PROVIDE COMMERCE INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of December 31, 2004, the registrant had 12,151,581 shares of common stock outstanding.

Statements of Operations – Three and six months ended December 31, 2004 and 2003

Provide Commerce, Inc. (the “Company”) was incorporated in the State of Delaware and commenced operations on February 6, 1998. The Company operates an e-commerce marketplace for perishable goods, such as fresh-cut floral arrangements, potted plants, high quality meats and fruits, and related merchandise. Products are purchased by customers and shipped directly from the growers/producers for overnight or other prompt delivery.

The accompanying unaudited financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, and do not contain all information included in the audited financial statements and notes thereto. The interim unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K. In the opinion of management, the information furnished herein reflects all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

In December 2003, the Company effected a 1-for-3.037716 reverse stock split of its common stock. The accompanying financial statements give retroactive effect to the reverse stock split for all periods presented.

The balance sheet at June 30, 2004 has been derived from the audited financial statements at that date.

Basic net income (loss) per common share is calculated by dividing net income (loss) for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, convertible preferred stock and other contingent issuances of common stock to the extent these shares are dilutive. The Company incurred a loss for the six months ended December 31, 2003 and, accordingly, has excluded all convertible preferred stock, shares issuable upon exercise of common stock options, warrants and shares subject to repurchase from the calculation of diluted net loss per common share for that period as follows:

The following table summarizes potential common shares that are not included in the denominator used in net loss per common share for the six months ended December 31, 2003, because to do so would be anti-dilutive for the period presented:

Effective July 1, 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). The Company selected the prospective method, which is one of the six transition methods allowed by SFAS No. 148, Accounting for Stock-based Compensation—Transition and Disclosure, to transition to the fair value method of measuring stock-based compensation expense. Under the prospective method, the Company expensed only those employee stock options that were granted or modified after July 1, 2002. The majority of awards under the Company’s plans vest over a period of four years. The expense associated with stock compensation is amortized over the vesting period of the individual award using an accelerated method of amortization consistent with the method described in FASB Interpretation No. 28.

The effect of applying the fair value recognition provisions of SFAS 123 to stock-based employee compensation for all outstanding and unvested awards in periods prior to July 1, 2002, on net income (loss) and earnings per common share for the three or six months ended December 31, 2004 did not result in pro forma income which is materially different from the reported amount. Therefore, such pro forma information is not presented herein.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. As the Black-Scholes option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future periods. The Company used the minimum value method to determine the fair value of options granted prior to its initial filing in September 2003 of a registration statement under the Securities Act of 1933 relating to an initial public offering of the Company’s common stock.

The Company adopted the fair-value-based method of accounting for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on July 1, 2005. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). The Company does not anticipate that this will have a material effect on its financial statements. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our annual consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1,556 for the six months ended December 31, 2004 and $246, $0, and $0 in fiscal years ended June 30, 2004, 2003 and 2002, respectively.

In September 2003, the Company’s Board of Directors approved an amendment to the certificate of incorporation and increased the authorized common stock to 50,000,000 shares, which became effective December 22, 2003 in connection with the Company’s initial public offering. During the six months ended December 31, 2004, the Company issued 385,668 shares of common stock upon the exercise of outstanding options and warrants.

At December 31, 2004, 155 shares were subject to repurchase at the original issuance price. The shares are subject to repurchase at the election of the company in the event the employees are terminated. There will be little or no consideration paid for these shares in the event they are repurchased.

On July 7, 2004, the Company completed a secondary public offering whereby 1,981,019 shares of common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by the Company and an aggregate of 1,881,019 shares were sold by selling stockholders. The Company received net proceeds of approximately $1,353 in connection with the secondary offering.

In August 2003, the Company declared and paid a cash dividend to the holders of the then issued and outstanding Series A and Series B preferred stock in the aggregate amount of $1,500.

In September 2003, the Company’s Board of Directors approved an amendment to the certificate of incorporation setting the authorized preferred stock to 5,000,000 shares which became effective December 22, 2003 in connection with the Company’s initial public offering. The preferred stock is “blank check preferred,” which can be created and issued by the Board of Directors without stockholder approval, with rights senior to those of common stock. Prior to December 22, 2003, the Company’s Board of Directors was authorized to issue 7,300,000 shares of preferred stock and had designated 300,000 shares of the Company’s preferred stock as “Series A preferred stock” and 7,000,000 shares as “Series B preferred stock.”

On December 22, 2003, in connection with the Company’s initial public offering, the Series A preferred stock outstanding of 221,715 shares was converted into 760,383 shares of common stock. In addition, on December 22, 2003, in connection with the Company’s initial public offering, the Series B preferred stock outstanding of 5,816,285 shares was reclassified into 2,104,853 shares of common stock.

In November 2003, the compensation committee of the Board of Directors approved a Deferred Compensation Plan which became effective in January 2004. The Deferred Compensation Plan is an unfunded non-qualified plan for the benefit of non-employee directors and certain designated management and highly compensated employees of the Company. The plan permits participants to defer receipt of certain compensation, as well as certain income for stock option exercises. In addition, the Company may elect to make a matching contribution to any or all of the participants in an amount of fifty percent (50%) of the participant’s deferred annual base salary or annual bonus, but in no event shall the matching contributions exceed ten percent (10%) of the participant’s annual base salary with respect to deferrals of base salary or ten percent (10%) of the participant’s annual bonus with respect to deferrals of annual bonus. As of June 30, 2004 and December 31, 2004, the Company had deferred compensation of $186 and $894, respectively, related to the Deferred Compensation Plan.

In November 2003, the compensation committee of the Board of Directors approved a Supplemental Executive Retirement Plan (the “SERP”) which became effective in January 2004. The SERP is an unfunded non-qualified plan for the benefit of certain non-employee directors, designated management and highly compensated employees of the Company. Participants under the SERP will be due a benefit (as defined for purposes of the SERP) upon early or normal retirement, disability, death or other termination of employment. The ordinary benefit is a benefit equal to 0.015 multiplied by the number of years of service to the Company and multiplied by the participant’s final average compensation, and reduced by amounts paid under the Deferred Compensation Plan. Amounts due under the SERP will be paid in equal installments over 15 years commencing at normal retirement (age 65). If an ordinary benefit commences prior to normal retirement, the participant will receive the actuarial equivalent of his or her vested benefit at normal retirement, generally to be paid over 15 years. The benefit for our chairman as of December 31, 2004 is $232 payable annually over 20 years commencing upon retirement. The following is a summary of our net periodic benefit cost included the following components for the three and six months ended December 31, 2004:

The SERP is an unfunded obligation of the Company in which earned plan benefits will be paid out of general operating funds as they come due. To offset the cost of the plan, the Company has purchased life insurance policies on all of the participants within the plan. The Company is the sole beneficiary on these policies. Using this structure and professional actuarial guidance, the Company anticipates that there will be no net cost over the full life of the plan.

During the three and six months ended December 31, 2004, the Company recognized a tax expense of $891 and $441, respectively, an effective tax rate of 47.5%. The high effective tax rate anticipated for the year is a result of the stock-based compensation recognized under SFAS 123. No benefit or expense was recorded during the three and six months ended December 31, 2003 due to the valuation allowance against net deferred tax assets during those periods.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution: You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included elsewhere in this report. This discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed at “Risks and Uncertainties” below. This discussion represents our current judgment on the future direction of our business. Such risks and uncertainties could cause actual results to differ materially from any future performance suggested. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

PROVIDE COMMERCE^SM, PROFLOWERS^{^®}, UPTOWN PRIME^{^®} and CHERRY MOON FARMS^SM, are trademarks or service marks of Provide Commerce, Inc. We have trademark rights in these marks in the U.S. and have registrations issued and pending in the U.S. We also have registrations issued or pending for the trademark PROFLOWERS in Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland. This report also refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective holders.

We operate an e-commerce marketplace of websites for perishable goods that consistently delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and integrated logistical relationships with FedEx and UPS to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment requirements beyond our existing technology and systems and minimal inventory carrying costs.

We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. Since inception, we have focused on developing our supply chain management technology, refining and broadening our relationships with our delivery partners, generating flower sales, establishing and promoting our brands, pursuing relationships with other retailers, and preparing to launch websites featuring additional product offerings.

We plan to assess and target additional categories based on our market platform’s ability to add value by streamlining the supply chain for the benefit of customers and suppliers. We have identified premium meat and fresh fruit as initial categories where we believe we can leverage our customer base, marketing and distribution relationships and infrastructure. In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats and seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits.

