AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21,JULY 12, 1999
REGISTRATION NO. 333-333-78985
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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1-800-FLOWERS.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 5992 11-3117311
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
(516) 237-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JAMES F. MCCANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1-800-FLOWERS.COM, INC.
1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
(516) 237-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
ALEXANDER D. LYNCH, ESQ. PAUL P. BROUNTAS, ESQ.
KENNETH R. MCVAY, ESQ. BRENT B. SILER, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47TH FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
Class A common stock, par value $.01 per share.................. $150,000,000 $41,700
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED MAY 21, 1999.
LOGO
SHARES
1-800-FLOWERS.COM, INC.
CLASS A COMMON STOCK
------------------
This is an initial public offering of shares of class A common stock of
1-800-FLOWERS.COM, Inc. All of the shares of class A common stock are
being sold by 1-800-FLOWERS.COM. 1-800-FLOWERS.COM anticipates that the initial
public offering price will be between $ and $ per share.
Prior to this offering, there has been no public market for the class A
common stock. Application has been made for quotation of the class A common
stock on the Nasdaq National Market under the symbol "FLWS".
1-800-FLOWERS.COM has two classes of common stock: class A common stock and
class B common stock. Holders of class A common stock generally have the same
rights as holders of class B common stock, except that holders of class A common
stock have one vote per share, while holders of class B common stock have 10
votes per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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PER SHARE TOTAL
----------- ---------
Initial public offering price................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to 1-800-FLOWERS.COM.............. $ $
The underwriters may, subject to the terms of the underwriting agreement,
purchase up to an additional shares of class A common stock from
1-800-FLOWERS.COM at the initial public offering price less the underwriting
discount.
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The underwriters expect to deliver the shares of class A common stock
against payment in New York, New York on , 1999.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
WIT CAPITAL CORPORATION
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Prospectus dated , 1999.
[GRAPHICS]
2
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED,
REFERENCES IN THIS PROSPECTUS TO "1-800-FLOWERS.COM", "WE", "US" AND "OUR" REFER
TO 1-800-FLOWERS.COM, INC. AND ITS SUBSIDIARIES.
1-800-FLOWERS.COM, INC.
OUR BUSINESS
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products
and gifts. With the development of our online business and a strategic
acquisition, we have continuously expanded our product offerings, most recently
to include home and garden merchandise. As a result, we have developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption.
We believe the 1-800-FLOWERS brand is one of the most recognized brands in
the floral industry. We believe our brand is characterized by convenience,
high-quality products, a broad selection of merchandise and superior customer
service.
We provide our customers the choice of purchasing our products online, by
calling us toll-free or by visiting our owned or franchised retail stores. We
were one of the first companies to market products online through CompuServe and
America Online. In 1995, we opened our own Web site and since then have expanded
our Internet presence through strategic online relationships, including AOL and
Microsoft Network.
The Internet is our fastest growing sales channel. For the nine months ended
March 28, 1999, online revenues were $30.2 million, representing an 85.3%
increase over the same period in the previous fiscal year.
We offer more than 1,500 varieties of fresh-cut and seasonal flowers, plants
and floral arrangements and more than 6,000 SKUs of gifts and home and garden
products, including gift baskets, gourmet foods, garden accessories and casual
lifestyle furnishings. We are committed to providing our individual and
corporate customers the best possible shopping experience through superior
service and a 100% satisfaction guarantee.
We believe we have been and continue to be a leader in implementing
integrated technologies and systems that support our online and telephonic sales
channels and our fulfillment operations. We have implemented a common
transaction processing system and a centrally managed telecommunications network
that can serve as a platform for future growth.
Because many of our products must be handled delicately and delivered
promptly to ensure customer satisfaction and freshness, we have developed
significant expertise in fulfilling our customers' orders reliably, quickly and
cost-effectively. We fulfill our products through our network of approximately
1,500 local florists, our owned or franchised stores, third party suppliers and
our advanced fulfillment center.
As of December 31, 1998, we had sold our products to more than 6.7 million
customers, of which 2.7 million had made a purchase from us in the previous
twelve months. Our total net revenues for the nine months ended March 28, 1999
were $203.7 million.
In May 1999, we completed a private placement of preferred stock yielding us
net proceeds of $102.6 million. The investors include Benchmark Capital Partners
and SOFTBANK America Inc., both leading Internet-focused investment firms, and
Forum Holding BV, an affiliate of LVMH Moet Hennessey Louis Vuitton S.A.
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OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers, gifts and
products for the home and garden. We intend to meet this objective by:
- aggressively extending our brand from flowers and gifts to home and garden
products;
- expanding our offerings of gifts and home and garden products;
- strengthening our customer relationships through enhanced content,
features and personalization of our Web site;
- increasing the number of customers placing orders through our Web site;
- continuing to upgrade our technology infrastructure; and
- continuing to improve our fulfillment capabilities.
OUR OFFICES
Our headquarters are located at 1600 Stewart Avenue, Westbury, New York
11590 and our telephone number is (516) 237-6000. Our Web site address is
WWW.1800FLOWERS.COM. The information on our Web site is not a part of this
prospectus.
OUR TRADEMARKS
We have applied for or received trademark and/or service mark registration
for, among others, the marks "1-800-FLOWERS.COM", "1-800-FLOWERS", and "Plow &
Hearth". All other trademarks and service marks used in this prospectus are the
property of their respective owners.
4
THE OFFERING
Shares offered by 1-800-FLOWERS.COM........... shares of class A common stock
Shares to be outstanding after this
offering.................................... shares of class A common stock
shares of class B common stock
Proposed Nasdaq National Market symbol........ FLWS
Use of proceeds............................... To repay existing debt, redeem outstanding
stock and stock options, fund our marketing
activities, enhance our infrastructure, enter
into strategic online relationships, expand
our product offerings and for other general
corporate purposes.
The number of shares to be outstanding after this offering excludes:
- shares of class B common stock subject to options outstanding as of
, 1999 at a weighted average exercise price of $ per share;
- additional shares of class A common stock that could be issued under
our stock option plan; and
- shares of class A common stock issuable upon the exercise of
outstanding warrants at a nominal exercise price.
Holders of class A common stock generally have the same rights as the
holders of class B common stock, except that holders of class A common stock
have one vote per share and holders of class B common stock have 10 votes per
share on all matters submitted to the vote of stockholders. Holders of class A
common stock and class B common stock generally vote together as a single class
on all matters presented to the stockholders for their vote or approval, except
as may be required by Delaware law. Class B common stock may be converted into
class A common stock at any time on a one-for-one basis and each share of class
B common stock will automatically convert into one share of class A common stock
upon its transfer, with limited exceptions. After this offering, James F.
McCann, our Chairman and Chief Executive Officer, will control % of the
combined voting power of the common stock.
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EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS THE RECAPITALIZATION OF OUR COMMON STOCK EFFECTED IN 1999;
- REFLECTS A -FOR-1 STOCK SPLIT OF OUR CLASS A AND B COMMON STOCK TO BE
EFFECTED PRIOR TO CONSUMMATION OF THIS OFFERING; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated statement of operations and
balance sheet data. We acquired The Plow & Hearth, Inc. in April 1998 and the
financial data reflect the results of operations of this subsidiary since its
date of acquisition. You should read this information together with the
discussion in "Management's Discussion and Analysis of Financial Condition and
Result of Operations" and our consolidated financial statements and notes to
those statements included elsewhere in this prospectus.
YEAR ENDED NINE MONTHS ENDED
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JUNE 30, JULY 2, JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................... $ 91,663 $ 116,807 $ 153,128 $ 186,430 $ 220,592 $ 146,217 $ 203,668
Gross profit................................... 38,195 52,150 60,308 71,352 83,626 54,444 79,930
Operating income (loss)........................ 831 1,561 2,702 6,852 6,415 2,144 (9,052)
Net income (loss) applicable to common
stockholders................................. 638 837 268 2,925 3,466 1,190 (8,682)
Net income (loss) per common share applicable
to common stockholders:
Basic........................................ $ 0.13 $ 0.17 $ 0.06 $ 0.66 $ 0.79 $ 0.27 $ (1.97)
Diluted...................................... 0.13 0.17 0.05 0.63 0.74 0.25 (1.97)
Shares used in the calculation of net income
(loss) per common share:
Basic........................................ 4,853 4,860 4,705 4,414 4,412 4,414 4,400
Diluted...................................... 4,853 4,978 4,942 4,674 4,661 4,675 4,400
The following summary balance sheet data as of March 28, 1999 is presented:
- on an actual basis;
- on a pro forma basis after giving effect to the 1999
recapitalization, the May 1999 private placement and the use of the
proceeds therefrom to redeem all outstanding class C common stock; and
- on a pro forma as adjusted basis to reflect our sale of shares of class A
common stock in this offering at an assumed initial public offering price
of $ per share, after deducting the underwriting discount and
estimated offering expenses, and the use of a portion of the proceeds to
repay existing debt and redeem outstanding stock and stock options.
