate 1-800-FLOWERS.COM
for the loss of future license fees. Allowances relating to such notes
(1998-$593,000 and 1999-$300,000) have been recorded based upon previous
experience and management's periodic evaluation of other relevant factors.
GOODWILL AND LICENSES
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired. Amortization expense relating to goodwill is
amortized on a straight-line basis over periods ranging from 15 to 20 years.
Licenses represent the fair value of franchise agreements acquired in
1-800-FLOWERS.COM's acquisition of Amalgamated Consolidated Enterprises, Inc.
and are amortized on a straight-line basis over a 16-year period.
F-7
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED CATALOG COSTS
1-800-FLOWERS.COM capitalizes the costs of producing and distributing
its catalogs. These costs are amortized in direct proportion with actual sales
from the corresponding catalog over a period not to exceed twenty-six weeks.
LONG-LIVED ASSETS
When impairment indicators are present, 1-800-FLOWERS.COM reviews the
carrying value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analysis expected to be
generated by the asset. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds the future discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less costs to sell.
1-800-FLOWERS.COM evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates of
useful lives. If estimates are changed, the unamortized costs will be allocated
to the increased or reduced number of remaining periods in the revised useful
life.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of 1-800-FLOWERS.COM's cash and equivalents, notes
and accounts receivable, accounts payable, and accrued liabilities approximate
their fair values principally because of the short-term nature of the
significant items. The fair value of 1-800-FLOWERS.COM's long-term obligations
are estimated based on the current rates offered to 1-800-FLOWERS.COM for
obligations of similar terms and maturities. Under this method,
1-800-FLOWERS.COM's fair value of long-term obligations was not significantly
different than the stated values at June 28, 1998 and June 27, 1999.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject 1-800-FLOWERS.COM to a
concentration of credit risk consist primarily of its holdings of cash and
equivalents, short-term investments and accounts receivable. Cash and
equivalents and short-term investments are deposited with high credit, quality
financial institutions. Concentration of credit risk with respect to accounts
receivable are limited due to 1-800-FLOWERS.COM's large number of customers and
their dispersion throughout the United States. A substantial portion of
receivables are related to balances owed by major credit card companies. The
timing of the related cash realization and fees accrued are determined based
upon agreements with these companies. Credit is also extended to customers based
upon an evaluation of the customer's financial condition and collateral is
generally not required. Allowances relating to accounts receivable (June 28,
1998-$784,000 and June 27, 1999-$1,182,000) have been recorded based upon
previous experience and other relevant factors, in addition to management's
periodic evaluation. Credit losses have been within management's expectations.
INCOME TAXES
Income taxes are provided using the liability method. Accordingly,
deferred tax assets and
F-8
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities are recognized for future tax consequences attributable to
differences between the carrying amount of assets and liabilities for financial
statement and income tax purposes, as determined under enacted tax laws and
rates that will be in effect when the differences are expected to reverse.
REVENUE RECOGNITION
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, net of
returns and credits, and include customer service and shipping charges. Net
revenues are recognized upon delivery of the order to the recipient of floral
products and upon shipment of non-floral products. 1-800-FLOWERS.COM provides an
allowance for sales returns in the period of sale, based upon historical
experience.
COST OF REVENUES
Cost of revenues consists primarily of florist fulfillment costs (fees
paid to wire services that serve as clearinghouses for floral orders, net of
rebates), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and the associated costs of inbound freight and outbound
shipping. Additionally, cost of revenues includes labor and facility costs
related to wholesale operations.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, catalog costs, fees paid to strategic online partners,
fulfillment (other than costs included in cost of revenues) and customer service
center expenses as well as payroll and non-payroll related expenses for those
areas engaged in marketing, selling, merchandising, customer service and
fulfillment activities. All such marketing and sales costs are expensed when
incurred.
1-800-FLOWERS.COM expenses all advertising costs at the time the
advertisement is first shown. Advertising expense (including the amortization of
deferred catalog costs of approximately $2,604,000 and $17,606,000 for the years
ended June 28, 1998 and June 27, 1999, respectively) was approximately
$16,700,000, $16,691,000 and $36,387,000 for the years ended June 29, 1997, June
28, 1998 and June 27, 1999, respectively.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist primarily of the payroll
and operating expenses for the information technology group, maintenance,
support and licensing costs pertaining to the order entry, customer service,
fulfillment and database systems as well as all costs associated with the Web
site, including designing, developing and third party hosting. All such
technology and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
1-800-FLOWERS.COM accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
F-9
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT DISCLOSURES
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. Statement 131 superseded Statement of
Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. 1-800-FLOWERS.COM operates in one
business segment through any of its three access channels.
The adoption of Statement 131 did not affect 1-800-FLOWERS.COM's consolidated
results of operations or financial position.
For the years ended June 29, 1997, June 28, 1998 and June 27, 1999, the
flowers and plants products category represented 92.1%, 86.9% and 71.8% of total
net revenues, respectively.
COMPREHENSIVE INCOME
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on 1-800-FLOWERS.COM's net income (loss) or stockholders' equity
(deficit). Statement 130 requires unrealized gains or losses on
1-800-FLOWERS.COM's available-for-sale securities, which prior to adoption was
reported separately in stockholders' equity, to be included in comprehensive
income. The related tax effect on comprehensive income is not material for the
periods presented. Prior year consolidated financial statements have been
restated to conform to the requirements of Statement 130.