In July 2004, we completed a secondary public offering whereby 1,981,019 shares of our common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by us and an aggregate of 1,881,019 shares were sold by selling stockholders. We received net proceeds of approximately $1.3 million in connection with the secondary offering.

To date, we have derived our net sales primarily from the sale of flowers, plants and gifts from our www.proflowers.com website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. For the three months ended December 31, 2004, we reported net sales of $33.5 million, an increase of 43.8% from $23.3 million for the three months ended December 31, 2003 and net income of $1.0 million as compared to net income of $0.2 million for the three months ended December

31, 2003. For the six months ended December 31, 2004, we reported net sales of $53.4 million, an increase of 47.5% from $36.2 million for the six months ended December 31, 2003, and net income of $0.5 million as compared to a net (loss) of $(0.6) million for the six months ended December 31, 2003.

The following table sets forth our results of operations expressed as a percentage of net sales for the three and six months ended December 31, 2004, and 2003:

Our net sales are derived primarily from the sale of flowers, plants and gifts from our www.proflowers.com website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. We also generate net sales from fees that we receive from retailers for whom we design and operate websites to sell perishable products under their own brands.

The increase in net sales for the three and six months ended December 31, 2004, compared to the same period last year resulted primarily from an increases in the number of orders by new and existing customers and average order values, as shown below.

Growth in the number of new customers for the three and six months ended December 31, 2004 is a result of our advertising and marketing campaigns which are designed to attract and maintain customers. We believe continued strength in repeat orders is a result of our strong customer satisfaction and our retention marketing efforts.

In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits. We expect premium meat and fresh premium fruit net sales to grow in significance to our business as we develop and deploy our premium meat and fresh premium fruit websites. We expect that approximately 3% of our net sales will be derived from premium meats and fresh premium fruits in fiscal 2005. You must consider our prospects for expanding our premium meat and fresh premium fruit net sales during fiscal 2005 and beyond in light of the risks associated with expanding into new product categories and the other risks outlined in “Risks and Uncertainties” below.

We intend to grow our existing flower and meat, fruit and other product categories via arrangements with other branded retailers and direct marketers. We offer a variety of arrangements for branded retailers or direct marketers that want to use our market platform to offer perishable products, including a co-branded website, a private label website or a hybrid of the two. The arrangements are currently structured to involve a combination of revenue sharing and fee-based agreements. For revenue sharing agreements, we pay the retailer a portion of the revenues generated from its website. Fee-based retailer arrangements involve a combination of up-front development costs and per-transaction fees paid to us by the retailer. Our branded retailer arrangements regardless of the payment structure represent an immaterial percentage of our net sales for the three and six months ended December 31, 2004. You must consider our prospects for expanding through relationships with other branded retailers and direct marketers in light of the risks outlined in “Risks and Uncertainties” below.

Our gross profit consists of net sales less cost of sales. Our cost of sales consists primarily of flower and other product costs and shipping charges. Other costs included in cost of sales are producer and delivery supply costs, distribution facility labor costs and the cost of replacement products.

The increase in the gross margin in absolute dollars for the quarter ended December 31, 2004 compared to the same period last year was a result of the increase in net sales combined with a higher gross profit percentage. The increase in cost of sales in terms of gross dollars was principally attributable to the variable costs associated with purchasing and shipping products to our customers and packaging costs.

The increase in the gross margin in absolute dollars for the six months ended December 31, 2004 compared to the same period last year was a result of the increase in net sales combined with a higher gross profit percentage. The increase in cost of sales in terms of gross dollars was principally attributable to the variable cost associated with shipping products to our customers, the direct cost of purchasing products and packaging costs.

The increase in the gross profit percentage for the three and six months ended December 31, 2004 compared to the same periods last year was a result of reduction in shipping costs relative to net sales as a result of implementing ground delivery for many of our products. In addition, we experienced cost savings in accessory costs due to product cost savings and a more profitable product mix. These savings were partially offset by an increase in the costs of replacement products which were sent to our customers affected by severe weather conditions the week of Christmas.

We expect that our gross profit will fluctuate in the future as we expand into new product categories based upon our product mix, average order value, product costs, shipping costs, product replacement and refund rates and handling and packaging costs for the various products.

Our selling and marketing expenses consist primarily of advertising costs, payroll and payroll related benefits for our category development and marketing and customer service staff, focus groups and other marketing research and promotional expenses. Advertising costs are generally expensed as incurred. For advertising contracts which cover an extended period of time, the costs are expensed over the life of the contract based on the specifics of the contract, such as orders placed, radio spots run or Internet advertisements placed. Our advertising efforts target the acquisition of new customers and repeat orders from existing customers.

The increase in the selling and marketing expenses for the three and six months ended December 31, 2004 compared to the same periods last year was primarily due to an increase in online and offline advertising and promotional costs as a result of our marketing activities designed to generate additional net sales through increases in our number of new customers and repeat purchases by existing customers. In addition, we experienced an increase in payroll and payroll related expenses as our marketing staff headcount has increased in an effort to drive increases in net sales. We also experienced an increase in the cost of our customer service personnel as the increase in net sales has increased headcount of permanent and seasonal customer service representatives.

The decrease in selling and marketing expenses for the three months ended December 31, 2004 as a percentage of sales compared to the same period last year was primarily a result of reductions in online marketing spending and payroll and payroll related costs as a percentage of net sales. These reduced expenses were partially offset by increased spending in offline and direct mail advertising. In addition we experienced a reduction, as a percentage of net sales, in our fixed marketing and advertising costs as these costs do not increase proportionately to the increase in net sales. The increase in selling and marketing expenses for the six months ended December 31, 2004 as a percentage of net sales compared to the same period last year was primarily a result of increased costs related to offline and direct mail advertising, including increased utilization of catalogs. These costs were partially offset by a reduction, as a percentage of net sales, in our online marketing expenditures and in our fixed marketing and advertising costs as these costs do not increase proportionately to the increase in net sales.

We expect selling and marketing expenses to continue to increase in absolute dollars in the future as a result of continued expansion of our sales and marketing infrastructure in support of a broader product portfolio and expanded sales efforts. While we currently expect selling and marketing expenses to increase in absolute dollars, we expect them to remain generally comparable to prior years as a percentage of net sales for the remainder of fiscal 2005. However, as we identify opportunities to increase our growth in net sales, we may increase our marketing expense to take advantage of additional potential net sales.

Our general and administrative expenses consist primarily of payroll and payroll related benefits for our employees, except those associated with fulfillment, customer service, technology and sales and marketing employees. These expenses also include depreciation of fixed assets, facilities costs (other than facilities costs associated with cost of goods sold), credit card fees, insurance, legal and accounting and other professional fees, travel, phone, utilities, bad debt expense and other general corporate expenses.

The increase in absolute general and administrative expenses for the three months ended December 31, 2004 compared to the same period last year was primarily due to increases in expenses related to being a public company including insurance costs, legal and accounting and other professional fees, and an increase in payroll and payroll related benefits as our administrative headcount has increased to meet the demands of our growing company. In addition, we experienced an increase in variable credit card transaction fees as our sales volume has increased. These increases were partially offset by a decrease in chargeback activity from credit card transactions as we have implemented additional security features on our website to combat the use of fraudulant credit cards.

The increase in absolute general and administrative expenses for the six months ended December 31, 2004 compared to the same period last year was primarily due to increases in expenses related to being a public company, including insurance costs, legal and accounting and other professional fees, and increases in payroll and payroll related benefits and depreciation of fixed assets. The increase in payroll and payroll related benefits was a result of increasing headcount in order to support the growth of our company. The increase in depreciation was a result of investments in fixed assets to support our increased sales volumes. These increases were partially offset by a decrease in chargeback activity from credit card transactions as we have implemented additional security features on our website to combat the use of fraudulent credit cards.

The slight increase in general and administrative expenses as a percentage of net sales for the three and six months ended December 31, 2004 compared to the same periods last year was primarily a result of increases in expenses related to being a public company including insurance costs, legal and accounting and other professional fees, and increased depreciation of fixed assets necessary to support the growth in transactional volume. In addition, for the six months ended December 31, 2004 compared to last year, an increase in retirement benefit costs contributed to the increase in general and administrative expense as a percentage of net sales. For both the three and six months ended December 31, 2004, these increases were partially offset by a decrease in credit card chargeback activity from credit card transactions as we have implemented additional security features on our website to combat the use of fraudulent credit cards.