AS OF MARCH 28, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents......................................................... $ 2,632
Working capital (deficit).................................................... (9,490)
Total assets................................................................. 86,599
Long-term liabilities........................................................ 38,640
Redeemable class C common stock.............................................. 19,020
Total stockholders' equity (deficit)......................................... (7,919)
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The summary unaudited pro forma combined financial data set forth below give
effect to our acquisition of Plow & Hearth in April 1998 as if the acquisition
had been consummated at the beginning of the respective periods. The data for
the nine months ended March 28, 1999 is actual, reflecting the operations of
Plow & Hearth for the entire period, and is provided for comparative purposes.
The summary unaudited pro forma combined financial data do not purport to be
indicative of future operations and should not be construed as representative of
future operations.
NINE MONTHS ENDED
YEAR ENDED --------------------------------
JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues................................................... $ 257,747 $ 183,372 $ 203,668
Gross profit................................................... 100,663 71,481 79,930
Operating income (loss)........................................ 5,488 1,217 (9,052)
Net income (loss) applicable to common stockholders............ 1,856 (420) (8,682)
Net income (loss) per common share applicable to common
stockholders:
Basic........................................................ $ 0.42 $ (0.10) $ (1.97)
Diluted...................................................... 0.40 (0.10) (1.97)
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 4,412 4,414 4,400
Diluted...................................................... 4,661 4,414 4,400
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RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR CLASS A COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT CASE, THE TRADING PRICE OF
OUR CLASS A COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE
We expect to incur significant operating and capital expenditures in order
to:
- expand the 1-800-FLOWERS.COM brand through marketing and other promotional
activities;
- enter into strategic online relationships;
- increase the number of products we offer; and
- enhance our technological infrastructure and fulfillment capabilities.
Although we have been profitable in the past, we expect to incur losses for
the foreseeable future as a result of these expenditures. In order to achieve
and maintain profitability, we will need to generate revenues significantly
above historical levels. We cannot assure you that we will achieve sufficient
revenues for profitability. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS
Our future revenues and results of operations may fluctuate significantly
due to a combination of factors, many of which are outside of our control. We
may be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If we have a shortfall in revenue in relation to our expenses, our
operating results will suffer. Our operating results for any particular quarter
may not be indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that, in future periods, our results of
operations may be below the expectations of public market analysts and
investors. This could cause the trading price of our class A common stock to
fall.
Consumer spending on flowers, gifts and other products we sell may vary with
general economic conditions. If general economic conditions deteriorate and our
customers have less disposable income, consumers will likely spend less on our
products and our quarterly operating results will suffer.
For a discussion of other factors that may affect our quarterly results, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-- Quarterly Results of Operations".
OUR OPERATING RESULTS WILL SUFFER IF SALES DURING OUR PEAK SEASONS DO NOT MEET
OUR EXPECTATIONS
Sales of our products are seasonal, concentrated in the second calendar
quarter, due to Mother's Day, Easter and graduations, and the fourth calendar
quarter, due to the Thanksgiving and Christmas holidays. In anticipation of
increased sales activity during these periods, we hire a significant number of
temporary employees to supplement our permanent staff and we significantly
increase our inventory levels. If sales during these periods do not meet our
expectations, we may not generate sufficient revenue to offset these increased
costs and our operating results will suffer.
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IF OUR CUSTOMERS DO NOT FIND OUR EXPANDED PRODUCT LINES APPEALING, OUR BUSINESS
WILL SUFFER
Our business historically has focused on offering floral and gift products.
We have expanded our product lines in the gift, home and garden categories,
particularly with our acquisition of Plow & Hearth in April 1998, and we expect
to incur significant costs in marketing these new products. If our customers do
not find our expanded product lines appealing, we may not generate sufficient
revenue to offset their related costs and our business will suffer.
IF WE FAIL TO DEVELOP AND MAINTAIN OUR BRAND, WE WILL NOT INCREASE OR MAINTAIN
OUR CUSTOMER BASE OR OUR REVENUES
We must develop and maintain the 1-800-FLOWERS.COM brand to expand our
customer base and our revenues. In addition, we may introduce or acquire other
brands in the future. We believe that the importance of brand recognition will
increase as we expand our product offerings. Many of our customers may not be
aware of the non-floral products we offer. We intend to substantially increase
our expenditures for creating and maintaining brand loyalty and raising
awareness of our additional product offerings. However, if we fail to advertise
and market our products effectively, we may not succeed in establishing our
brands and our business will suffer.
Our success in promoting and enhancing the 1-800-FLOWERS.COM brand will also
depend on our success in providing our customers high-quality products and a
high level of customer service. If our customers do not perceive our products
and services to be of high quality, the value of the 1-800-FLOWERS.COM brand
would be diminished.
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC ONLINE RELATIONSHIPS THAT GENERATE
A SIGNIFICANT AMOUNT OF TRAFFIC COULD LIMIT THE GROWTH OF OUR BUSINESS
A significant portion of our online customers purchase our products at our
AOL online store or come to our Web site from third party Web sites with which
we have strategic relationships, including AOL.com and the Microsoft Network. If
these third-party sites do not attract a significant number of visitors, we will
not receive a significant number of online customers from these relationships
and our business will suffer. In addition, we plan to enter into more of these
relationships and we may pay significant fees to do so. We may also be required
to pay significant fees to maintain and expand existing relationships. Our
business will suffer if we fail to enter into new relationships or maintain
existing relationships or if these relationships do not result in traffic
sufficient to justify their cost.
IF LOCAL FLORISTS AND OTHER THIRD-PARTY VENDORS DO NOT FULFILL ORDERS TO OUR
CUSTOMERS' SATISFACTION, OUR BUSINESS WILL SUFFER
Floral orders placed by our customers are fulfilled by local florists, most
of which are either part of our BloomNet network of approximately 1,500 florists
or are stores that we own or franchise. Except for the stores we own, we do not
directly control any of these florists. In addition, many of the non-floral
products we sell are manufactured and delivered to our customers by independent
third-party vendors. If customers are dissatisfied with the performance of the
local florist or other third-party vendors, they may not utilize our services
when placing future orders and our business may suffer.
Many of our arrangements with local florists for order fulfillment are not
formalized in writing. Of those relationships which have been formalized in
writing, most may be terminated with 10 days notice. If a florist discontinues
its relationship with us, we will be required to obtain a suitable replacement
located in the same area, which may cause delays in delivery or a decline in
quality, leading to customer dissatisfaction.
We offer our customers a 100% satisfaction guarantee on our products. If
customers are not satisfied with the products they receive, we will either send
the customer another product or issue the customer a refund
9
or a credit. Our business could suffer if a significant number of customers
request replacement products, refunds or credits.
INCREASED SHIPPING COSTS AND LABOR STOPPAGES MAY ADVERSELY AFFECT SALES OF OUR
NON-FLORAL PRODUCTS
Our non-floral products are delivered to customers either directly from the
manufacturer or from our warehouse in Virginia. We have established
relationships with the United States Postal Service, Federal Express, United
Parcel Service and other common carriers for the delivery of these products. If
these carriers were to raise the prices they charge to ship our goods, our
customers might choose to buy comparable products locally to avoid shipping
charges. In addition, these carriers may experience labor stoppages, which could
impact our ability to deliver products on a timely basis to our customers and
adversely affect our customer relationships.
IF WE FAIL TO CONTINUOUSLY IMPROVE OUR WEB SITE, WE WILL NOT ATTRACT OR RETAIN
CUSTOMERS
If our potential or existing customers do not find our Web site a convenient
place to shop, we will not attract or retain customers and our sales will
suffer. To encourage the use of our Web site, we must continuously improve its
accessibility, content and ease of use. If our competitors' Web sites are
perceived as easier to use or better able to satisfy customer needs, our
customer traffic and our business would be adversely affected.
COMPETITION COULD HARM OUR BUSINESS
There are many companies that offer products in the floral, gift and home
and garden categories. In the floral category, our competitors include:
- retail floral shops, some of which maintain toll-free telephone numbers;
- online floral retailers;
- catalog companies that offer floral products;
- floral telemarketers and wire services; and
- supermarkets and mass merchants with floral departments.
Similarly, the gift, home and garden categories are highly competitive. Each
of these categories encompasses a wide range of products and is highly
fragmented. Products in these categories may be purchased from a number of
outlets, including mass merchants, retail specialty shops, online retailers and
mail-order catalogs.
Competition is intense and we expect it to increase. Increased competition
could result in:
- price reductions, decreased revenue and lower profit margins;
- loss of market share; and
- increased marketing expenditures.