3. ACQUISITIONS
During the three years ended June 27, 1999, 1-800-FLOWERS.COM made the
acquisitions described below, each of which has been accounted for as a
purchase. Accordingly, the consolidated financial statements include the
operating results of each business from the respective date of acquisition.
THE PLOW & HEARTH, INC.
In April 1998, 1-800-FLOWERS.COM acquired 88% of the issued and
outstanding shares of common stock of Plow & Hearth (70% of the fully diluted
equity due to the existence of 28,334 outstanding management stock options).
Plow & Hearth is a catalog company located in Virginia. The acquisition price
was $16,100,000, exclusive of the management put liability described below, of
which $14,700,000 was financed through 1-800-FLOWERS.COM's credit agreement (see
Note 5). The purchase price has been allocated to the assets acquired and the
liabilities assumed based on fair values at the date of acquisition. The excess
of the purchase price over the estimated fair values of the net assets acquired
of $19,600,000 has been recorded as goodwill and is being amortized over 20
years.
1-800-FLOWERS.COM, Plow & Hearth and Plow & Hearth management
shareholders and option holders entered into a stockholders' agreement effective
with the acquisition. In accordance with
F-10
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the agreement, as amended, each management shareholder and option holder has the
right to cause Plow & Hearth to purchase 12,668 shares of its outstanding stock
and 28,344 stock options at a price contingent upon the operating profits of
Plow & Hearth, with a minimum obligation upon either the death, disability or
termination of employment of a management shareholder or option holder or the
60-day period commencing on April 3, 2002 and terminating on June 3, 2002.
Accordingly, 1-800-FLOWERS.COM recorded a liability of $6,300,000 at the
acquisition date. The liability at June 28, 1998 was adjusted to approximately
$8,700,000 and, subsequently at June 27, 1999, to $6,300,000, based on the
formula defined in the stockholders' agreement. This resulted in an increase and
subsequent reduction of general and administrative expenses of approximately
$1,631,000 for the years ended June 28, 1998 and June 27, 1999, respectively,
reflecting the option holders percentage of the increase (decrease), with the
remainder adjusted to goodwill, reflecting the minority interest holders'
percentage of the increase (decrease). 1-800-FLOWERS.COM's minimum obligation
under the put liability increased to $8,400,000 upon the completion of its
initial public offering ("IPO") in August 1999 (see Note 12).
Concurrently with the acquisition of Plow & Hearth, 1-800-FLOWERS.COM
also acquired an 85% interest in Plow & Hearth LP. Plow & Hearth owns the
remaining 15%. Plow & Hearth LP owns the land and distribution center/office
facility of Plow & Hearth and leases the facility to Plow & Hearth. The $800,000
purchase price has been allocated to the assets acquired and the liabilities
assumed based on fair values at the date of acquisition. The purchase price
approximates the estimated fair values of the net assets acquired, including the
assumption of a $2,400,000 construction loan payable.
The following table reflects unaudited pro forma results of operations
of 1-800-FLOWERS.COM and Plow & Hearth on the basis that the acquisition had
taken place at the beginning of the earliest period presented:
YEARS ENDED
------------------------------
JUNE 29, 1997 JUNE 28, 1998
--------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues $222,324 $257,747
=============== ==============
Net income $4,468 $3,464
=============== ==============
Net income applicable to common stockholders $3,006 $1,856
=============== ==============
Net income per common share applicable to common stockholders:
Basic $0.07 $0.04
=============== ==============
Diluted $0.06 $0.04
=============== ==============
Shares used in the calculation of net income per common share:
Basic 44,140 44,120
=============== ==============
Diluted 46,740 46,610
=============== ==============
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated on July 1, 1996 or of
F-11
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
future operations of the combined companies.
GREAT PLAINS WHOLESALE FLORISTS, INC.
In July 1997, 1-800-FLOWERS.COM's subsidiary, Floral Works, Inc.,
acquired the business and assets of Great Plains Wholesale Florists, Inc., a
supplier of fresh cut flowers and arrangements to the supermarket industry, for
$900,000 in cash and the issuance of a $900,000 four-year seller financed note
bearing interest at 6.5% per annum. The purchase price has been allocated to the
assets acquired and the liabilities assumed based on their fair values at the
date of acquisition.
The excess of the purchase price over the net assets acquired, of
approximately $1,744,000, has been recorded as goodwill and is being amortized
over 15 years. Had this acquisition been consummated as of July 1, 1996, the
unaudited pro forma consolidated net revenues and results of operations would
not have been considered material for the year ended June 29, 1997.
FLORAL WORKS, INC.
In September 1996, 1-800-FLOWERS.COM invested $1,100,000 in cash for an
80% interest in Floral Works, Inc. which was formed in order to acquire specific
assets and liabilities of FLS Floral Wholesalers Ltd. The purchase price has
been allocated to the assets acquired and the liabilities assumed based on fair
values at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $826,000 has
been recorded as goodwill and is being amortized over 15 years.
Additionally, the minority stockholders received 75 stock appreciation
rights with an exercise price of $2,800 per right. The stock appreciation rights
vest ratably over 5 years and the exercise price increases 10% annually. At June
27, 1999, 40% of the stock appreciation rights are exercisable. Since issuance,
1-800-FLOWERS.COM has not recorded any provision related to such stock
appreciation rights.