We expect general and administrative expenses to continue to increase in absolute dollars in the future as a result of continued expansion of our administrative infrastructure in support of a broader technology and product portfolio. However, we also anticipate that general and administrative expenses will decrease as a percentage of net sales as a result of net sales growing faster than general and administrative expenses, particularly in high sales volume quarters.

Our information technology systems expenses consist primarily of payroll and payroll related benefits for information technology personnel, engineering consulting expenses, and outside services, including hosting of our Internet servers. Information technology system expenses are expensed as incurred. Information technology system expenses are net of software capitalization of major site and product development efforts under Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use.

The increase in information technology costs in absolute dollars for the three and six months ended December 31, 2004 compared to the same periods last year was a result of an increase in payroll and payroll related benefits necessary to support the increase in sales volumes and the growth of the company. These costs were partially offset by an increase in the capitalized costs associated with internally developed software of approximately $290,000 and $267,000 for the three months ended December 31, 2004 and 2003, respectively, and approximately $624,000 and $513,000 for the six months ended December 31, 2004 and 2003, respectively.

The decline in information technology expense as a percentage of net sales for the three and six months ended December 31, 2004 compared to the same periods last year was caused primarily by our net sales growth, which outpaced our growth in information technology system expenses combined with capitalized information technology expenditures. We expect information technology system expenses to increase in absolute dollars for the remainder of fiscal 2005 compared to fiscal 2004 but to remain at a relatively constant percentage of net sales compared to fiscal 2004 as we continue to invest in our infrastructure to support the growth of our business.

Stock-based compensation increased during the three and six months ended December 31, 2004 compared to the same periods last year due to the amortization of compensation expense related to options granted in connection with the retention of key employees and hiring of new employees. The increase was due to both an increase in the number of options issued and a higher cost per option as a result of the increase in the market price of our common stock. As a percent of net sales, stock-based compensation decreased during the quarter ended December 31, 2004 as the increase in stock-based compensation expense was less than the increase in net sales. The increase in stock-based compensation as a percentage of net sales for the six months ended December 31, 2004, was due to significantly higher amortization during the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Prior to fiscal 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective July 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123. We selected the prospective method of adoption described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All grants prior to our adoption of SFAS No. 123 will continue to be accounted for under the intrinsic value provision of APB No. 25.

Other income, net included in the statements of operations primarily consists of interest income and interest expense.

The increase in other income, net for the three and six months ended December 31, 2004 compared to the same periods last year was a result of an increase in investment income from our cash and marketable securities following our initial and secondary public offerings and additions to cash levels generated through continuing operations. In addition, we incurred less interest expense related to our obligation under a capital lease, which lease expired in the second quarter of fiscal 2005.

The income tax expense reflects the anticipated effective tax rate for the year applied to the income before tax for the three and six months ended December 31, 2004. The high effective tax rate anticipated for the year is a result of the stock-based compensation recognized under SFAS 123. No benefit or expense was recorded during the three or six months ended December 31, 2003 due to the valuation allowance against net deferred tax assets during those periods.

The change in net income (loss) is a result of the changes in net sales and expenses as previously discussed.

Since our inception, we have financed our operations through sales of stock, and, more recently, internally generated cash flows from operations. The increases in working capital and cash and cash equivalents at December 31, 2004 over June 30, 2004 resulted primarily from working capital generated by operations of approximately $7.8 million combined with the receipt of the net proceeds of $1.4 million from our secondary public offering of common stock, completed in July 2004, reduced by the purchase of fixed assets of approximately $3.2 million.

Net cash provided by operating activities was $7.8 million for the six months ended December 31, 2004. The generation of cash from operations during the period was primarily a result of an increase in accounts payable and other accrued liabilities in combination with cash flow from revenues, less expenses, net of non-cash expenses such as depreciation and stock-based compensation. The increase in accounts payable and other current liabilities was primarily due to the increase in costs associated with increased sales activity during the period compared to the same period last year.

We use cash in investing activities primarily to purchase computer hardware and software, office equipment and furniture. Investing activities also includes the purchase and sale of marketable securities in order to provide for cash flow needs or invest excess cash. Cash used in investing activities during the six months ended December 31, 2004 was primarily a result of the purchase of fixed assets.

Net cash provided by financing activities was $2.0 million for the six months ended December 31, 2004. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business.

In July 2004, we completed a secondary public offering whereby 1,981,019 shares of our common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by us and an aggregate of 1,881,019 shares were sold by selling stockholders. We received net proceeds of approximately $1.4 million in connection with the secondary offering.

The change in marketable securities is a result of the net sales or purchases of marketable securities to meet our cash requirements or invest additional cash.

We believe that our available cash and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risks and Uncertainties” below, may cause us to seek additional debt or equity financing in the future. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those related to the timing of marketing expense, lives and depreciation of fixed assets, reserves for bad debts and credit card chargebacks, reserves for inventory and impairment of long-lived assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management believes there have been no material changes during the three and six month periods ended December 31, 2004 to the critical accounting policies reported in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2004 as filed with the Securities and Exchange Commission on September 28, 2004.

We adopted the fair-value-based method of accounting for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, we use the Black-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on July 1, 2005. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). We do not anticipate that this will have a material effect on its financial statements. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our annual consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1,556 for the six months ended December 31, 2004 and $246, $0, and $0 in fiscal years ended June 30, 2004, 2003 and 2002, respectively.

The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In addition, there may be other risks of which we are currently unaware or that we do not currently believe are material that could become important factors that harm our business, financial condition or results of operations. You should also consider the other information described in this report.

Our quarterly operating results may fluctuate significantly. You should not rely on them as an indication of our future results.

Our future net sales and results of operations may fluctuate significantly from quarter to quarter due to a combination of factors, many of which are outside of our control. The most important of these factors include:

We may be unable to adjust spending quickly enough to offset any unexpected sales shortfall resulting from any of these or other factors. If we have a shortfall in net sales in relation to our expenses, our operating results will suffer. Our operating results for any particular period may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance. In future periods, it is possible that our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to fall.

We achieved annual net income for the first time during fiscal 2003, and we cannot assure you we will continue to operate profitably.

We achieved annual net income for the first time in our corporate history during fiscal 2003 of $4.3 million and achieved annual net income attributable to common stockholders for fiscal 2004 of $18.0 million. However, we may not be able to continue to achieve positive net income in future fiscal years, especially as we introduce new product categories. We expect our operating expenses to increase in the future, as we, among other things:

After investment in items including those described above, we expect to maintain profitability for fiscal 2005 and for the foreseeable future, although no assurances can be made that we will be profitable. In order to maintain profitability as we expand into new product categories, we will need to generate net sales exceeding historical levels and/or reduce relative operating expenditures. We do not have significant experience offering product categories other than flowers. We may not be able to generate the required net sales from flowers and other perishable products or reduce operating expenses sufficiently to sustain or increase operating profitability. If we have a shortfall in net sales without a corresponding reduction to our expenses, our operating results may suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to fall.

We have operated our flower category for approximately six years and our premium meat and fresh fruit categories for approximately one year. This limited operating history makes evaluating our business and its prospects difficult.

We have a limited operating history on which an investor can evaluate our business. We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. To date, we have derived our net sales primarily from the sale of flowers, plants and gifts from our www.proflowers.com website. We began selling premium meat and fresh premium fruit in October 2003. An investor in our common stock must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving online retail markets such as these we have targeted. If we do not successfully manage these risks or successfully execute our business strategy, our business, results of operations and financial condition will be adversely affected.

Utilization of our deferred tax assets is dependent on future taxable income.

We have a federal tax net operating loss carryforwards at June 30, 2004 of approximately $25.1 million, which represents a substantial amount of our deferred tax assets. In calculating our tax provision, and assessing the likelihood that we will be able to utilize the deferred tax assets, we have considered and weighed all of the evidence, both positive and negative, and both objective and subjective. We have factored in the inherent risk of forecasting net sales and expenses over an extended period of time. We have also considered the potential risks associated with our business, as outlined in other risk factors in this report, and have taken into account material permanent differences in the treatment of net sales and expenses for purposes of financial reporting and tax accounting, such as the treatment of stock options, limitation on meals and entertainment and stock-based compensation.

Based on information available through our third quarter of fiscal 2004, and sufficient positive evidence, particularly the fact that we reported taxable income for the past three fiscal years and forecasted future book and tax income, we reversed the valuation allowance during fiscal 2004. Although we anticipate generating future taxable income, we cannot guarantee that we will generate sufficient taxable income to fully utilize our deferred tax assets.