These and other competitive factors could materially and adversely affect our
business.
IF WE DO NOT ACCURATELY ASSESS CUSTOMER RESPONSE TO OUR PRODUCTS, OUR BUSINESS
MAY SUFFER
In the past, we did not need to maintain significant inventory of products.
However, as the volume of non-floral products we offer has expanded, we intend
to increase inventory levels and the number of products maintained in our
warehouses. Because we have limited experience offering many of our non-floral
products through our Web site, we may not predict inventory levels accurately.
If we overestimate customer demand for our products, excess inventory and
outdated merchandise could accumulate, tying up working capital and potentially
resulting in reduced warehouse capacity and inventory losses due to damage,
theft and obsolescence. If we underestimate customer demand, we will disappoint
customers who may turn to our competitors. Moreover, the strength of the
1-800-FLOWERS.COM brand could be diminished due to misjudgments in merchandise
selection.
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IF THE SUPPLY OF FLOWERS FOR SALE BECOMES LIMITED, THE PRICE OF FLOWERS WILL
RISE OR FLOWERS MAY BE UNAVAILABLE
A variety of factors affect the supply of flowers in the United States and
the price of our floral products. If the supply of flowers available for sale is
limited due to weather conditions or other factors, prices for flowers will
likely rise and customer demand for our floral products may be reduced.
Alternatively, we may not be able to obtain high quality flowers in an amount
sufficient to meet customer demand. Even if available, flowers from alternative
sources may be of lesser quality and/or may be more expensive than those
currently offered by us.
Most of the flowers sold in the United
States are grown by farmers located abroad, primarily in Colombia, Ecuador and
Holland, and we expect that this will continue in the future. The availability
and price of flowers could be affected by a number of factors affecting these
regions, including:
- import duties and quotas;
- agricultural limitations and restrictions to manage pests and disease;
- changes in trading status;
- economic uncertainties and currency fluctuations;
- severe weather;
- work stoppages;
- foreign government regulations and political unrest; and
- trade restrictions, including United States retaliation against foreign
trade practices.
A FAILURE TO MANAGE OUR INTERNAL OPERATING AND FINANCIAL FUNCTIONS COULD
ADVERSELY AFFECT OUR BUSINESS
Our expansion efforts have significantly strained our operational and
financial systems. To accommodate our growth, we recently implemented new or
upgraded operating and financial systems, procedures and controls. Any failure
to integrate these initiatives in an efficient manner could adversely affect our
business. In addition, our systems, procedures and controls may prove to be
inadequate to support our future operations.
OUR FRANCHISEES MAY DAMAGE OUR BRAND OR INCREASE OUR COSTS
As of March 28, 1999, we franchised 87 flower shops through 54 franchisees.
Our franchise business is governed by our Uniform Franchise Offering Circular,
franchise agreements and applicable franchise law. If our franchisees do not
comply with our established operating standards or the terms of the franchise
agreements, the 1-800-
FLOWERS.COM brand may be damaged. We may incur significant additional costs,
including time-consuming and expensive litigation, to enforce our rights under
the franchise agreements. Additionally, we are the primary tenant on 56 leases,
which the franchisees sublease from us. If a franchisee fails to meet its
obligations as subtenant, we could incur significant costs to avoid a default
under the primary lease. Furthermore, as a franchisor we have obligations to our
franchisees. Franchisees may challenge the performance of our obligations under
the franchise agreements and subject us to costs in defending these claims and,
if the claims are successful, costs in connection with their compliance.
IF THIRD PARTIES ACQUIRE RIGHTS TO USE SIMILAR DOMAIN NAMES OR PHONE NUMBERS OR
IF WE LOSE THE RIGHT TO USE OUR PHONE NUMBERS, OUR BRAND MAY BE DAMAGED AND WE
MAY LOSE SALES
Our Internet domain names are an important aspect of our brand recognition.
We cannot practically acquire rights to all domain names similar to
WWW.1800FLOWERS.COM. If third parties obtain rights to similar domain names,
these third parties may confuse our customers and cause our customers to
inadvertently place orders with these third parties, which would result in lost
sales for us and could damage our brand.
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Likewise, the phone number that spells 1-800-FLOWERS is important to our
brand and our business. While we have obtained the right to use the phone
numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common
"FLOWERS" misdials, we may not be able to obtain rights to use the FLOWERS phone
number as new toll-free prefixes are issued, or the rights to all similar and
potentially confusing numbers. If third parties obtain the phone number which
spells "FLOWERS" with a different prefix or a toll-free number similar to
FLOWERS, these parties may also confuse our customers and cause lost sales for
us and potential damage to our brand. In addition, under applicable FCC rules,
ownership rights to telephone numbers cannot be acquired. Accordingly, the FCC
may rescind our right to use any of our phone numbers, including 1-800-FLOWERS.
IF WE DO NOT CONTINUE TO RECEIVE REBATES FROM WIRE SERVICES, OUR RESULTS OF
OPERATIONS COULD SUFFER
We have entered into arrangements with independent wire service companies
that provide us with rebates when we transmit our customers' floral orders to a
local florist utilizing their service. One of these arrangements expires June
30, 1999. If we cannot renew these arrangements or enter similar arrangements on
commercially reasonable terms, our results of operations could suffer. In
addition, these companies may eliminate or modify the rebate structure they have
in place with us. Any adverse modification to these rebate structures could also
cause our results of operations to suffer.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD
A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
IF WE ARE UNABLE TO INTEGRATE ANY ACQUIRED BUSINESS, OUR OPERATIONS MAY BE
DISRUPTED
We have acquired complementary businesses and may continue to do so in the
future. We are currently in the process of integrating the Web site, operations,
systems and personnel of Plow & Hearth. If we are unable to fully integrate Plow
& Hearth or any future acquisition, our business and operations could suffer,
our management will be distracted and our expenses may increase.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY
OUR BUSINESS WILL SUFFER IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR
COMMERCE
We expect to derive an increasing amount of our revenue from electronic
commerce, and intend to extensively market our non-floral products online. If
the Internet is not accepted as a medium for commerce, our revenues will not
grow as we expect and our business will suffer. A number of factors may inhibit
Internet usage, including:
- inadequate network infrastructure;
- consumer concerns for Internet privacy and security;
- inconsistent quality of service; and
- lack of availability of cost-effective, high speed service.
If Internet usage grows, the infrastructure may not be able to support the
demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the Internet infrastructure. If these interruptions continue,
Internet usage may decline.
12
In addition, a significant barrier to electronic commerce over the Internet
has been the need for secure transmission of confidential information and
transaction information. Internet usage could decline if any well-publicized
compromise of security occurred. As a result, we may be required to expend
capital and resources to protect against or to alleviate these problems.
UNEXPECTED SYSTEM INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED
REVENUE AND HARM TO OUR REPUTATION
In the past, particularly during peak holiday periods, we have experienced
significant increases in traffic on our Web site and in our toll-free customer
service centers. Our operations are dependent on our ability to maintain our
computer and telecommunications systems in effective working order and to
protect our systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Our systems have in the past, and
may in the future, experience:
- system interruptions;
- long response times; and
- degradation in our service.
We cannot assure you that we will adequately implement systems to improve
the speed, security and availability of our Internet and telecommunications
systems. Because our business depends on customers making purchases on our
systems, our business will suffer and our reputation could be harmed if we
experience frequent or long system delays or interruptions or if a disruption
occurs during a peak holiday season.
IF OUR THIRD-PARTY TECHNOLOGY PROVIDERS DO NOT ADEQUATELY MAINTAIN OUR WEB SITE
AND TELEPHONE SERVICE, WE MAY EXPERIENCE SYSTEM FAILURES AND OUR BUSINESS MAY
SUFFER
We are largely dependent on Fry Multimedia to host and maintain our Web site
and on AT&T to provide telephone services to our customer service centers. If
Fry Multimedia or AT&T experience system failures or fail to adequately maintain
our systems, we would experience interruptions and our customers might not
continue to utilize our services. While we intend to co-locate the hosting of
our Web site with a third-party vendor to provide additional back-up and
redundancy, we may not be able to do so. Our future success depends upon these
third-party relationships. We may not be able to maintain these relationships or
replace them on financially attractive terms. Failure to do so may disrupt our
operations or require us to incur significant unanticipated costs.
INTERRUPTIONS IN FTD'S MERCURY SYSTEM MAY DISRUPT OUR CUSTOMERS' ORDER
FULFILLMENT AND CREATE CUSTOMER DISSATISFACTION
A significant portion of our customers' orders are communicated to the
fulfilling florist through FTD's Mercury system. The Mercury system has in the
past experienced interruptions in service. If the Mercury system experiences
interruptions in the future, we would experience difficulties in fulfilling our
customers' orders and many of our customers might not continue to shop with us.