Had this acquisition been consummated as of July 1, 1996, the unaudited
pro forma consolidated net revenues and results of operations would not have
been considered material for the year ended June 29, 1997.
AMERICAN FLORAL SERVICES, INC.
In February 1994, 1-800-FLOWERS.COM completed an investment transaction
with American Floral Services, Inc., a floral wire service. The investment
consisted of 1-800-FLOWERS.COM purchasing a minority interest in American Floral
Services Class A common stock and 15% preferred stock and a long-term note
receivable. During the year ended June 30, 1996, the long-term note receivable
was converted into additional preferred stock of American Floral Services. On
June 30, 1997, American Floral Services repurchased, on a pro-rata basis, 59% of
its then outstanding shares of Class A common stock in the amount of $387.16 per
share. This transaction resulted in a gain on 1-800-FLOWERS.COM's investment in
American Floral Services of approximately $1,545,000 which was received and
recorded as other income during the year ended June 28, 1998. In addition,
during the years ended June 29, 1997, June 28, 1998 and June 27, 1999,
1-800-FLOWERS.COM recorded $318,000, $123,000 and $123,000, respectively, of
other income representing the accrual of cumulative
F-12
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock dividends. Accrued preferred stock dividends at June 29, 1997 of
$318,000 were paid in July 1997.
4. CAPITAL STOCK TRANSACTIONS
In January 1995, 1-800-FLOWERS.COM entered into an investment agreement
with Chase Venture Capital Associates ("Chase"), under which Chase purchased
263,452 shares of redeemable Class C common stock and a warrant, expiring in
2005, to purchase 2,371,040 shares of Class A common stock with a nominal
exercise price for an investment of $10.0 million. As of June 27, 1999, all such
warrants are outstanding.
On May 8, 1998, 1-800-FLOWERS.COM entered into a stock purchase
agreement with a stockholder whereby 1-800-FLOWERS.COM purchased 1,400 shares of
its Class A common stock and 140,000 shares of its Class B common stock for
$133,000.
On May 20, 1999, the board of directors and stockholders approved an
increase in the number of authorized shares of common stock to 400,000,000 and
preferred stock to 1,200,000. Subsequent to the increase in the authorized
shares of preferred stock, 1-800-FLOWERS.COM completed a private placement of
984,493 shares of preferred stock on May 20, 1999, yielding net proceeds of
$101.6 million. In connection with this private placement, and pursuant to the
terms of the investment agreement with Chase, 1-800-FLOWERS.COM redeemed the
Class C common stock for approximately $14.9 million and Chase used such
proceeds to purchase 143,053 shares of preferred stock and received 263,452
shares of Class A common stock in connection with the redemption of the Class C
common stock. In accordance with the preferred stock purchase agreement, and
effective with 1-800-FLOWERS.COM's IPO in August 1999 (see Note 12), each share
of preferred stock was converted into ten shares of Class A common stock.
Concurrent with the completion of the private placement,
1-800-FLOWERS.COM redeemed 84,768 shares of Class C common stock owned by its
Chief Executive Officer for $4.3 million and issued him 84,768 shares of Class B
common stock in connection with the redemption. During the year ended June 27,
1999, 1-800-FLOWERS.COM recorded a dividend in the amount of $5.2 million as a
result of the issuances of common stock in exchange for the redemption of all of
the outstanding Class C common stock, as well as for the accrual of the 10%
cumulative dividend on the Class C common stock through the date of redemption.
In order to facilitate its IPO, on July 7, 1999, 1-800-FLOWERS.COM
amended and restated its certificate of incorporation to provide for the
conversion of existing shares of common stock into newly established classes of
common stock and for a ten-for-one split of the outstanding shares of common
stock and an increase in the number of authorized shares of preferred stock (see
Note 12).
F-13
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
1-800-FLOWERS.COM's long-term debt and obligations under capital leases
are as follows:
JUNE 28, 1998 JUNE 27, 1999
-------------- --------------
(IN THOUSANDS)
Bank term loan and revolving credit line (1) $ - $21,000
Standby credit note (2) 15,500 -
Commercial notes and revolving credit lines (3-6) 2,333 4,675
Seller financed acquisition obligations (7-12) 3,867 3,351
Obligations under capital leases (see Note 11) 4,050 5,078
-------------- --------------
25,750 34,104
Less current maturities of long-term debt and obligations under
capital leases 3,287 6,647
-------------- --------------
$22,463 $27,457
============== ==============
- ----------
(1) On March 19, 1999, 1-800-FLOWERS.COM entered into an agreement with a
bank that provided for an $18,000,000 term loan and a $12,000,000
revolving credit line, bearing interest at LIBOR Index plus 2.25% per
annum (7.31% at June 27, 1999) payable monthly. 1-800-FLOWERS.COM used
the proceeds to repay amounts outstanding under its previous credit
agreement (see (2) below). At June 27, 1999, 1-800-FLOWERS.COM had
$3,000,000 of outstanding borrowings under the revolving credit line
agreement.
In conjunction with an amendment to the credit agreement, in April
1999, the bank waived default of certain covenants and amended the
agreement whereby the revolving credit line was reduced to $5,000,000
and the term loan will be due and payable on the earlier of
1-800-FLOWERS.COM's successful completion of an IPO or July 3, 2000.
Upon closing of its IPO in August 1999, 1-800-FLOWERS.COM used a
portion of the proceeds to repay all amounts outstanding under this
agreement (see Note 12).