If our customers do not find our expanded product categories appealing or if we are unable to successfully leverage our business strategy into our new product categories, our business may suffer.

We have recently expanded our product lines into other categories of perishable goods. In October 2003, we launched and are now operating two additional websites under our gourmet food business unit: Uptown Prime, offering premium meats and now premium seafood; and Cherry Moon Farms, offering fresh premium fruits. In any possible future expansion of our categories, we intend to leverage our e-commerce platform, marketing and shipping relationships and customer base to develop opportunities for us and other retailers using our platform to offer perishable products. While our market platform has been incorporated into and tested in the online floral retail market, we cannot predict whether it can be successfully applied to other perishable product categories over time. In addition, expansion of our business strategy into new product categories may require us to incur significant marketing expenses, develop relationships with new suppliers and comply with new regulations. These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:

We cannot be certain that we will be able to successfully address any or all of these challenges in a manner that will enable us to expand our business into new product categories in a cost-effective or timely manner. If our new product categories are not received favorably by consumers, our reputation and the value of the applicable new brand and our other brands could be damaged. The lack of market acceptance of our new product categories or our inability to generate satisfactory net sales from any expanded product categories to offset their cost could harm our business.

We depend on two third-party carriers, and the failure of these carriers to deliver our product offerings in a timely or accurate manner could harm our business.

We currently rely primarily on two third-party carriers, FedEx and UPS, for shipments of our products to customers. We are therefore subject to the risks, including capacity and volume constraints, security concerns, employee strikes or other labor stoppages, inclement weather, equipment failures or other delays and fluctuations in fuel costs, associated with the carriers’ ability to provide timely and cost-effective order fulfillment and delivery services to meet our distribution and shipping needs. Under our contracts with both parties, we have agreed to waive specified refunds and guarantees for service failures and for commitment times during our seasonal peak periods in exchange for favorable pricing on our shipments with them. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, our brands and our results of operations.

We re-negotiate various provisions of our agreements with FedEx and UPS on a periodic basis and are subject to possible terminations upon sixty days prior notice with FedEx and thirty days prior notice with UPS. We may face substantial increases in the cost of delivery services from our delivery partners as a result of increases in the prices of gasoline and fuel, heightened security measures or other factors. If in the future we fail to negotiate rates or other terms as favorable to us as the existing terms of our agreement, such failure will adversely affect our business and results of operations. In addition, if for any reason FedEx or UPS is unable or unwilling to deliver products to our customers in a timely manner or on acceptable terms, we may not be able to secure alternative shipping partners on acceptable terms in a timely manner, or at all.

We depend on three suppliers for approximately 50% of our flower products, and the loss of any of these suppliers could harm our business.

For the six months ended December 31, 2004, and for fiscal year 2004 we depended upon three suppliers for approximately 48.1% and 44.2 % of our flower products, respectively. If any one of these three flower suppliers were to become unable or unwilling to continue to supply flowers to our customers, our business could be harmed. We do not have long-term contracts with any of our flower suppliers for order fulfillment, and these suppliers can terminate their relationships with us at any time. If a flower supplier discontinues its relationship with us, we will be required to obtain a suitable replacement, which may cause delays in delivery or a decline in product quality, leading to customer dissatisfaction and loss of customers. We expect to encounter similar risks as we develop our premium meat and fruit and other perishable product supplier relationships.

If our marketing efforts are not effective, our brands may not achieve the broad recognition necessary to succeed.

We believe that broader recognition and a favorable consumer perception of our brands, including our Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands, are essential to our future success. Accordingly, we intend to pursue an aggressive brand-enhancement strategy through a variety of online and offline marketing and promotional techniques, involving the Internet, print, radio, email, direct mail, public relations and television. These initiatives will involve significant expense. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future net sales. Successful positioning of the Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands will largely depend on:

Due to the change in our corporate name in September 2003 and expansion of our product categories in October 2003, our ProFlowers brand is our only brand that has received broader recognition by customers who associate it with our www.proflowers.com website and the sale of flowers and floral products. To increase awareness of our new corporate name and brands and our other proposed brands and product offerings, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in net sales to cover such advertising and promotional expenses. In addition, even if brand recognition increases, the number of new customers or the number of transactions on our branded websites may not increase. Also, even if the number of new customers increases, those customers may not purchase products through our branded websites on a regular basis.

We have historically experienced seasonality in our business, which we expect to continue and which could cause our operating results to fluctuate.

We have historically experienced seasonality in our ProFlowers business due to the nature of our products, and we expect this seasonality to continue. Our net sales and earnings are generally lowest in the third calendar quarter, our first fiscal quarter. Sales of our products are highly concentrated in the first calendar quarter, due to Valentine’s Day, the second calendar quarter, due to Mother’s Day and Easter, and the fourth calendar quarter, due to the Thanksgiving and end-of-year holidays. In addition, due to variability in the date for Easter, earnings comparability between years can be impacted since Easter can occur in either the first or second calendar quarter. In anticipation of increased sales activity during these periods, we utilize a significant number of temporary employees to supplement our permanent staff. We also increase our inventory levels at our distribution facilities. If net sales during these periods do not meet our expectations, we may not generate sufficient net sales to offset these increased costs and our operating results may suffer.

In addition, our business may also be adversely affected by the particular day of the week on which certain major holidays fall. For example, because Valentine’s Day will fall on a Monday in 2005, we may experience less demand for our product related to our logistical challenges in delivering shipments on the actual date or the dates immediately prior to such holiday.

The relatively recent launch of our new branded websites targeting premium meat and fresh fruit makes it difficult for us to assess the impact of seasonal factors on our business in the future. We expect that our new product categories will also be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by our new branded websites and seasonality patterns affecting Internet use generally. For example, demand for our current and new product offerings is likely to increase during holiday periods, such as Father’s Day and Christmas, while Internet use in general may decline during the summer months. Our results may also be affected by seasonal fluctuations in the products made available to us for sale by participating suppliers. Cyclical variations for new products we plan to offer may either smooth or increase our existing seasonality. Unanticipated fluctuations in seasonality could adversely affect our operating results and cause us to miss our internal and third-party earnings projections, which could cause our stock price to decline.

We face intense competition from both traditional and online retail companies with greater brand recognition and resources, which may adversely affect our business.

The e-commerce market segments in which we currently compete are intensely competitive, and we have many competitors in different industries. Many of the products we offer can be purchased at supermarkets and warehouse stores as well as specialty markets. Our floral competitors include traditional florists, catalog and online floral providers such as Hallmark Flowers, and floral wire services such as FTD, 1-800-FLOWERS and Teleflora. In the premium meat and seafood category, we believe our competitors include specialty butchers, mail order companies, seafood specialty catalogs and other online premium meat providers, such as Omaha Steaks Company. We believe competitors in the fresh fruit category include local farmers’ markets and specialty catalog companies, such as Harry & David. Additionally, we compete with specialty food companies and general gift companies.

Competition in the e-commerce channel may intensify, especially as we expand into product categories in addition to flowers. The nature of the Internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our ability to expand our business, and thus reduce our sales and operating profits, or both.

Many of our current and potential competitors enjoy substantial competitive advantages, including:

As a result, these current and potential competitors may be able to secure merchandise from suppliers on more favorable terms, and may be able to adopt more aggressive pricing policies. Other companies in the retail and e-commerce service industries may enter into business combinations or alliances that strengthen their competitive positions. These business combinations or alliances might prevent them from also entering into relationships with us or prevent us from taking advantage of such combinations or alliances. They also may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Intense competition may lead to:

Failure to provide our customers with high-quality products and customer service may harm our brand and cause our net sales to decline.

We believe that our success in promoting and enhancing our brands will depend on our success in providing our customers high-quality products and a high level of customer service. Product orders placed by our customers are fulfilled by our third-party suppliers. We work with our suppliers to develop best practices for quality assurance; however, we do not directly or constantly control any of our suppliers. If our suppliers do not fulfill orders to our customers’ satisfaction, our customers may not shop with us again. In addition, because we do not have constant, direct control over these third-party suppliers, interruptions or delays in the products they supply may be difficult to remedy in a timely fashion. If any of our suppliers is incapable of or unwilling to fulfill our product orders, we will attempt to ship the products from another source to guarantee right-day delivery; however, we may not be able to ship the products from an alternate source in a timely manner or at all. Furthermore, we depend on our customer service department to respond to our customers should they have questions or problems with their orders. During peak periods, we also rely on temporary employees and outsourced staff to respond to customer inquiries. Temporary employees and outsourced staff may not have the same level of commitment to our customers as our full-time employees. If our customers are dissatisfied with the quality of the products or the customer service they receive, or if we are unable to deliver products to our customers in a timely manner or at all, our customers may stop purchasing products in the related category from us. Also, they may choose not to purchase products from another of our product categories, which could adversely affect our business and results of operations.