YEAR 2000 PROBLEMS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS
We are dependent upon the proper functioning of our technology
infrastructure. This technology infrastructure is comprised of our computer and
telecommunications systems, which include hardware and software provided by
third-party vendors, and the systems maintained by our suppliers and BloomNet
florists. A failure of any part of our technology infrastructure to correctly
recognize dates beyond December 31, 1999 could materially disrupt our ability to
receive and fulfill customer orders, cause us to incur significant expenses and
cause losses of valuable data, each of which could adversely affect our business
and operations. For a discussion of Year 2000 issues, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness Disclosure".
13
RISKS RELATING TO OUR ORGANIZATION AND LEGAL UNCERTAINTY
WE ARE CONTROLLED BY OUR CHIEF EXECUTIVE OFFICER, WHOSE INTERESTS MAY DIFFER
FROM OTHER STOCKHOLDERS
Our common stock is divided into two classes. The class A common stock has
one vote per share and the class B common stock has 10 votes per share. % of
the class B common stock will be owned by James F. McCann, our Chairman and
Chief Executive Officer. Accordingly, Mr. McCann will own % of the combined
voting power of our common stock after this offering and will control the
outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, and also the power to prevent or cause a
change in control. The interests of Mr. McCann may differ from the interests of
the other stockholders.
IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL
SUFFER
Our success is dependent on our ability to hire, retain and motivate highly
qualified personnel. In particular, our success depends on the continued efforts
of our Chairman and Chief Executive Officer, James F. McCann, and our Senior
Vice President, Christopher G. McCann. In addition, we have recently hired
several new members of our senior management team to help manage our growth and
we will need to recruit, train and retain a significant number of additional
employees, particularly employees with technical backgrounds. These individuals
are in high demand and we are not certain we will be able to attract the
personnel we need. The loss of the services of any of our executive management
or key personnel, our failure to integrate any of our new senior management into
our operations or our inability to attract qualified additional personnel could
cause our business to suffer.
THE INTERNET IS SUBJECT TO MANY GOVERNMENTAL REGULATIONS THAT MAY AFFECT OUR
ABILITY TO CONDUCT BUSINESS
Any new law or regulation, or the application or interpretation of existing
laws, may decrease the growth in the use of the Internet or our Web site. We
expect there will be an increasing number of laws and regulations pertaining to
the Internet in the United States and throughout the world. These laws or
regulations may relate to liability for information received from or transmitted
over the Internet, online content regulation, user privacy, taxation and quality
of products and services sold over the Internet. Moreover, the applicability to
the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. This could
decrease the demand for our products, increase our costs or otherwise adversely
affect our business.
REGULATIONS IMPOSED BY THE FEDERAL TRADE COMMISSION MAY ADVERSELY AFFECT OUR
BUSINESS
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from individuals
when accessing Web sites, with particular emphasis on access by minors. These
regulations may include requirements that we establish procedures to disclose
and notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by us. These regulations may also
include enforcement and redress provisions. Moreover, even in the absence of
those regulations, the Federal Trade Commission has begun investigations into
the privacy practices of other companies that collect information on the
Internet. One investigation resulted in a consent decree pursuant to which an
Internet company agreed to establish programs to implement the principles noted
above. We may become subject to a similar investigation, or
14
the Federal Trade Commission's regulatory and enforcement efforts may adversely
affect our ability to collect demographic and personal information from users,
which could adversely affect our marketing efforts.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may damage our brand and our reputation.
We rely on trademark, unfair competition and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our intellectual property rights.
Despite our precautions, it may be possible for third parties to obtain and use
our intellectual property without authorization. Third parties have in the past
infringed or misappropriated our intellectual property or similar proprietary
rights. We believe infringements and misappropriations will continue to occur in
the future. Although we intend to police for infringements and misappropriations
of our intellectual property, we may not be able to do so effectively.
Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries are uncertain or do not protect
intellectual property rights to the same extent as do the laws of the United
States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE
AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR BUSINESS
We cannot be certain that our products do not or will not infringe valid
patents, trademarks, copyrights or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims relating to the
intellectual property of others from time to time in the ordinary course of our
business. We may incur substantial expense in defending against these
third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt our business.
WE MAY INCUR SIGNIFICANT EXPENSES IN SATISFACTION OF CLAIMS FOR STATE SALES AND
USE TAXES
At present, except for our retail operations, we do not collect sales or
other similar taxes in respect of sales and shipments of our products in states
other than New York, Texas, Arizona, Florida, Georgia and Virginia. However,
various states have sought to impose state sales tax collection obligations on
out-of-state direct marketing companies such as ours. A successful assertion by
one or more of these states that we should have collected or be collecting sales
tax on the sale of our products could result in additional costs and
corresponding price increases to our customers. The U.S. Congress has passed
legislation limiting for three years the ability of states to impose taxes on
Internet-based transactions. Failure to renew this legislation could result in
the broad imposition of state taxes on e-commerce.
PRODUCT LIABILITY CLAIMS MAY ADVERSELY AFFECT OUR BUSINESS
Several of the products we sell, including perishable food products, may
expose us to product liability claims in the event that the use or consumption
of these products results in personal injury. Although we have not experienced
any material losses due to product liability claims to date, we may be subject
to product liability claims in the future and incur significant costs in their
defense. Product liability claims often create negative publicity, which could
materially damage our reputation and our brand. Although we maintain insurance
against product liability claims, our coverage may be inadequate to cover any
liabilities we may incur.
15
RISKS RELATED TO THIS OFFERING
WE WILL HAVE DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING, WHICH WE
MAY NOT USE EFFECTIVELY
We are not required to use the net proceeds of this offering for any
particular purpose, other than to redeem stock and stock options and to repay
existing debt. Our management will therefore have significant flexibility in
applying the net proceeds of this offering, including uses with which
stockholders may disagree. The failure of management to apply such funds
effectively could damage our business and result in lost business opportunities.
See "Use of Proceeds".
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
Following this offering, the price at which our class A common stock will
trade is likely to be highly volatile and may fluctuate substantially. The stock
market has from time to time experienced significant price and volume
fluctuations that have affected the market prices of securities, particularly
securities of companies with Internet operations. As a result, investors may
experience a material decline in the market price of our class A common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. We may
become involved in this type of litigation in the future. Litigation of this
type is often expensive and diverts management's attention and resources.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
Sales of a large number of shares in the public market after this offering
could have an adverse effect on the market price of our class A common stock.
See "Shares Eligible for Future Sale".
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER
Provisions in our charter and bylaws and Delaware law may have the effect of
delaying or preventing a change of control or changes in our management that a
stockholder might consider favorable. See "Description of Capital Stock". If a
change of control or change in management is delayed or prevented, the market
price of our class A common stock could decline.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
pro forma net tangible book value per share. Accordingly, investors purchasing
shares in this offering will suffer immediate and substantial dilution. See
"Dilution".
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about 1-800-FLOWERS.COM and
our industry. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, as more fully
described under the caption "Risk Factors" and elsewhere in this prospectus. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no obligation to
publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
16
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares of class A common stock offered by us will be $ million, assuming an
initial public offering price of $ per share and after deducting the
estimated underwriting discount and offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that the net proceeds
will be $ million.
We intend to use a portion of the proceeds of this offering as follows:
- $18.0 million to repay a term loan with Chase Bank that matures on the
earlier of the consummation of this offering and July 3, 2000 and was used
to fund our acquisition of Plow & Hearth;
- $3.0 million to repay a draw on our line of credit with Chase Bank that
matures simultaneously with the term loan and was used for working capital
and general corporate purposes; and
- $8.8 million to redeem all outstanding Plow & Hearth common stock not held
by us and Plow & Hearth stock options.
We intend to use the remaining proceeds over time:
- to fund our marketing activities;
- to enhance our infrastructure;
- to enter into strategic online relationships;
- to expand our product offerings; and
- for other general corporate purposes.
We believe opportunities may exist from time to time to expand our current
business through strategic acquisitions. We may use a portion of the proceeds
for these purposes. We are not currently a party to any contracts, letters of
intent, commitments or agreements, and are not currently engaged in active
negotiations, with respect to any acquisitions.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to provide funds to finance
the expansion of our business. As a result, we do not anticipate paying any cash
dividends in the foreseeable future.
17
CAPITALIZATION
The following table sets forth our capitalization as of March 28, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to (1) the 1999
recapitalization, (2) the May 1999 private placement, and (3) the use of a
portion of the proceeds therefrom to redeem all class C common stock
outstanding; and
- on a pro forma as adjusted basis to reflect (1) our sale of shares of
class A common stock in this offering at an assumed initial public
offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses, (2) the use of a portion of the
proceeds from this offering to repay existing debt and redeem outstanding
stock and stock options, (3) the automatic conversion of all outstanding
shares of our preferred stock into class A common stock; and (4) the
filing of an amendment to our certificate of incorporation upon
consummation of this offering. See "Use of Proceeds".