(2) On April 3, 1998, 1-800-FLOWERS.COM entered into a credit agreement
with a bank that provided for a $15,500,000 standby credit note and a
$5,000,000 revolving credit facility. 1-800-FLOWERS.COM borrowed the
full amount under the standby credit note in connection with the
acquisitions of Plow & Hearth and Plow & Hearth LP (see Note 3). On
March 19, 1999, 1-800-FLOWERS.COM repaid amounts then outstanding and
entered into a new credit agreement with the same bank (see (1) above).
Other components of long-term debt, relating to obligations of Plow & Hearth,
are as follows:
(3) $4,500,000 revolving credit line dated September 28, 1998, renewable
annually, (none outstanding at June 27, 1999) bearing interest equal to
the monthly LIBOR Index plus 1.75% per annum (6.81% at June 27, 1999).
(4) $2,400,000 commercial note dated June 13, 1997 ($2,258,000 outstanding
at June 27, 1999)
F-14
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assumed in the Plow & Hearth and Plow & Hearth LP acquisitions, bearing
interest at 8.19% per annum. The note is payable in 203 equal monthly
installments of principal and interest commencing June 13, 1997.
(5) $1,460,000 note dated July 1, 1998 ($1,421,000 outstanding at June 27,
1999) bearing interest equal to the monthly Treasury Bill rate plus
2.1% per annum (6.45% at June 27, 1999). The note is payable in 180
equal monthly installments of principal and interest commencing
November 1, 1998.
(6) $2,980,000 construction line, dated May 12, 1999, convertible, at
1-800-FLOWERS.COM's option, to a 15 year fixed rate term loan in
September 1999 ($996,000 outstanding at June 27, 1999) bearing interest
at 7.61% per annum.
The following notes relate to seller-financed acquisition obligations, all of
which have been collateralized by either the stock or assets of various
subsidiaries of 1-800-FLOWERS.COM:
(7) $2,225,000 in promissory notes payable dated October 10, 1994 bearing
interest at rates between 9% and 12% per annum. Interest is paid
monthly on the outstanding principal balance until the notes have been
paid in full. The notes are payable in 60 equal monthly installments
commencing November 1, 1999.
(8) $800,000 promissory note payable assumed October 10, 1994 ($67,000
outstanding at June 27, 1999) and dated September 1, 1993 bearing
interest at 12% per annum. Interest is paid monthly on the outstanding
principal balance until the note has been paid in full. The note is
payable in 36 equal monthly installments commencing October 1, 1996.
(9) $200,000 promissory note payable assumed October 10, 1994 and dated
September 1, 1993 bearing interest at 9% per annum. Interest is paid
monthly on the outstanding principal balance until the note has been
paid in full. The note is payable in 60 equal monthly installments
commencing November 1, 1999.
(10) $275,000 promissory note payable dated November 1, 1994 ($173,000
outstanding at June 27, 1999) bearing interest at 8% per annum. The
note is payable in 120 equal monthly installments of principal and
interest commencing December 1, 1994.
(11) $95,000 note payable assumed November 1, 1994 ($11,000 outstanding at
June 27, 1999) bearing interest at 8% per annum. The note is payable in
60 equal monthly installments of principal and interest commencing
February 1, 1995.
(12) $900,000 promissory note payable dated July 1,1997 ($675,000
outstanding at June 27, 1999) bearing interest at 6.5% per annum. The
note is payable in four equal installments of principal and interest
commencing July 1, 1998.
F-15
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 27, 1999, long-term debt maturities, excluding amounts relating to
capital leases (see Note 11), are as follows (in thousands):
YEAR DEBT MATURITIES
---- ---------------
2000 $4,792
2001 19,156
2002 1,159
2003 936
2004 940
Thereafter 2,043
-----------
$29,026
===========
6. INCOME TAXES
Significant components of the provision (benefit) for income taxes are
as follows (in thousands):
YEARS ENDED
-------------- ------------- --------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
-------------- ------------- --------------
Current:
Federal $2,600 $2,039 $(1,699)
State and local 705 877 -
-------------- ------------- --------------
3,305 2,916 (1,699)
Deferred (170) 265 (1,016)
-------------- ------------- --------------
$3,135 $3,181 $(2,715)
============== ============= ==============
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
YEARS ENDED
--------------------------------------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
-------------- -------------- -------------
Tax at U.S. statutory rates 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit 6.0 7.5 -
Nondeductible goodwill amortization 1.9 2.1 4.8
Dividends received deduction (1.0) (4.4) (0.2)
Other 0.8 0.2 0.4
-------------- -------------- -------------
41.7% 39.4% (29.0)%
============== ============== =============
F-16
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of 1-800-FLOWERS.COM's deferred tax assets
(liabilities) are as follows:
JUNE 28, 1998 JUNE 27, 1999
------------- -------------
(IN THOUSANDS)
Deferred tax assets:
Bad debts $ 481 $ 412
Other accrued expenses and reserves 1,156 1,092
State tax operating losses -- 260
Valuation allowance -- (260)
Deferred tax liabilities:
Installment sales (157) (147)
Tax in excess of book depreciation (1,175) (36)
------- -------
Net deferred taxes $ 305 $ 1,321
======= =======
1-800-FLOWERS.COM paid income taxes, net of refunds, of approximately
$1,700,000, $2,930,000 and $400,000 for the years ended June 29, 1997, June 28,
1998 and June 27, 1999, respectively.