We are dependent on our strategic relationships to help promote our branded websites and expand our product offerings; if we fail to maintain or enhance these relationships, our development could be hindered.

We believe that our strategic relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers are critical to attract customers, facilitate broad market acceptance of our products and brands and enhance our sales and marketing capabilities. For example, 31.5% of our total customer orders placed in fiscal 2004 were generated from customers who linked to our website from websites operated by other retailers or Internet portal companies with whom we have a strategic relationship. A failure to maintain existing and to establish additional strategic online relationships that generate a significant amount of traffic from other websites could limit the growth of our business. Establishing and maintaining relationships with leading Internet portal companies, other online retailers, radio advertisers and direct marketers is competitive and expensive. In particular, many Internet portal companies have significantly increased their rates. We may not successfully enter into additional relationships or renew existing ones beyond their current terms. We may also be required to pay significant fees to maintain and expand existing relationships. Further, many Internet portal companies, other online retailers, radio advertisers and direct marketers that we may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our competitors. As a result, these companies may be reluctant to enter into, maintain or expand a relationship with us. Our net sales may suffer if we fail to enter into new relationships or maintain or expand existing relationships, or if these relationships do not result in traffic sufficient to justify their costs.

In addition, we are subject to many risks beyond our control that influence the success or failure of our strategic partners. For example, traffic to our branded websites could decrease if the traffic to the website of an Internet portal company on which we advertise decreases. Our business could be harmed if any of our strategic partners experience financial or operational difficulties or if they experience other corporate developments that adversely affect their performance under our agreements.

We are dependent on other retailers using our marketplace to sell perishable products to their customers. Any failure by us to recruit additional retailers to use our marketplace, or any loss of our current users, could harm our business.

We intend to grow a portion of our business and product categories through relationships with other branded retailers and direct marketers that use our platform to sell under their brands. We currently have arrangements with Martha Stewart Living Omnimedia, Albertson’s, Inc., another two Fortune 100 retailers and other retailers. Under our agreement with Martha Stewart Living Omnimedia, we use our platform to operate the floral website of Martha Stewart Living Omnimedia. Our agreement with Martha Stewart Living Omnimedia may be terminated by either party upon 120 days prior notice. Under our agreement with Albertson’s, we provide our market platform and products for Albertson’s online floral business. Our agreement with Albertson’s is for a three-year term, automatically renewable for additional one-year periods, unless prior notice is given. Our agreement with Albertson’s may be terminated by either party for specified reasons, including bankruptcy or cessation of business by the other party. It may also be terminated by the non-breaching party sixty days after notification of an uncured breach of the agreement. While we are not dependent on these agreements and while these agreements represented an immaterial percentage of our net sales in fiscal 2004 and 2003, any termination of these agreements, or failure to enter into similar agreements, could adversely affect this aspect of our business model.

If the supply of flowers or any other perishable product we offer for sale becomes limited, the price of these products could rise or these products may be unavailable and our net sales and gross margins could decline.

Many factors, such as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the price of our floral products. If the supply of flowers available for sale is limited, prices for flowers could rise, which could cause customer demand for our floral products to be reduced and our net sales and gross margins to decline. Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternate sources may be of lesser quality and/or may be more expensive than those currently offered by us. We expect that we will encounter similar risks with premium meat, fresh fruit and other perishable products as we expand our e-commerce platform into these product categories.

In the second quarter of fiscal 2005 and in fiscal 2004, 61.5% and 60.0%, respectively, of the flowers we sold were grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and we expect that this will continue in the future. We also may purchase premium meat, fresh fruit and other perishable products from suppliers in foreign countries. The availability and price of these products could be affected by a number of other factors affecting foreign suppliers, including:

If the number of customers using our satisfaction guarantee increases, our net income could decrease.

We guarantee that all of our flowers will last at least seven days and our plants at least 14 days. We offer our customers a 100% satisfaction guarantee on our floral, meat and fruit products during the relevant periods. We expect to offer a similar 100% satisfaction guarantee on our other products. If customers are not satisfied with the products they receive, we either send them a replacement product or issue a refund. If a significant number of customers request replacement products or refunds, our net income could decrease and our reputation as a provider of high-quality products could be harmed.

System interruptions, natural disasters and other unexpected problems could prevent us from fulfilling orders for our customers.

Our computer and telecommunications systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, failure in the Internet backbone service providers or Internet service providers, earthquakes, acts of war or terrorism, acts of God, human error, computer viruses, physical or electronic break-ins and similar events. Any of these events could lead to system interruptions, delays and loss of critical data, and make our websites or toll-free customer service centers inaccessible to our customers or prevent us from efficiently fulfilling orders or providing services to other retailers who rely on our market platform to assist them in operating their online businesses. For instance, in January 2004, a router failure at our Internet service provider caused two hours of degraded website response times and availability. This effect would be magnified if interruptions were to occur during one of our peak selling periods, such as Valentine’s Day or Mother’s Day. We do not have fully redundant systems in different geographical areas or a formally tested disaster recovery plan. Our business interruption insurance may be inadequate to compensate for all losses that may occur.

Despite any precautions we may take, the occurrence of a natural disaster, the closure of a hosting facility we are using without adequate notice for financial reasons or other unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications capacity could result in interruptions in our service. Any slowdown, damage to or failure of our systems could result in interruptions in our service. We cannot assure you that we will adequately, and in a timely manner, implement systems to improve the speed, security and availability of our Internet and telecommunications systems. Frequent or long service delays or interruptions in our service or disruptions during a peak holiday season will reduce our net sales and profits, and our reputation and future net sales and profits will be harmed if our customers believe that our system is unreliable.

We may not be able to increase capacity or introduce enhancements to our branded websites in a timely manner or without service interruptions.

A key element of our strategy is to generate a high volume of traffic on our branded websites. As traffic on our branded websites grows, we may not be able to accommodate all of the growth in user demand on our branded websites and in our toll-free customer service center. Our inability to add additional hardware and software to upgrade our existing technology or network infrastructure to accommodate in a timely manner increased traffic on our branded websites, in our toll-free customer service centers and increased sales volume, may cause decreased levels of customer service and satisfaction. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business, results of operations and financial condition.

We also intend to introduce additional or enhanced features and services to retain current customers and attract new customers to our branded websites. If we introduce a feature or a service that is not favorably received, our current customers may not use our branded websites as frequently, and we may not be successful in attracting new customers. We may also experience difficulties that could delay or prevent us from introducing new services and features. Furthermore, these new services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features, our business, results of operations and financial condition could be adversely affected.

We fulfill a significant portion of our flower orders through our Miami distribution facility.

We fulfilled 21.7% of our total flower orders in the six months ended December 31, 2004 and 19.4% of our total flower orders in fiscal year 2004 through our Miami distribution facility. In the future, we may be unable to fulfill our customers’ orders through the Miami distribution facility in a timely manner, or at all, due to a number of factors, including:

In the event that we are unable to fulfill our customers’ orders through the Miami distribution facility, we will attempt to re-ship the orders from another source to ensure timely delivery. However, we cannot guarantee that our other suppliers and distribution facilities will have the capacity or the variety of flowers to fulfill all orders from the Miami distribution facility or that we will be able to deliver the affected orders in a timely manner. In addition, if operations from our Miami distribution facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement distribution facility in a location on terms acceptable to us or at all. Our business and results of operations could be materially and adversely affected if we experience temporary or permanent disruptions at our Miami distribution facility.

If we fail to protect our intellectual property rights, our ability to compete could be harmed.

Protection of our intellectual property is critical to our success. Patent, trademark, copyright and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We face numerous risks in protecting our intellectual property rights, including the following:

As a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts, third parties may have violated and may in the future violate, or attempt to violate, our intellectual property rights. Infringement claims and lawsuits would likely be expensive to resolve and would require substantial management time and resources. In addition, we have not sought, and do not intend to seek, trademark, patent and other intellectual property protections in most foreign countries. In countries where we do not have such protection, businesses may use our trademarks to sell products or to develop a distribution method that incorporates our patented technology.

We may be sued by third parties for alleged infringement of their proprietary rights.