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
AS OF MARCH 28, 1999
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------------ ------------ ------------
(IN THOUSANDS)
Long-term debt and obligations under capital leases, excluding current
portion.................................................................... $ 28,148 $ $
Redeemable class C common stock, non-voting; 100,000 shares authorized,
34,822 shares issued and outstanding (actual); no shares authorized, issued
or outstanding (pro forma and pro forma as adjusted)....................... 19,020 -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 200,000 shares authorized (actual);
1,200,000 shares authorized (pro forma) and 10,000,000 share authorized
(pro forma as adjusted):
Series A preferred stock, no shares authorized, issued or outstanding
(actual); 1,200,000 shares authorized, shares issued and
outstanding (pro forma); no shares authorized, issued or outstanding
(pro forma as adjusted).............................................. -- --
Common Stock, $0.01 par value, 10,150,000 shares authorized (actual);
400,000,000 shares authorized (pro forma and pro forma as adjusted):
Class A common stock, one vote per share; 50,000 shares authorized,
48,087 shares issued and 42,807 shares outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 0 -- --
Class B common stock, non-voting; 10,000,000 shares authorized,
4,884,993 shares issued and 4,356,993 shares outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 49 -- --
Class A common stock, one vote per share; no shares authorized, issued
or outstanding (actual); 200,000,000 shares authorized (pro forma and
pro forma as adjusted); shares issued and outstanding (pro
forma); shares issued and outstanding (pro forma as adjusted).... --
Class B common stock, ten votes per share; no shares authorized, issued
or outstanding (actual); 200,000,000 shares authorized (pro forma and
pro forma as adjusted); shares issued and outstanding (pro forma
and pro forma as adjusted)........................................... --
Additional paid-in capital................................................. 3,863
Retained earnings (deficit)................................................ (7,148)
Deferred compensation...................................................... (1,575)
Treasury stock, at cost; 5,280 shares of class A common stock and 528,000
shares of class B common stock........................................... (3,108)
------------ ------------ ------------
Total stockholders' equity (deficit)......................................... (7,919)
------------ ------------ ------------
Total capitalization......................................................... $ 39,249 $ $
------------ ------------ ------------
------------ ------------ ------------
The number of shares of common stock outstanding after this offering (pro
forma as adjusted) does not include:
- shares of class B common stock subject to options outstanding as of
March 28, 1999 at a weighted average exercise price of $ per share;
- additional shares of class A common stock that could be issued under
our stock option plan; and
- shares of class A common stock issuable upon the exercise of
outstanding warrants at a nominal exercise price.
18
DILUTION
Our pro forma net tangible book value as of March 28, 1999 was approximately
$ million, or $ per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of class A and
class B common stock outstanding at that date, assuming the consummation of the
1999 recapitalization, the May 1999 private placement, the redemption of
the class C common stock and the automatic conversion of our outstanding
preferred stock into class A common stock. Dilution in net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of class A common stock in this offering and the net
tangible book value per share of common stock after giving effect to the
offering. After giving effect to the issuance and sale of the shares of class A
common stock offered by us and after deducting the estimated underwriting
discount and offering expenses payable by us, our pro forma net tangible book
value as of March 28, 1999 would have been $ , or $ per share. This
represents an immediate increase in pro forma net tangible book value of $
per share to existing stockholders and an immediate dilution of $ per share
to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution:
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share at March 28, 1999....... $
Increase in pro forma net tangible book value per share attributable
to this offering..................................................
---------
Pro forma net tangible book value per share after the offering........
---------
Dilution per share to new investors................................... $
---------
---------
The following table summarizes, on the pro forma basis described above, as
of March 28, 1999 the differences between the number of shares of common stock
purchased from us, the aggregate cash consideration paid to us and the average
price per share paid by existing class A and class B common stockholders and new
investors purchasing shares of class A common stock in this offering. The
calculation below is based on an assumed initial public offering price of $
per share, before deducting the estimated underwriting discount and offering
expenses payable by us.
TOTAL CONSIDERATION
SHARES PURCHASED
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- --------- ----------- --------------
Existing stockholders...................................% $ % $
New investors...........................................
----- --------- --------- -----
Total................................................. 100.0% $ 100.0%
----- --------- --------- -----
----- --------- --------- -----
This discussion and table assume no exercise of any stock options or
warrants outstanding as of March 28, 1999. As of March 28, 1999, on the pro
forma basis described above, there were options outstanding to purchase a total
of shares of class B common stock with a weighted average exercise price
of $ per share and warrants outstanding to purchase shares of class A
common stock at a nominal exercise price. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors. See "Capitalization".
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
June 30, 1996, June 29, 1997 and June 28, 1998 and the nine months ended March
28, 1999 and the consolidated balance sheet data as of June 29, 1997, June 28,
1998 and March 28, 1999 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the years ended June 30, 1994 and
July 2, 1995 and the selected consolidated balance sheet data as of June 30,
1994, July 2, 1995 and June 30, 1996 are derived from our audited consolidated
financial statements not included in this prospectus. The selected consolidated
statement of operations data for the nine months ended March 29, 1998 is derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus which, in the opinion of management, has been prepared on the same
basis as the audited consolidated financial statements and contains all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of our results of operations. The selected unaudited pro forma
combined financial data give effect to our acquisition of Plow & Hearth in April
1998 as if the acquisition had been consummated at the beginning of the
respective periods. The selected unaudited pro forma combined financial data do
not purport to be indicative of what our actual results of operations would have
been if the acquisition had been consummated at the assumed times and the
interim period financial data do not purport to be indicative of future
operations and should not be construed as representative of future operations.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements included elsewhere in this prospectus.
20
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------- ------------------------
JUNE 30, JULY 2, JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
----------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues:
Telephonic..................... $ 87,284 $ 100,826 $ 127,920 $ 145,295 $ 161,874 $ 107,141 $ 146,245
Online......................... 116 4,470 9,936 16,092 26,748 16,309 30,248
Retail fulfillment............. 4,263 11,511 15,272 25,043 31,970 22,767 27,175
----------- --------- --------- --------- --------- ----------- -----------
Total net revenues........... 91,663 116,807 153,128 186,430 220,592 146,217 203,668
Cost of revenues................. 53,468 64,657 92,820 115,078 136,966 91,773 123,738
----------- --------- --------- --------- --------- ----------- -----------
Gross profit..................... 38,195 52,150 60,308 71,352 83,626 54,444 79,930
Operating expenses:
Marketing and sales............ 29,170 38,564 42,952 47,464 55,417 38,089 67,204
Technology and development..... 500 626 851 1,411 1,794 1,128 5,207
General and administrative..... 7,019 10,035 11,556 12,338 15,832 10,315 10,528
Depreciation and
amortization................. 675 1,364 2,247 3,287 4,168 2,768 6,043
----------- --------- --------- --------- --------- ----------- -----------
Total operating expenses..... 37,364 50,589 57,606 64,500 77,211 52,300 88,982
----------- --------- --------- --------- --------- ----------- -----------
Operating income (loss).......... 831 1,561 2,702 6,852 6,415 2,144 (9,052)
Other income (expense), net...... (131) (131) (209) 674 1,654 1,729 (1,129)
----------- --------- --------- --------- --------- ----------- -----------
Income (loss) before income taxes
and minority interests......... 700 1,430 2,493 7,526 8,069 3,873 (10,181)
Provision (benefit) for income
taxes.......................... 62 300 1,255 3,135 3,181 1,515 (2,926)
----------- --------- --------- --------- --------- ----------- -----------
Income (loss) before minority
interests...................... 638 1,130 1,238 4,391 4,888 2,358 (7,255)
Minority interests............... -- -- 59 (4) 186 38 (99)
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss)................ 638 1,130 1,297 4,387 5,074 2,396 (7,354)
Redeemable class C common stock
dividends...................... -- 293 1,029 1,462 1,608 1,206 1,328
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss) applicable to
common stockholders............ $ 638 $ 837 $ 268 $ 2,925 $ 3,466 $ 1,190 $ (8,682)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss) per common
share applicable to common
stockholders:
Basic.......................... $ 0.13 $ 0.17 $ 0.06 $ 0.66 $ 0.79 $ 0.27 $ (1.97)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ $ 0.13 $ 0.17 $ 0.05 $ 0.63 $ 0.74 $ 0.25 $ (1.97)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Shares used in the calculation of
net income (loss) per common
share:
Basic.......................... 4,853 4,860 4,705 4,414 4,412 4,414 4,400
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ 4,853 4,978 4,942 4,674 4,661 4,675 4,400
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
21
AS OF
--------------------------------------------------------------------------------------------------
JUNE 30, 1994 JULY 2, 1995 JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- ------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