7. SUPPLEMENTARY FINANCIAL INFORMATION
PROPERTY, PLANT AND EQUIPMENT
JUNE 28, 1998 JUNE 27, 1999
------------- -------------
(IN THOUSANDS)
Computer equipment $9,648 $15,547
Software development costs 5,997 7,767
Telecommunication equipment 3,854 4,285
Leasehold improvements 3,715 6,363
Building and building improvements 3,463 5,745
Equipment 1,917 2,616
Furniture and fixtures 1,437 2,373
Land 389 389
-------------- --------------
30,420 45,085
Accumulated depreciation and amortization 11,041 17,560
-------------- --------------
$19,379 $27,525
============== ==============
F-17
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENTS
JUNE 28, 1998 JUNE 27, 1999
---------------------------- -----------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------------------------- -----------------------------
(IN THOUSANDS)
Investments available-for-sale:
Federal and municipal government bonds $5,173 $5,178 $- $ -
Equity securities 266 275 - -
-------------- ------------- --------------- -------------
$5,439 5,453 $- -
============== ------------- =============== -------------
Other investments:
Equity investment in American Floral
Services, at cost 918 918
Other 46 66
------------- -------------
6,417 984
Less short-term investments 5,034 -
------------- -------------
$1,383 $984
============= =============
Maturities of investments classified as available-for-sale were as follows (in
thousands):
JUNE 28, 1998 JUNE 27, 1999
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------- -----------------------
Due in one year or less $5,034 $5,034 $- $-
Due after one year 139 144 - -
Equity securities not due at a specific date 266 275 - -
---------------------- -----------------------
$5,439 $5,453 $- $-
====================== =======================
There were no gross unrealized holding losses at June 29, 1997, June
28, 1998 and June 27, 1999. Additionally, gross realized gains or losses on the
sales of available-for-sale securities were immaterial for all periods
presented.
OTHER ASSETS
JUNE 28, 1998 JUNE 27, 1999
------------- -------------
(IN THOUSANDS)
Exclusive online marketing contract, net $ - $2,500
Deferred catalog costs, net 669 1,021
Deferred offering costs - 1,019
Other assets, net 1,126 1,137
------------- -------------
1,795 5,677
============= =============
F-18
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Changes in operating working capital items, excluding the effects of
acquisitions:
YEARS ENDED
-------------- -------------- --------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
-------------- -------------- --------------
(IN THOUSANDS)
Receivables $ (1,475) $ (1,908) $ (1,296)
Inventories 32 (373) (2,525)
Prepaid and other 838 732 (281)
Recoverable income taxes - - (2,431)
Accounts payable 1,742 3,655 2,606
Accrued expenses 278 (2,010) 2,442
Income taxes payable 1,132 (380) (845)
-------------- -------------- --------------
$2,547 $ (284) $ (2,330)
============== ============== ==============
Changes in operating non-working capital items, excluding the effects of
acquisitions:
YEARS ENDED
-------------- -------------- -------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
-------------- -------------- -------------
(IN THOUSANDS)
Other assets $ (24) $(1,821) $(3,787)
Other liabilities 80 (43) 715
-------------- -------------- -------------
$56 $(1,864) $(3,072)
============== ============== =============
Interest paid amounted to approximately $912,000, $879,000 and
$2,723,000 for the years ended June 29, 1997, June 28, 1999 and June 27, 1999,
respectively.
Cash receipts on notes receivable amounted to $600,000, $723,000 and
$786,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 1999,
respectively.
ACCRUED EXPENSES
JUNE 29, 1998 JUNE 28, 1999
-------------- --------------
(IN THOUSANDS)
Payroll and payroll related items $1,877 $2,074
Credits and chargeback reserve 425 846
Sales and use taxes 61 264
Interest 298 185
Other 440 2,174
-------------- --------------
$3,101 $5,543
============== ==============
F-19
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROFIT SHARING PLAN
1-800-FLOWERS.COM has a 401(k) Profit Sharing Plan covering
substantially all of its eligible employees. All full-time employees who have
attained the age of 21 are eligible to participate upon completion of one year
of service. Participants may elect to make voluntary contributions to the 401(k)
plan in amounts not exceeding federal guidelines. On an annual basis
1-800-FLOWERS.COM, as determined by its board of directors, may make certain
discretionary contributions. Employees are vested in 1-800-FLOWERS.COM's
contribution based upon years of service. 1-800-FLOWERS.COM made contributions
of $101,000, $92,000 and $87,000 for the years ended June 29, 1997, June 28,
1998 and June 27, 1999, respectively.
9. STOCK OPTION PLAN
In January 1997, 1-800-FLOWERS.COM's board of directors approved
1-800-FLOWERS.COM's 1997 Stock Option Plan. The stock option plan authorizes the
granting to key employees, officers, directors and consultants of
1-800-FLOWERS.COM options to purchase an aggregate of 5,985,440 shares of
1-800-FLOWERS.COM's Class B common stock. The options may be either incentive
stock options or non-qualified stock options. The exercise price of an option
shall be determined by 1-800-FLOWERS.COM's board of directors or compensation
committee of the board at the time of grant, provided, however, that in the case
of an incentive stock option the exercise price may not be less than 100% of the
fair market value of such stock at the time of the grant, or less than 110% of
such fair market value in the case of options granted to a 10% owner of
1-800-FLOWERS.COM's stock. The vesting and expiration periods of options issued
under the stock option plan are determined by 1-800-FLOWERS.COM's board of
directors or compensation committee as set forth in the applicable option
agreement, provided that the expiration date shall not be later than ten years
from the date of grant.