Companies that participate in the e-commerce and supply chain management industries or others may hold a large number of patents, patent applications, trademarks and copyrights. Participants in these industries are involved in

litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly technical or scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property contests, with or without merit, could be costly and time-consuming to litigate or settle, and could divert management’s attention from executing our business plan. In addition, our distribution technology may not be able to withstand any third-party claims against its use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our distribution technology to avoid infringing a third-party’s patent and could be required to temporarily or permanently discontinue using the related aspect of our technology.

Current and future governmental and industry regulations may significantly limit our business opportunities.

New laws or regulations may be enacted with respect to the Internet or existing laws may be applied or interpreted to apply to the Internet, which may decrease the growth in the use of the Internet or our branded websites. As use of the Internet continues to evolve, we expect that there will be an increasing number of laws and regulations pertaining to the Internet in the U.S. and throughout the world. These laws and 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. Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. We also may be subject to regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to the Internet could affect our ability to market our products, decrease the demand for our products, increase our costs or otherwise adversely affect our business.

We are affected by regulations applicable to the importation of flowers and the sale and handling of food items.

Our importation of certain flower offerings and our sale and handling of premium meat and fresh fruit offerings subject us to various federal, state and local government regulations, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHIS. We have designed our importation procedures and our food handling operations to comply with such regulations. However, the FDA, OSHA, USDA, APHIS or another federal, state or local food regulatory authority may require changes to our importation procedures and food sales and handling operations. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in a timely manner, or at all. Failure to make requested changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings. In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.

Various legal rules and regulations related to the collection, dissemination and security of personal information may affect our ability to solicit our customers and potential customers with emails or telephone calls and to collect or disseminate personal data about our customers.

A growing body of laws designed to protect the privacy of personally identifiable information as well as to protect against its misuse may adversely affect the growth of our business and our marketing efforts. These laws include the Federal Trade Commission Act, the Children’s Online Privacy Protection Act and Federal Trade Commission, or FTC, regulations implementing that act, the Fair Credit Reporting Act, the Gramm Leach Bliley Act and related regulations as well as other legal provisions. The FTC has the authority to protect against the misuse of consumer information by targeting companies that collect, disseminate or maintain personal information in an unfair or deceptive manner, as well as companies that fail to notify parents and obtain parental consent before collecting information from children. The FTC has conducted dozens of investigations into the privacy and security practices of companies that collect information on the Internet. The provisions of these laws and related regulations are complicated, and we do not have extensive experience in complying with them. The evolving nature of the FTC’s and other governmental bodies’ enforcement efforts, and the possibility of new laws in this area, may adversely affect our ability to collect and disseminate or share demographic and personal information from users and our ability to email or telephone users, all of which could adversely affect our marketing efforts and business. In addition, even technical violations of these laws can result in significant penalties. Given the volume of transactions we process as a consumer-focused e-commerce company, any violations of applicable privacy laws could expose us to significant liability.

Our branded websites use various “cookies” without the customer’s knowledge or consent. These cookies may or may not be saved on customer’s hard drives. We use cookies for a variety of reasons, including the collection of data derived from the customer’s Internet activity. Most currently available web browsers allow users to remove cookies at any time or to prevent cookies from being stored on their hard drive. Some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies or other data collecting tools. Any reduction or limitation in the use of cookies or other data collecting tools could limit the effectiveness of our sales and marketing efforts. We could incur expenses if new regulations concerning the use of personal information are introduced or if our privacy practices are investigated.

We depend on continued use of the Internet and growth of the online perishables retail market.

Our net sales may not grow if the Internet does not continue to grow as an accepted medium for commerce in flowers and other perishable product categories. Consumer use of the Internet as a medium for commerce, and especially commerce in perishable products, is a recent phenomenon that is subject to a level of uncertainty. A number of factors may inhibit Internet usage, including:

If use of the Internet as a medium for commerce in perishable products does not continue to grow, or grows at a slower rate than we anticipate, our sales will be lower than expected and our business will be harmed.

Our accounting and financial system is not integrated with our transaction processing system.

We use an internally developed system for substantially all aspects of transaction processing, including order management, credit card processing and shipping. Our accounting and financial system is purchased from a third-party. Because our current transaction processing system, which provides frequent operational reports, is not integrated with our accounting and financial system, we must manually input data in order to prepare information for accounting and financial reporting. This manual input of data may make it more difficult for management to obtain accurate financial statements and reporting information on a timely basis. We intend to integrate our transaction processing and accounting systems. We cannot guarantee that we will complete this integration in a fast and effective manner. Any inability to do so may have a material adverse effect on our business, financial condition and results of operations.

The secure transmission of confidential information over the Internet is essential in maintaining consumer confidence in our branded websites. Even occasional security breaches of our system or other Internet-based systems could significantly harm our business and damage our reputation. Any penetration of our network security or other misappropriation of our customer’s personal information could subject us to potential liability. We may be subject to claims based on unauthorized purchases with credit card information, or aiding and abetting identity theft or other similar fraud claims. Claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation and financial liability. We rely on licensed encryption and authentication technology to effect the secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology that we use to protect customer transaction data.

We may incur substantial expense to protect against and remedy security breaches and their consequences. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Our insurance policies’ limits may not be adequate to reimburse us for losses caused by security breaches. We cannot guarantee that our security measures will prevent security breaches.

Consumer spending on flowers and other perishable products we sell or intend to sell may vary with general economic conditions in the U.S.

Negative trends in the general economy, including trends resulting from actual or threatened military action by the U.S. and threats of terrorist attacks on the U.S. and abroad, could cause a decrease in consumer spending on flowers, premium meats, fresh fruits and perishable products in general. Also, any reduction in consumer confidence or disposable income in general may affect the demand for our products. If general economic conditions do not improve or deteriorate further and our customers have less disposable income, consumers may spend less on our products and our quarterly operating results may suffer.

Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. The Sarbanes-Oxley Act mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In particular, we expect to incur additional administrative expense and devote substantial management time as we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our independent registered public accounting firm to attest to, our internal controls. In addition, The Nasdaq National Market, on which our common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our directors and executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and executive officers, which would adversely affect our business.

We may not successfully address problems encountered in connection with any future acquisitions.

In December 1999, we purchased Flower Farm Direct, Inc. Subsequently, we amortized and wrote off approximately $9.0 million of goodwill related to the acquisition. We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our technical capabilities, complement our current products and services or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted.

We expect to continue to experience growth in the scope of our operations and the number of our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures and controls. Our future success will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:

Any failure to successfully manage our growth could distract management’s attention, and result in our failure to execute our business plan.

If we are required to collect sales and use taxes on the products we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales may decrease.

In accordance with current industry practice and our interpretation of current law, as of December 31, 2004, we did not collect sales and use taxes or other such taxes with respect to shipments of goods into states other than California, Florida, Indiana, Kansas, Massachusetts, Mississippi, Minnesota, North Carolina, New Jersey, Ohio, Pennsylvania, Tennessee, Texas and Washington. The operation of our distribution facilities, the operations of any future distribution facilities and other aspects of our evolving business may, however, result in increased sales and use tax obligations. Some states have sought or are now seeking to impose sales or other tax collection obligations on companies that engage in electronic commerce as we do. Federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, which placed a moratorium on state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on discriminatory taxes on electronic commerce. This moratorium expired in November 2003. Congress is currently debating several proposals to retain the moratorium. If no moratorium proposals are adopted, state and local governments may be free to impose new taxes on electronically purchased goods. Congress could also pass alternative proposals allowing state and local governments to impose taxes on electronic commerce. In either event, we could be required to pay past and collect future sales and use taxes in states other than those in which we already collect such taxes.

We are dependent on our management team and key employees, and the loss of any of them could harm our business.

Our success depends, in part, upon the continued availability and contributions of our senior management team, particularly William Strauss, our chief executive officer, and Abraham Wynperle, our president and chief operating officer. Important factors that could cause the loss of key personnel include:

The loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business plan.

If third parties acquire rights to use similar domain names or phone numbers or if we lose the right to use our domain names or phone numbers, our brands 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.providecommerce.com, www.proflowers.com, www.uptownprime.com or www.cherrymoonfarms.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.

The phone number that spells 1-888-FRESHEST is also important to our brand and business. While we have obtained the right to use the phone numbers 1-888-FRESHEST, 1-800-FRESHEST and 1-800-PROFLOW, as well as common toll-free “FRESHEST” and “PROFLOW” misdials, we may not be able to obtain rights to use the FRESHEST and PROFLOW phone numbers 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 “FRESHEST” or “PROFLOW” with a different prefix, these parties may also confuse our customers and impede our customer service efforts, causing lost sales and potential damage to our brands. In addition, under applicable Federal Communication Commission, or FCC, rules, ownership rights to phone numbers cannot be acquired. Accordingly, the FCC may rescind our right to use any of its phone numbers, including 1-888-FRESHEST and 1-800-PROFLOW.