DATA:
Cash and equivalents...... $ 1,344 $ 10,775 $ 6,639 $ 11,443 $ 8,873 $ 2,632
Working capital
(deficit)............... (3,382) 2,822 (2,452) 1,975 1,950 (9,490)
Total assets.............. 13,669 35,483 36,884 44,130 81,746 86,599
Long-term liabilities..... 7,251 14,959 17,804 9,456 35,359 38,640
Redeemable class C common
stock................... -- 10,293 14,622 16,084 17,692 19,020
Total stockholders' equity
(deficit)............... (4,222) (3,316) (5,615) (2,670) 672 (7,919)
NINE MONTHS ENDED
YEAR ENDED --------------------------------
JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues:
Telephonic................................................... $ 197,303 $ 142,568 $ 146,245
Online....................................................... 26,748 16,310 30,248
Retail fulfillment........................................... 33,696 24,494 27,175
-------------- --------------- ---------------
Total net revenues......................................... 257,747 183,372 203,668
Cost of revenues............................................... 157,084 111,891 123,738
-------------- --------------- ---------------
Gross profit................................................... 100,663 71,481 79,930
Operating expenses:
Marketing and sales.......................................... 67,492 50,164 67,204
Technology and development................................... 2,126 1,460 5,207
General and administrative................................... 20,369 14,852 10,528
Depreciation and amortization................................ 5,188 3,788 6,043
-------------- --------------- ---------------
Total operating expenses................................. 95,175 70,264 88,982
-------------- --------------- ---------------
Operating income (loss)........................................ 5,488 1,217 (9,052)
Other income (expense), net.................................... 194 269 (1,129)
-------------- --------------- ---------------
Income (loss) before income taxes and minority interests....... 5,682 1,486 (10,181)
Provision (benefit) for income taxes........................... 2,548 882 (2,926)
-------------- --------------- ---------------
Income (loss) before minority interests........................ 3,134 604 (7,255)
Minority interests............................................. 330 182 (99)
-------------- --------------- ---------------
Net income (loss).............................................. 3,464 786 (7,354)
Redeemable class C common stock dividends...................... 1,608 1,206 1,328
-------------- --------------- ---------------
Net income (loss) applicable to common stockholders............ $ 1,856 $ (420) $ (8,682)
-------------- --------------- ---------------
-------------- --------------- ---------------
Net income (loss) per common share applicable to common
stockholders:
Basic........................................................ $ 0.42 $ (0.10) $ (1.97)
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... $ 0.40 $ (0.10) $ (1.97)
-------------- --------------- ---------------
-------------- --------------- ---------------
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 4,412 4,414 4,400
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... 4,661 4,414 4,400
-------------- --------------- ---------------
-------------- --------------- ---------------
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
1-800-FLOWERS.COM is a leading e-commerce provider of floral products and
gifts. With the development of our online business and a strategic acquisition,
we have continuously expanded our product offerings, most recently to include
home and garden merchandise. As a result, we have developed relationships with
customers who purchase products for gifting occasions as well as for everyday
consumption. We offer a broad range of products, including fresh-cut and
seasonal flowers, floral arrangements, gift baskets, gourmet foods, home and
garden accessories and casual lifestyle furnishings.
Our revenues primarily consist of the selling price of merchandise and
service and shipping charges, net of returns and credits.
Most of our floral products and some of our gift products are fulfilled by
members of our BloomNet network of approximately 1,500 florists or one of our
owned or franchised stores. We recognize revenue upon delivery of the order to
the recipient. We transmit our orders either through BloomLink, our proprietary
Internet-based electronic communication system, or a third-party wire service.
Our remittance to the fulfilling florist is processed either through a
third-party clearinghouse or directly paid by us. It is industry practice for
the clearinghouse to credit back to the originating florist a rebate for
payments processed through the clearinghouse. For florist-fulfilled orders, we
record the fees paid to the clearinghouses, net of rebates earned, as a cost of
revenues.
Our home and garden merchandise and most of our gift products are shipped by
us or third parties directly to the customer. We recognize revenue upon shipment
of the order. We ship non-floral gift items by United States Postal Service,
Federal Express, United Parcel Service or other common carriers. Most of our
home and garden products are fulfilled from our Madison, Virginia fulfillment
center. For sales of gifts and home and garden merchandise, we record the
merchandise cost and the associated costs of inbound freight and outbound
shipping as cost of revenues.
Our retail fulfillment operations primarily consist of our 34 owned stores
and 87 franchised stores. Retail fulfillment revenues also include revenues
attributable to our wholesale business, fees paid to us by members of our
BloomNet network and royalties, fees and sublease payments paid to us by our
franchised stores. Our owned stores serve as important local points of
fulfillment and enable us to test new products and marketing programs. A
majority of the revenues derived from our owned stores represent fulfillment of
our floral orders and are eliminated as intercompany revenues.
In April 1998, we acquired 88% of the issued and outstanding capital stock
of The Plow & Hearth, Inc., a catalog company specializing in home and garden
merchandise. We also acquired an advanced distribution facility, which we are
currently expanding to approximately 300,000 square feet. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed based on fair
values at the date of acquisition. The purchase price, consisting of $16.1
million in cash and a management put liability of $6.3 million, exceeded the
estimated fair values of the net assets acquired by $19.6 million. This excess
has been recorded as goodwill and is being amortized over 20 years. We borrowed
$14.7 million of the purchase price through our bank credit facility.
In connection with the acquisition of Plow & Hearth, we entered into an
agreement with a number of Plow & Hearth's stockholders
23
and optionholders, whose shares and options we did not purchase in the
acquisition. Pursuant to the agreement, each stockholder and optionholder has
the right to cause Plow & Hearth to purchase all of its outstanding stock or
stock options at a price contingent upon the operating profits of Plow & Hearth,
upon the occurrence of specified events. Accordingly, we recorded a put
liability of $6.3 million at the acquisition date. The put liability was
increased by $2.4 million at June 28, 1998 to approximately $8.7 million, based
on the formula specified in the agreement, of which $1.6 million was charged to
earnings and $800,000 was charged to goodwill. During the first two quarters of
fiscal 1999, the prior year charge to earnings was reversed and goodwill
adjusted in accordance with the formula to properly state the put liability. We
will use a portion of the proceeds of this offering to purchase these
stockholders' and optionholders' Plow & Hearth stock and stock options.
Effective for the fiscal year ended June 28, 1998, we adopted Statement of
Position 98-1, known as SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
statement also requires that costs related to the preliminary project stage and
post-implementation and post-operations stage in an internal-use computer
software development project be expensed as incurred. Capitalized computer
software development for internal use totaled approximately $828,000, $5.2
million and $626,000 for the years ended June 29, 1997 and June 28, 1998 and the
nine months ended March 28, 1999, respectively. No such costs were capitalized
during the year ended June 30, 1996.
Although we have been profitable in the past, we expect to incur losses for
the foreseeable future as a result of the significant operating and capital
expenditures required to achieve our objectives. In order to achieve and
maintain profitability, we will need to generate revenues significantly above
historical levels. Our prospects for achieving profitability must be considered
in light of the risks, uncertainties, expenses, and difficulties encountered by
companies in the rapidly evolving market of online commerce.
24
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated
statements of operations expressed as a percentage of total net revenues for the
periods indicated:
YEARS ENDED NINE MONTHS ENDED
------------------------------------- ------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
Net revenues:
Telephonic............................................ 83.5% 78.0% 73.4% 73.2% 71.8%
Online................................................ 6.5 8.6 12.1 11.2 14.9
Retail fulfillment.................................... 10.0 13.4 14.5 15.6 13.3
----- ----- ----- ----- -----
Total net revenues.................................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues........................................ 60.6 61.7 62.1 62.8 60.8
----- ----- ----- ----- -----
Gross profit............................................ 39.4 38.3 37.9 37.2 39.2
----- ----- ----- ----- -----
Operating expenses:
Marketing and sales................................... 28.0 25.4 25.1 26.0 33.0
Technology and development............................ 0.6 0.8 0.8 0.8 2.6
General and administrative............................ 7.5 6.6 7.2 7.1 5.1
Depreciation and amortization......................... 1.5 1.8 1.9 1.9 3.0
----- ----- ----- ----- -----
Total operating expenses............................ 37.6 34.6 35.0 35.8 43.7
----- ----- ----- ----- -----
Operating income (loss)................................. 1.8 3.7 2.9 1.4 (4.5)
----- ----- ----- ----- -----
Other income (expense), net............................. (0.2) 0.4 0.8 1.2 (0.5)
Income taxes (benefit).................................. 0.8 1.7 1.4 1.0 (1.4)
----- ----- ----- ----- -----
Net income (loss)....................................... 0.8% 2.4% 2.3% 1.6% (3.6)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
COMPARISON OF THE NINE MONTHS ENDED MARCH 28, 1999 AND THE NINE MONTHS ENDED
MARCH 29, 1998
NET REVENUES. Net revenues consist primarily of the selling price of
merchandise and service and shipping charges, net of returns and credits. Total
net revenues increased 39.3%, from $146.2 million for the nine months ended
March 29, 1998 to $203.7 million for the nine months ended March 28, 1999.