During January 1999, 1-800-FLOWERS.COM issued stock options to
employees to purchase 200,000 shares of common stock at $2.00 per share, which
was considered to be the fair value of the common stock at that time and vest at
the rate of 25% per year on the anniversary of the grant date. Soon thereafter,
1-800-FLOWERS.COM entered into discussions with an investor to purchase shares
of common stock at $10.43 per share. Accordingly, for accounting purposes,
1-800-FLOWERS.COM used such per share value to record a deferred compensation
charge of $1,680,000, of which $210,000 was amortized during the year ended June
27, 1999, associated with the option grants in January 1999.
F-20
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activity in stock options:
YEARS ENDED
------------------------------------------------------------------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
---------------------- ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
----------- ---------- ---------- ----------- ------------ -----------
Balance, beginning of - $- 427,750 $1.30 525,500 $1.36
year
Grants 427,750 1.30 102,500 1.61 712,000 2.00
Forfeitures - - (4,750) 1.18 - -
----------- ---------- ------------
Balance, end of year 427,750 1.30 525,500 1.36 1,237,500 1.73
=========== ========== ============
Weighted-average fair
value of options
issued during the
year $0.22 $0.73 $0.90
The following table summarizes information about stock options
outstanding at June 27, 1999:
WEIGHTED-
AVERAGE
OPTIONS OPTIONS REMAINING
EXERCISE PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
-------------- ----------- ----------- ----------------
$1.30 423,000 253,800 2.5 years
1.61 102,500 25,630 8.5 years
2.00 712,000 393,000 9.1 years
------------- -------------
1,237,500 672,430 6.8 years
============= =============
In July 1999, 1-800-FLOWERS.COM's board of directors adopted and
stockholders approved the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive Plan (see
Note 12). At June 27, 1999, 1-800-FLOWERS.COM has reserved approximately
24,784,460 shares of common stock for issuance under common stock options,
warrants and convertible preferred stock.
FAIR VALUE DISCLOSURES
Pro forma information regarding net income (loss) is required by
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which also requires that the information be determined as if
1-800-FLOWERS.COM had accounted for its stock options under the fair value
method of that statement. The fair value of these options was estimated at the
date of grant using the minimum value option pricing model with the following
assumptions: risk free interest rate of 6%; no dividend yield and a
weighted-average expected life of the options of 5 years at date of grant. As
further described in Note 12, 1-800-FLOWERS.COM became a public entity in August
1999. As a
F-21
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result, the determination of fair value of all options granted after such time
will include an expected volatility factor in addition to the factors described
above, and the results presented below may not be indicative of future periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
1-800-FLOWERS.COM pro forma financial information is as follows:
YEARS ENDED
-------------- -------------- --------------
JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) applicable to common
stockholders:
As reported $2,925 $3,466 $(12,061)
Pro forma 2,898 3,438 (12,501)
Basic earnings (loss) per share applicable to
common stockholders:
As reported $0.07 $0.08 $(0.27)
Pro forma 0.07 0.08 (0.28)
Diluted earnings (loss) per share applicable to
common stockholders:
As reported $0.06 $0.07 $(0.27)
Pro forma 0.06 0.07 (0.28)
F-22
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
The following sets forth the data used in the computation of basic and
diluted earnings (loss) per common share:
YEARS ENDED
------------------------------------
JUNE 29, JUNE 28, JUNE 27,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Numerator:
Net income (loss) $ 4,387 $ 5,074 $ (6,846)
Redeemable Class C common stock dividends (1,462) (1,608) (5,215)
-------- -------- --------
Net income (loss) applicable to
common stockholders $ 2,925 $ 3,466 $(12,061)
======== ======== ========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average common
shares outstanding 44,140 44,120 44,035
Effect of dilutive securities:
Employee stock options 230 120 --
Warrants 2,370 2,370 --
-------- -------- --------
Dilutive potential common shares 2,600 2,490 --
-------- -------- --------
Denominator for diluted earnings (loss)
per share-weighted average common
shares outstanding and assumed
conversions 46,740 46,610 44,035
======== ======== ========
During the year ended June 27, 1999, 1,127,546 shares of convertible
preferred stock and options and warrants to purchase 3,322,000 shares of common
stock (using the treasury stock method) were excluded from the diluted loss per
share computation as their effect would be antidilutive. For all periods
presented, 348,221 shares of common stock issued upon the conversion of Class C
common stock (see Note 4) were excluded from the diluted loss per share
computation until their associated conversion/redemption in May 1999, as their
inclusion would be antidilutive. Additionally, subsequent to June 27, 1999,
1-800-FLOWERS.COM issued options to purchase 1,023,000 shares of Class A common
stock with an exercise price of $21, equal to the price of the shares sold in
its IPO and 300,000 shares of Class A common stock with an exercise price of
$16.
11. COMMITMENTS AND CONTINGENCIES
LEASES
1-800-FLOWERS.COM currently leases office, store facilities, and
equipment under various operating leases through fiscal 2009. As leases expire,
it can be expected that in the normal course of business they will be renewed or
replaced. Most lease agreements contain renewal options and rent escalation
clauses and require 1-800-FLOWERS.COM to pay real estate taxes, insurance,
common area
F-23
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
maintenance and operating expenses applicable to the leased properties.