If our third-party technology providers do not adequately maintain our telephone service, we may experience system failures and our business may suffer.

We are largely dependent on AT&T and SBC Pacific Bell to provide telephone service to our customer service centers. If AT&T or SBC Pacific Bell experience system failures or fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our services. Frequent or long system failures or interruptions in our service or disruptions during a peak holiday season could materially harm our business and results of operations.

If we lose our telephone service, we will be unable to operate a significant portion of our customer service. Our future success depends upon these third-party relationships because we do not have the resources to maintain telephone services without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt our operations or require us to incur significant unanticipated costs.

Our general and administrative expense would increase if we experience significant credit card fraud or fraud with respect to our bill-me-later functionality, a third party payment option similar to traditional credit cards. A failure to adequately control fraudulent credit card transactions or bill-me-later transactions would increase our general and administrative expense because we do not carry insurance against this risk. We have developed technology to help 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 or bill-me-later service provider approved payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions if we do not obtain a cardholder’s signature.

Several of the products we sell and intend to 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. We may incur significant costs in defense of product liability claims. Product liability claims often create negative publicity, which could materially damage our reputation and our brands. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur.

Health concerns relating to the consumption of beef, fruit or other food products could have a negative impact on our premium meat, fruit and related product offerings and could negatively impact our results of operations.

The success of our premium meat website and other planned perishable product offerings could be affected by health concerns related to the consumption of beef or fruit or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning e-coli, “mad cow” or “foot-and-mouth” disease. This negative publicity may adversely affect demand for our premium meat or fruit products which could materially harm our business and results of operations.

Prior to our initial public offering in December 2003, there was no public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using our shares as consideration.

We expect that the price of our common stock will fluctuate substantially.

The market price of our common stock has been, and is likely to continue to be, highly volatile. The market price may fluctuate substantially due to many factors, including:

In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of e-commerce companies have been particularly volatile, including our stock price since our initial public offering in December 2003. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.

Because of the significant stock ownership of our largest stockholder, our largest stockholder will be able to exert significant influence over us and our significant corporate decisions.

As of December 31, 2004, our largest stockholder and persons affiliated with our largest stockholder beneficially owned 34.1% of our outstanding common stock. In addition, as of the same date, our executive officers, directors and other stockholders holding more than 5% of our outstanding capital stock and their affiliates, in the aggregate, beneficially owned approximately 43.6% of our outstanding common stock. These persons, acting together, may have the ability to control our management and affairs. Our majority stockholder and persons affiliated with our majority stockholder will have the ability to exert significant influence over the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may harm the market price of our common stock by, among other things:

If our common stockholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. Certain of our directors and executive officers, including our chairman and our chief executive officer, have established programmed selling plans under Rule 10b5-1 for the purpose of effecting sales of common stock. We have also registered all shares of common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. In addition, the holders of up to 5,720,234 shares of common stock, based upon shares outstanding as of December 31, 2004 and assuming exercise of such holders’ outstanding options and warrants, will have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Our existing sources of cash and cash flows, may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations and financial condition.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

Our amended and restated certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At December 31, 2004, we did not have any balances outstanding under our bank line of credit arrangement (which we terminated in October 2003); however, the amount of outstanding debt at any time may fluctuate and we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest rates would have a material effect on our results of operations or financial condition. We derive substantially all of our net sales from sales within the U.S. We have business relationships with foreign growers and other vendors. Approximately $70,000 or 49.3% of total payments to these foreign growers and vendors for the six months ended December 31, 2004 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 50.7% of total payments to foreign vendors, the amount is less than 1% of total payments to all vendors and suppliers. Since transactions in foreign currencies are immaterial to us as a whole, we do not consider it necessary to hedge against currency risk at this time.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on their evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures were (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) effective at the reasonable assurance level to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

(a) During the quarter ended December 31, 2004, we issued the following securities to certain holders of the previously issued warrants to purchase shares of our common stock:

On October 5, 2004, we issued 105 shares of our common stock upon the cashless exercise of a previously issued warrant to purchase shares of our common stock.

On October 7, 2004, we issued 1,062 shares of our common stock upon the cashless exercise of a previously issued warrant to purchase shares of our common stock.

On October 14, 2004, we issued 106 shares of our common stock upon the cashless exercise of a previously issued warrant to purchase shares of our common stock.

On December 18, 2004, we issued 156,643 shares of our common stock upon the cashless exercise of a previously issued warrant to purchase shares of our common stock.

On December 22, 2004, we issued 10,124 shares of our common stock upon the cash exercise of a previously issued warrant to purchase shares of our common stock.

These transactions did not involve a public offering. Appropriate legends were affixed to the stock certificates, as applicable in such transactions. The shares of our common stock identified above were issued under a claim of exemption under Regulation D promulgated by the SEC, or, alternatively, under Section 4(2) of the Securities Act. We believe each transferee had adequate access to information about us to make an informed investment and each transferee is an accredited investor within the meaning of Rule 501 of Regulation D.

(b) Our initial public offering of common stock, $0.001 par value, was effected through a Registration Statement on Form S-1 (File No. 333-109009) that was declared effective by the Securities and Exchange Commission on December 16, 2003. The net offering proceeds to us, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $34.8 million. As of December 31, 2004, we have not used any of the net proceeds from the offering. We intend to use the net proceeds from the offering for: (i) sales and marketing activities; (ii) promotion of existing and future product categories; and (iii) general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no commitments with respect to any acquisition or investment.

The amounts actually expended for each of the purposes listed above and the timing of our actual expenditures will depend on numerous factors, including the status of our efforts to increase our number of relationships with other retailers to use our market platform, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We have not determined the amount or timing of expenditures in the areas listed above and will retain broad discretion in the allocation and use of the net proceeds. Pending the uses described above, we have invested the net proceeds in short-term, interest-bearing, investment-grade securities.

Our 2004 Annual Meeting of Stockholders was held on November 18, 2004. The following matters were voted upon at the meeting and were adopted by the margins indicated:

1. The stockholders elected nine directors to hold office until the 2005 Annual Meeting of Stockholders and until their successors are elected and have been qualified, or until their earlier death, resignation or removal.

2. The stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2005.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Provide Commerce, Inc.

By:		/s/ Rex E. Bosen
		Rex E. Bosen
		Vice President, Finance and Accounting and Principal Financial Officer


Delaware		84-1450019
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

5005 Wateridge Vista Drive San Diego, CA		92121
(Address of Principal Executive Offices)		(Zip Code)



COVER PAGE

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	ITEM 1.	Financial Statements (unaudited)	1

	Balance Sheets as of December 31, 2004 and June 30, 2004		2

	Statements of Operations for the three and six months ended December 31, 2004 and 2003		3

	Statements of Cash Flows for the six months ended December 31, 2004 and 2003		4

	Notes to Financial Statements		5

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	32

	ITEM 4.	Controls and Procedures	33

PART II. OTHER INFORMATION			34

	ITEM 1.	Legal Proceedings *	34

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

	ITEM 3.	Defaults upon Senior Securities *	34

	ITEM 4.	Submission of Matters to a Vote of Security Holders	35

	ITEM 5.	Other Information *	35

	ITEM 6.	Exhibits	35

SIGNATURE			37


	December 31, 2004			June 30, 2004
Assets
Current assets:
Cash and cash equivalents	$	25,681		$	18,210
Marketable securities		40,272			41,218
Accounts receivable, net of allowance for doubtful accounts of $60 and $105 at December 31, 2004 and June 30, 2004, respectively		970			1,372
Inventory, net		1,745			1,343
Prepaid expenses and other current assets		1,313			652
Deferred tax assets		4,558			4,482

Total current assets		74,539			67,277

Property and equipment, net		6,590			4,626
Deferred tax assets		6,334			5,953
Other assets		2,349			2,369

Total assets	$	89,812		$	80,225

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	17,615		$	13,010
Accrued compensation		2,261			2,812
Income tax payable		—			943
Deferred revenue		532			325
Current portion of capital lease		—			48