Telephonic revenues increased 36.5%, from $107.1 million for the nine months
ended March 29, 1998 to $146.2 million for the nine months ended March 28, 1999
as a result of the Plow & Hearth acquisition. Online revenues increased 85.3%,
from $16.3 million for the nine months ended March 29, 1998 to $30.2 million for
the nine months ended March 28, 1999. Retail fulfillment revenues increased
19.3%, from $22.8 million for the nine months ended March 29, 1998 to $27.2
million for the nine months ended March 28, 1999, primarily due to an increase
in the number of owned retail stores from 21 to 34. We do not expect to
materially increase the number of owned retail stores in the foreseeable future.
COST OF REVENUES. Cost of revenues consists primarily of fees paid to
clearinghouses, net of rebates, and the cost of merchandise sold, including
inbound freight and outbound shipping. Additionally, cost of revenues includes
labor and facility expenses related to our wholesale operations and facility
costs related to properties that we sublet to our franchisees. Cost of revenues
increased 34.7%, from $91.8 million for the nine months ended March 29, 1998 to
$123.7 million for the nine months ended March 28, 1999. Cost of revenues
increased in line with total net revenues. For the same period, gross margin
increased 2.0 percentage points to 39.2%. The improvement in gross margin was
primarily attributable to the Plow & Hearth acquisition,
25
whose product line carries a higher margin than our floral products.
MARKETING AND SALES EXPENSES. Marketing and sales expenses consist primarily
of advertising and promotional expenditures, catalog costs, fees paid to
strategic online partners, costs associated with retail store, customer service
center and fulfillment center operations and the operating expenses of our
departments engaged in marketing, selling and merchandising activities.
Marketing and sales expenses increased 76.4%, from $38.1 million, or 26.0% of
total net revenues, for the nine months ended March 29, 1998, to $67.2 million,
or 33.0% of total net revenues, for the nine months ended March 28, 1999. The
increase was primarily attributable to catalog printing and circulation
expenditures resulting from the Plow & Hearth acquisition, expansion of our
online and traditional media advertising campaigns, increased inbound freight
and outbound shipping, telephone expenses and payroll and related expenses in
support of increased order fulfillment and customer service activities. We
expect marketing and sales expenses to increase significantly in future periods
as we implement our strategy to expand our base of strategic online partners and
to pursue an aggressive branding and marketing campaign.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
consist primarily of payroll and operating expenses of our information
technology group, costs associated with our Web site, including design,
development and third-party hosting, and maintenance, support and licensing
costs pertaining to our order entry, customer service, fulfillment and database
systems. Technology and development expenses increased from $1.1 million for the
nine months ended March 29, 1998 to $5.2 million for the nine months ended March
28, 1999. The increase was primarily attributable to staff additions to the
technology team, costs incurred to enhance the content and functionality of our
Web site, further enhancements of our transaction processing system and
increased investment in other areas of our systems infrastructure. For the nine
months ended March 28, 1999, we capitalized $626,000 of acquired or developed
software in accordance with SOP 98-1. We believe that continued investment in
technology and development is critical to attaining our strategic objectives
and, as a result, we expect technology and development costs to increase
significantly, particularly in the areas of Web site development and database
management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and other expenses in support of our executive, finance &
accounting, legal, human resources and other administrative functions, as well
as professional fees and other general corporate expenses. General and
administrative expenses increased 1.9%, from $10.3, or 7.1% of total net
revenues, for the nine months ended March 29, 1998 to $10.5 million, or 5.2% of
total net revenues, for the nine months ended March 28, 1999. The decrease as a
percentage of total net revenues was attributable to a $1.6 million benefit
related to the reduction in the Plow & Hearth put liability. We expect that
general and administrative expenses will increase in the future due to the
expansion of our staff to support our growth strategy and the incremental costs
we expect to incur as a public company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2.8 million for the nine months ended March 29, 1998 to $6.0 million for the
nine months ended March 28, 1999. The increase was primarily due to additional
capital expenditures in short-lived information systems hardware and software,
as well as the increase in depreciable assets acquired and goodwill created by
the Plow & Hearth acquisition.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense attributable to our credit facility, promissory notes issued
to sellers in acquisitions, and leases, offset by interest income on our cash
and short-term investments and dividend income. For the nine months ended March
28, 1999, we recorded a net expense of $1.1 million due primarily to the
26
financing of the Plow & Hearth acquisition. For the nine months ended March 29,
1998, we realized other net income of $1.7 million, which consisted primarily of
a $1.5 million dividend from a minority investment.
INCOME TAXES. For the nine months ended March 28, 1999, we incurred a loss
that provided a tax benefit of $2.9 million at an effective rate of 28.7%. For
the nine months ended March 29, 1998, we provided for taxes of $1.5 million at
an effective rate of 39.1%. The effective tax rate differed from the combined
statutory rate as a result of the non-taxable component of a $1.5 million
dividend, offset in part by the non-deductibility of certain goodwill
amortization. We anticipate incurring significant losses in the foreseeable
future. After accounting for recoverable income taxes due to allowable tax
carry-back claims, we intend to provide a full valuation allowance on the
related deferred tax asset to reflect the uncertainty of its realization in the
future.
YEAR ENDED JUNE 28, 1998 COMPARED TO THE YEAR ENDED JUNE 27, 1997
NET REVENUES. Total net revenues increased 18.3%, from $186.4 million for
fiscal 1997 to $220.6 million for fiscal 1998. Telephonic revenues increased
11.4%, from $145.3 million in fiscal 1997 to $161.9 million in fiscal 1998. The
increase was primarily due to our April 1998 acquisition of Plow & Hearth, which
contributed $11.4 million in net revenues in the fourth quarter. Online revenues
increased 65.8%, from $16.1 million in fiscal 1997 to $26.7 million in fiscal
1998. Retail fulfillment revenues increased 28.0%, from $25.0 million in fiscal
1997 to $32.0 million in fiscal 1998, primarily as a result of our acquisition
of a wholesale supplier of fresh-cut flowers and floral arrangements to the
supermarket industry and an increase in the number of company-owned stores.
COST OF REVENUES. Cost of revenues increased 19.0%, from $115.1 million in
fiscal 1997 to $137.0 million in fiscal 1998. The increase was in line with the
increase in total net revenues. Our gross margin decreased 0.4 percentage points
from 38.3% to 37.9% due to an increase in the percentage of total net revenue
from lower margin wholesale operations.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 16.6%,
from $47.5 million, or 25.4% of total net revenues, for fiscal 1997 to $55.4
million, or 25.1% of total net revenues, for fiscal 1998. The additional
spending was primarily attributable to increased catalog expenditures resulting
from the Plow & Hearth acquisition as well as expansion of our online presence
through an online marketing agreement with AOL, which became effective in May
1997. The decrease as a percentage of net revenues was due to reduced
expenditures on traditional marketing activities and the favorable impact of
online revenues upon customer service center operating expense.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased 28.6%, from $1.4 million in fiscal 1997 to $1.8 million in fiscal
1998. In addition to recognized product development expenses, we capitalized
$5.2 million of software development costs in fiscal 1998 in accordance with SOP
98-1, reflecting our increased investments in our infrastructure. This compares
to $828,000 of capitalized development costs in fiscal 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 28.5%, from $12.3 million, or 6.6% of total net revenues, for fiscal
1997 to $15.8 million, or 7.2% of total net revenues, for fiscal 1998. The
increase in general and administrative expenses was primarily due to increased
salaries and related expenses associated with our retail and fulfillment
operations and a charge to earnings in June 1998 of $1.6 million related to an
increase in the Plow & Hearth put liability.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$3.3 million in fiscal 1997 to $4.2 million in fiscal 1998. The increase relates
to the higher level of depreciable assets in fiscal 1998 as well as the
depreciable assets acquired and
27
goodwill created by the Plow & Hearth acquisition.
OTHER INCOME (EXPENSE), NET. Other income, net increased from $674,000 for
fiscal 1997 to $1.7 million for fiscal 1998. The increase was primarily
attributable to a $1.5 million dividend from a minority investment partially
offset by increased interest expense related to borrowings incurred to finance
our acquisition of Plow & Hearth.