1-800-FLOWERS.COM has also entered into leases that are on a month-to-month
basis.
1-800-FLOWERS.COM also leases certain computer, telecommunication and
related equipment under capital leases, which are included in property and
equipment with a capitalized cost of approximately $7,037,000 and $10,124,000 at
June 28, 1998 and June 27, 1999, respectively, and accumulated amortization of
$5,031,000 and $6,897,000 respectively. Under the terms of one of these leases,
1-800-FLOWERS.COM is required to maintain an irrevocable standby letter of
credit in the amount of approximately $785,000 which is renewable annually.
As of June 27, 1999, future minimum payments under non-cancelable
equipment lease obligations and operating leases with initial terms of one year
or more consist of the following:
OBLIGATIONS
UNDER
EQUIPMENT OPERATING
LEASES LEASES
------------- -----------
(IN THOUSANDS)
2000 $1,812 $4,620
2001 1,054 3,936
2002 934 3,712
2003 501 3,214
2004 57 2,447
Thereafter - 3,984
------------- -----------
Total minimum lease payments 4,358 $21,913
===========
Less amounts representing interest (594)
-------------
Present value of net minimum lease payments $3,764
=============
1-800-FLOWERS.COM, through the Amalgamated Consolidated Enterprises
acquisition, subleases land and buildings (which are leased from third parties)
to 1-800-FLOWERS.COM's franchisees. Certain of the leases, other than land
leases which have been classified as operating leases, are classified as capital
leases and have initial lease terms of approximately 20 years (including option
periods in some cases).
F-24
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following schedule, as of June 27, 1999, reflects the lease
receipts due from franchisees (shown as Capitalized Investment in Leases) and
capital lease payment obligations:
CAPITALIZED OBLIGATIONS
INVESTMENT IN UNDER CAPITAL
LEASES LEASES
-------------- --------------
(IN THOUSANDS)
2000 $478 $403
2001 433 392
2002 379 339
2003 257 222
2004 173 173
Thereafter 162 162
-------------- --------------
Total minimum lease payments 1,882 1,691
Less interest (430) (377)
-------------- --------------
Present value of net minimum lease payments $1,452 $1,314
============== ==============
At June 27, 1999, the aggregate future rental expense under long-term
operating leases for land and buildings and corresponding sublease rental income
under long-term operating subleases were as follows:
SUBLEASE SUBLEASE
INCOME EXPENSE
-------------- -------------
(IN THOUSANDS)
2000 $3,187 $3,118
2001 2,789 2,742
2002 2,255 2,215
2003 1,881 1,849
2004 1,587 1,555
Thereafter 4,825 4,677
-------------- -------------
$16,524 $16,156
============== =============
In addition to the above, 1-800-FLOWERS.COM has agreed to provide rent
guarantees for leases entered into by certain franchisees with third party
landlords. At June 27, 1999, the aggregate minimum rent due by franchisees
guaranteed by 1-800-FLOWERS.COM during the eight-year period ending in fiscal
year 2006 was approximately $549,000.
Rent expense was approximately $5,800,000, $5,637,000 and $7,692,000
for the years ended June 29, 1997, June 28, 1998 and June 27, 1999.
1-800-FLOWERS.COM has commitments under exclusive online marketing
agreements with America Online, Inc. ("AOL") whereby 1-800-FLOWERS.COM was
required to pay a minimum of $11,500,000 over a four-year period commencing July
1, 1997. Such online marketing costs are capitalized and amortized over the
greater of the ratio of the number of impressions delivered over the
F-25
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total number of contracted impressions, or a straight-line basis over the term
of the agreement. Through June 27, 1999, 1-800-FLOWERS.COM paid $7,500,000
pursuant to the AOL agreements. Of the remaining $4,000,000, $3,000,000 was paid
in July 1999 and $500,000 was to be payable during each of the fiscal years
ending June 2000 and 2001. On September 1, 1999, 1-800-FLOWERS.COM expanded both
the term and scope of its strategic relationship with AOL. Pursuant to the terms
of the new agreement, 1-800-FLOWERS.COM will pay AOL $37,000,000 over the new
four-year term of the agreement which extends through fiscal 2003. Additionally,
during the first two years of the new agreement, 1-800-FLOWERS.COM is required
to share a portion of revenue derived from certain of the AOL properties
included in such agreement. Such amounts will be expensed as the related revenue
is recognized. 1-800-FLOWERS.COM's remaining payment obligations to AOL under
the previous agreement were cancelled upon the effectiveness of the new
agreement.
LITIGATION
There are various claims, lawsuits, and pending actions against
1-800-FLOWERS.COM and its subsidiaries incident to the operations of its
businesses. It is the opinion of management, after consultation with counsel,
that the ultimate resolution of such claims, lawsuits and pending actions will
not have a material adverse effect on 1-800-FLOWERS.COM's consolidated financial
position, results of operations or liquidity.
12. SUBSEQUENT EVENTS
CAPITAL TRANSACTIONS
On August 3, 1999, 1-800-FLOWERS.COM completed an IPO of 6,000,000
shares of its Class A common stock, par value $0.01 per share, at $21.00 per
share, raising net proceeds of approximately $115.7 million.