Total current liabilities		20,408			17,138

Accrued pension costs		772			576
Deferred compensation		894			186

Commitments

Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at December 31, 2004 and June 30, 2004.		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized, 12,151,581 shares and 11,665,913 shares issued and outstanding at December 31, 2004 and June 30, 2004, respectively.		12			12
Additional paid-in capital		101,397			95,974
Deferred stock-based compensation		(3,076	)		(2,663	)
Accumulated other comprehensive loss		(137	)		(53	)
Accumulated deficit		(30,458	)		(30,945	)

Total stockholders’ equity		67,738			62,325

Total liabilities and stockholders’ equity	$	89,812		$	80,225


	Three Months Ended December 31,				Six Months Ended December 31,
	2004		2003		2004		2003
Net sales	$	33,458	$	23,278	$	53,379	$	36,228
Cost of sales		17,833		13,110		28,441		20,445

Gross profit		15,625		10,168		24,938		15,783

Operating expenses:
Selling and marketing		7,529		5,308		12,418		8,123
General and administrative		4,565		3,127		8,440		5,676
Information technology systems		1,217		1,020		2,356		1,832
Stock-based compensation		752		569		1,378		757

Total operating expenses		14,063		10,024		24,592		16,388

Operating income (loss)		1,562		144		346		(605	)
Other income, net		313		26		582		38

Income (loss) before income tax		1,875		170		928		(567	)
Income tax provision		891		—		441		—

Net income (loss)		984		170		487		(567	)
Preferred stock dividend		—		—		—		(1,500	)

Net income (loss) attributable to common stockholders	$	984	$	170	$	487	$	(2,067	)

Net income (loss) per common share:
Basic	$	0.08	$	0.03	$	0.04	$	(0.33	)
Diluted	$	0.07	$	0.01	$	0.04	$	(0.33	)

Weighted average common shares outstanding:
Basic		11,965,133		6,738,803		11,905,417		6,270,108

Diluted		13,813,430		11,365,470		13,618,705		6,270,108

Stock-based compensation is allocated as follows:
Cost of sales	$	5	$	—	$	10	$	—
Selling and marketing		278		220		494		324
General and administrative		360		312		681		381
Information technology systems		109		37		193		52

Total stock-based compensation	$	752	$	569	$	1,378	$	757


	Six months ended December 31,
	2004			2003
Operating activities:
Net income (loss)	$	487		$	(567	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		1,275			749
Stock-based compensation		1,378			757
Tax benefit from the exercise of stock options		1,556			—
Non-cash interest expense in connection with issuance of warrants for line of credit		—			24
Changes in operating assets and liabilities:
Accounts receivable		401			(64	)
Inventory		(402	)		(38	)
Prepaid expenses and other current assets		(427	)		15
Accounts payable and other accrued liabilities		4,605			5,189
Accrued compensation		(551	)		(642	)
Accrued pension costs		196			—
Deferred compensation		709			—
Deferred revenue		208			196
Accrued and deferred income taxes		(1,633	)		—
Other assets		20			(27	)

Net cash provided by operating activities		7,822			5,592

Investing activities:
Purchases of property and equipment		(3,239	)		(1,584	)
Proceeds from note receivable		—			27
Purchases of marketable securities		(20,614	)		—
Sales/maturities of marketable securities		21,475			—

Net cash used in investing activities		(2,378	)		(1,557	)

Financing activities:
Payment of long-term debt and capital lease obligations		(48	)		(61	)
Common stock issued in connection with public offerings		1,353			34,592
Dividend paid to preferred stockholders		—			(1,500	)
Proceeds from exercise of common stock options and warrants		722			101

Net cash provided by financing activities		2,027			33,132

Net increase in cash and cash equivalents		7,471			37,167
Cash and cash equivalents at beginning of the period		18,210			11,496

Cash and cash equivalents at end of the period	$	25,681		$	48,663

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1		$	4
Income taxes	$	517		$	335

Non-cash financing activities:
Stock-based compensation associated with employee and consultant stock options	$	1,378		$	757
Conversion of preferred stock to common stock in connection with initial public offering	$	—		$	6
Tax benefit from the exercise of stock options	$	1,556		$	—
Unrealized gain (loss) on marketable securities	$	(84	)	$	—


	Three months ended December 31,					Six months ended December 31,
	2004		2003			2004		2003
Numerator
Net income (loss)	$	984	$	170		$	487	$	(567	)
Preferred stock dividends		—		—			—		(1,500	)

Net income (loss) attributable to common stockholders	$	984	$	170		$	487	$	(2,067	)


Denominator
Basic:
Weighted average common shares outstanding		11,965		6,750			11,906		6,283
Less: Weighted average shares subject to repurchase		—		(11	)		—		(13	)

Denominator on basic calculation		11,965		6,739			11,906		6,270

Basic net income (loss) per common share	$	0.08	$	0.03		$	0.04	$	(0.33	)

Diluted:
Weighted average common shares outstanding		11,965		6,739			11,906		6,270
Weighted average dilutive effect of convertible Series A preferred stock		—		636			—		—
Weighted average dilutive effect of convertible Series B preferred stock		—		1,707			—		—
Weighted average dilutive effect of warrants		388		721			367		—
Weighted average dilutive effect of common stock options		1,460		1,563			1,346		—

Denominator on diluted calculation		13,813		11,366			13,619		6,270

Diluted net income (loss) per common share	$	0.07	$	0.01		$	0.04	$	(0.33	)


		Six months ended December 31, 2003
Options to purchase common stock		2,217
Warrants to purchase common stock		975

Total		3,192


	Three Months Ended December 31, 2004		Six Months Ended December 31, 2004
Service Cost	$	73	$	147
Interest Cost		16		32
Amortization		9		17

Net periodic benefit cost	$	98	$	196


	December 31, 2004		June 30, 2004		% Increase (Decrease)
	(In millions, except percentages)
Working capital	$	54.1	$	50.1	8.0	%
Cash and cash equivalents	$	25.7	$	18.2	41.1	%
Marketable securities	$	40.3	$	41.2	(2.2	)%


Name of Director Elected:	Number of Shares For:	Number of Shares Withheld:
Joel T. Citron	11,242,033	147,150
David E. R. Dangoor	11,144,715	244,468
Joseph P. Kennedy	11,285,933	103,250
Arthur B. Laffer	11,228,033	161,150
Peter J. McLaughlin	11,144,615	244,568
James M. Myers	11,284,521	104,662
Jordanna Schutz	11,240,412	148,771
Marilyn R. Seymann	11,246,121	143,062
William Strauss	11,242,033	147,150


Exhibit 3.1	(1)	Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.4).

Exhibit 3.2	(1)	Bylaws of the Company, as amended (Filed as Exhibit 3.6).

Exhibit 4.1	(1)	Specimen stock certificate for shares of Common Stock of the Company (Filed as Exhibit 4.2).

Exhibit 4.2	(1)	Investors’ Rights Agreement, dated December 29, 1999 by and among us and the parties named therein (Filed as Exhibit 10.3).

Exhibit 4.3	(1)	Amendment Number One to the Investors’ Rights Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.5).

Exhibit 4.4	(1)	Amendment No. 1 to the Investors’ Rights Agreement, dated May 18, 2000 by and among us and parties named therein (Filed as Exhibit 10.6).

Exhibit 4.5	(1)	Amended and Restated Stockholders Agreement, dated December 29, 1999, by and among us and parties named therein (Filed as Exhibit 10.4).

Exhibit 4.6	(1)	Amendment Number One to the Amended and Restated Stockholders Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.7).

Exhibit 4.7	(1)	Amendment Number Two to the Amended and Restated Stockholders Agreement, dated August 11, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).

Exhibit 4.8	(1)	Amendment Number Three to the Amended and Restated Stockholders Agreement, dated June 25, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).



Exhibit 10.45†		FedEx Pricing Agreement Amendment, dated November 11, 2004, between us and Federal Express Corporation and FedEx Ground Package System, Inc.

Exhibit 10.46†		Carrier Agreement, dated December 10, 2004, between us and United Parcel Service Inc.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	Three Months Ended December 31,						Six Months Ended December 31,
	2004		2003		% Increase (Decrease)		2004		2003		% Increase (Decrease)
	(in thousands, except percentages and average order values)
Database of customers at period end		3,400		2,400	41.7	%		3,400		2,400	41.7	%
Orders placed by existing customers		431		301	43.2	%		701		465	50.8	%
Revenue from repeat orders	$	20,600	$	13,100	57.3	%	$	33,600	$	21,100	59.2	%
New customers		202		162	24.7	%		319		253	26.1	%
Average order value	$	45.33	$	44.79	1.2	%	$	45.95	$	45.50	1.0	%