In anticipation of the its IPO, 1-800-FLOWERS.COM amended and restated
its certificate of incorporation on July 7, 1999 to provide that all previously
outstanding shares of Class A common stock, which the holders of were entitled
to one vote per share, and Class B common stock, which contained no voting
rights, convert into a new series of Class B common stock and are entitled to 10
votes per share. Accordingly, 428,070 shares of old Class A common stock were
converted into the same number of shares of new Class B common stock.
Additionally, a new series of Class A common stock was established that entitles
the holders to one vote per share. Each share of new Class B common stock shall
automatically convert into one share of new Class A common stock upon transfer,
with limited exception, and at the option of the holder. Holders of 3,836,560
shares of new Class B common stock elected to convert such new Class B common
stock into an equal number of shares of new Class A common stock.
On July 7, 1999, the 1-800-FLOWERS.COM, Inc., 1999 Stock Incentive Plan
was adopted by 1-800-FLOWERS.COM's board of directors and approved by its
stockholders. Pursuant to the terms of the plan, 9,900,000 shares of Class A
common stock have been authorized for issuance. The share reserve will
automatically increase on the first trading day in January of each calendar
year, beginning January 2, 2000, by an amount equal to 3% of the total number of
shares of common stock outstanding on the last trading day in December in the
preceding calendar year, but in no event will this annual increase exceed
2,000,000 shares. The components of the plan include a discretionary option
grant
F-26
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
program, an automatic option grant program, a stock issuance program, and a
salary investment option grant program. In August 1999, 1-800-FLOWERS.COM
granted 1,023,000 options at an exercise price of $21 per share and 300,000
options at an exercise price of $16 per share. Such grants were made at the fair
market value on their respective grant dates.
Also on July 7, 1999, the board of directors and stockholders approved
an amendment to the certificate of incorporation to be effective on July 28,
1999 that provides for a ten-for-one split of the outstanding shares of common
stock and an increase in the number of authorized shares of preferred stock to
10,000,000. Retroactive effect has been given to the stock split. All common
stock, option and warrant data has been restated to reflect the stock split.
PREFERRED STOCK CONVERSION
Upon completion of 1-800-FLOWERS.COM's IPO, each issued and outstanding
share of preferred stock was converted into ten shares of Class A common stock,
resulting in the issuance of 11,275,460 shares of Class A common stock.
REPAYMENT OF BANK CREDIT FACILITY
In connection with the completion of its IPO, 1-800-FLOWERS.COM repaid
$21,000,000 of bank borrowings, representing all amounts outstanding under a
term loan and revolving credit line (see Note 5 (1)).
ACQUISITION OF MINORITY STOCKHOLDERS' INTEREST IN PLOW & HEARTH
Pursuant to the terms of the Plow & Hearth stockholders' agreement
between 1-800-FLOWERS.COM, Plow & Hearth and Plow & Hearth management
shareholders, upon completion of 1-800-FLOWERS.COM's IPO on August 3, 1999,
1-800-FLOWERS.COM acquired all of the remaining outstanding shares of common
stock and stock options from the minority stockholders of Plow & Hearth, when,
through its Plow & Hearth subsidiary, 1-800-FLOWERS.COM satisfied its obligation
under the management put liability (see Note 3) through the purchase, for cash,
of all of the outstanding shares of common stock and stock options for
$8,400,000.
F-27
1-800-FLOWERS.COM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-----------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
--------------- ---------------- ---------------- ----------------- -------------
Year ended June 27,1999:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful accounts-
accounts receivable $784,000 $737,000 $- $(339,000)(a) $1,182,00
Reserve for estimated doubtful accounts-
notes receivable 593,000 - - (293,000)(a) 300,000
Reserve for credits and chargebacks 425,000 - 13,858,000(d) (13,437,000)(e) 846,000
Valuation allowance on deferred tax
assets - - 260,000(b) - 260,000
--------------- ---------------- ---------------- ----------------- -------------
$1,802,000 $737,000 $14,118,000 $(14,069,000) $2,588,000
=============== ================ ================ ================= =============
Year ended June 28,1998:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful accounts-
accounts receivable $509,000 $213,000 $62,000(c) $- $784,000
Reserve for estimated doubtful accounts-
notes receivable 423,000 170,000 - - 593,000
Reserve for credits and chargebacks 400,000 - 5,336,000(d) (5,311,000)(e) 425,000
--------------- ---------------- ---------------- ----------------- -------------
$1,332,000 $383,000 $5,398,000 $(5,311,000) $1,802,000
=============== ================ ================ ================= =============
Year ended June 29, 1997:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful accounts-
accounts receivable $359,000 $269,000 $- $(119,000)(a) $509,000
Reserve for estimated doubtful accounts-
notes receivable 185,000 284,000 - (46,000)(a) 423,000
Reserve for credits and chargebacks 400,000 - 5,016,000(d) (5,016,000)(e) 400,000
--------------- ---------------- ---------------- ----------------- -------------
$944,000 $553,000 $5,016,000 $(5,181,000) $1,332,000
=============== ================ ================ ================= =============
- ----------
(a) Reduction in allowance due to write-off of accounts/notes receivable
balances.
(b) Record a valuation allowance for deferred tax assets.
(c) Increase in reserve due to acquisition of Plow & Hearth.
(d) Recorded as a reduction to revenues.
(e) Reduction in reserve upon authorization of credits and chargebacks.
S-1