INCOME TAXES. Income taxes increased from $3.1 million for fiscal 1997 to
$3.2 million for fiscal 1998. The effective tax rate decreased 2.3 percentage
points, from 41.7% for fiscal 1997 to 39.4% for fiscal 1998. The reduction in
rate was caused by receipt of a $1.5 million dividend taxed at more favorable
rates, offset in part by the effect of higher non-deductible goodwill related to
the Plow & Hearth acquisition.
YEAR ENDED JUNE 27, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996
NET REVENUES. Total net revenues increased 21.8%, from $153.1 million in
fiscal 1996 to $186.4 million in fiscal 1997. The increase in net revenues was
primarily the result of the growth of our telephonic and online customer base
and an increase in net revenues related to our retail fulfillment operations.
COST OF REVENUES. Cost of revenues increased 24.0%, from $92.8 million in
fiscal 1996 to $115.1 million in fiscal 1997. The increase was in line with the
increase in total net revenues. Our gross margin decreased 1.1 percentage points
from 39.4% in fiscal 1996 to 38.3% in fiscal 1997 due to an increase in revenue
from lower margin wholesale operations.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 10.5%,
from $43.0 million, or 28.0% of total net revenues, in fiscal 1996 to $47.5
million, or 25.4% of total net revenues, in fiscal 1997. The additional spending
increase was primarily attributable to increases in personnel costs supporting
the customer service centers as well as an increase in general advertising
dollars to support our brand. However, these increases were, in percentage
terms, lower than the percentage increase in total net revenues, resulting in a
decrease as a percentage of total net revenues.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased 64.5%, from $851,000 in fiscal 1996 to $1.4 million in fiscal 1997.
The increase related to the increase in information technology staff to support
our growth.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6.0%, from $11.6 million, or 7.5% of total net revenues, in fiscal
1996 to $12.3 million, or 6.6% of total net revenues, in fiscal 1997. The
increase in general and administrative expenses was primarily due to increased
salaries and related expenses associated with the expansion of our fulfillment
operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2.2 million in fiscal 1996 to $3.3 million in fiscal 1997. The increase relates
to a full year of depreciation on $5.0 million of assets purchased in fiscal
1996, as well as depreciation on assets purchased in fiscal 1997.
OTHER INCOME (EXPENSE), NET. Other income, net was $674,000 in fiscal 1997
compared to an expense of $209,000 in fiscal 1996. The difference was primarily
attributable to the retirement of $5.8 million of related party debt obligations
in fiscal 1996.
INCOME TAXES. Income taxes increased from $1.3 million in fiscal 1996 to
$3.1 million in fiscal 1997. The effective tax rate decreased 8.6 percentage
points, from 50.3% for fiscal 1996 to 41.7% in fiscal 1997. The effective tax
rate reflects the non-deductible amortization related to our 1995 purchase of
one of our franchisees and, in fiscal 1996, a non-deductible charge.
28
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth information expressed as a percentage of
total net revenues for the year ended June 28, 1998 (pro forma), the nine months
ended March 29, 1998 (pro forma) and the nine months ended March 28, 1999
(actual):
NINE MONTHS ENDED
YEAR ENDED ------------------------
------------- MARCH 29, MARCH 28,
JUNE 28, 1998 1998 1999
------------- ----------- -----------
Net revenues:
Telephonic................................................................ 76.5% 77.7% 71.8%
Online.................................................................... 10.4 8.9 14.9
Retail fulfillment........................................................ 13.1 13.4 13.3
----- ----- -----
Total net revenues...................................................... 100.0 100.0 100.0
Cost of revenues............................................................ 61.0 61.0 60.8
----- ----- -----
Gross profit................................................................ 39.0 39.0 39.2
----- ----- -----
Operating expenses:
Marketing and sales....................................................... 26.2 27.4 33.0
Technology and development................................................ 0.8 0.8 2.6
General and administrative................................................ 7.9 8.1 5.2
Depreciation and amortization............................................. 2.0 2.1 3.0
----- ----- -----
Total operating expenses................................................ 36.9 38.4 43.7
----- ----- -----
Operating income (loss)..................................................... 2.2 0.6 (4.4)
----- ----- -----
Other income (expense), net................................................. 0.2 0.3 (0.6)
Income taxes................................................................ 1.1 0.5 (1.4)
----- ----- -----
Net income (loss)........................................................... 1.3% 0.4% (3.6)%
----- ----- -----
----- ----- -----
NINE MONTHS ENDED MARCH 28, 1999 (ACTUAL)
COMPARED TO NINE MONTHS ENDED
MARCH 29, 1998 (PRO FORMA)
NET REVENUES. Total net revenues increased 11.1%, from $183.4 million for
the nine months ended March 29, 1998 to $203.7 million for the nine months ended
March 28, 1999. Telephonic revenues increased 2.5% from $142.6 million for the
nine months ended March 29, 1998 to $146.2 million for the nine months ended
March 28, 1999. This was due to an increase in sales of home and garden
merchandise, offset in part by a decline in telephonic floral revenues as a
greater proportion of our floral revenues were generated through our Web site.
Online revenues increased 85.3% from $16.3 million for the nine months ended
March 29, 1998 to $30.2 million for the nine months ended March 28, 1999. Retail
fulfillment revenues increased 11.0%, from $24.5 million for the nine months
ended March 29, 1998 to $27.2 million for the nine months ended March 28, 1999
due primarily to the increase in the number of our owned retail stores from 21
to 34.
COST OF REVENUES. Cost of revenues increased 10.6%, from $111.9 million for
the nine months ended March 28, 1998 to $123.7 million for the nine months ended
March 28, 1999. Our gross margin increased 0.2 percentage points from 39.0% for
the nine months ended March 29, 1998 to 39.2% for the comparable period in
fiscal 1999.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 33.5%,
from $50.2 million, or 27.4% of total net revenues, for the nine months ended
March 29, 1998 to $67.2 million, or 33.0% of total net revenues, for the
comparable period in fiscal 1999. The increase was primarily attributable to
increased catalog circulation,
29
expansion of our online and traditional media advertising, increased telephone
expenses and payroll and other related expenses in support of increased order
fulfillment and customer service activities.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased from $1.5 million for the nine months ended March 29, 1998 to $5.2
million for the comparable period in fiscal 1999. The increase was primarily
attributable to additions to our technology team, costs incurred to enhance the
content and functionality of our Web site, further enhancements of our
transaction processing system and increased investments in other areas of our
systems infrastructure. In accordance with SOP 98-1, we capitalized $626,000 of
acquired or developed software for the nine months ended March 28, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 29.5%, from $14.9 million, or 8.1% of total net revenues, for the nine
months ended March 29, 1998 to $10.5 million, or 5.2% of total net revenues, for
the comparable period in fiscal 1999. The decrease was primarily due to a $1.6
million benefit related to a reduction in the Plow & Hearth put liability in the
nine months ended March 28, 1999 and a $3.9 million non-recurring and non-cash
compensation charge in the nine months ended March 29, 1998 related to the
revaluation of Plow & Hearth stock options prior to the acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$3.8 million for the nine months ended March 29, 1998 to $6.0 million for the
comparable period in fiscal 1999. The increase was primarily due to additional
capital expenditures in short-lived information technology assets.
OTHER INCOME (EXPENSE), NET. For the nine months ended March 28, 1999, we
recorded a net expense of $1.1 million compared to net income of $269,000 for
the comparable period in fiscal 1998. Other income (expense), net consists
primarily of interest expense attributable to our credit facility and seller
financed notes and leases, offset by interest income on our cash and short-term
investments and dividend income. The higher net interest income in fiscal 1998
was due to a one-time $1.5 million dividend from a minority investment.
INCOME TAXES. For the nine months ended March 28, 1999, we incurred a loss
that provided a tax benefit of $2.9 million at an effective rate of 28.7%. For
the comparable period in fiscal 1998, we provided for taxes of $882,000 at an
effective rate of 59.4%. The effective tax rate differed from the combined
federal and state statutory rate of 40.0% as a result of the non-deductibility
of goodwill amortization related to the Plow & Hearth acquisition as well as,
for fiscal 1999, our inability to recognize certain state tax benefits.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly statement of operations
data for the last seven quarters and such data expressed as a percentage of
total net revenues. We believe this unaudited information has been prepared
substantially on the same basis as the annual audited financial statements and
all necessary adjustments, consisting of only normal recurring adjustments, have
been included in the amounts stated below to present fairly our results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
30
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 28,
1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- ----------- ----------- --------- ---------
(IN THOUSANDS)
Net revenues:
Telephonic........................ $ 28,601 $ 40,041 $ 38,498 $ 54,734 $ 34,370 $ 67,972 $ 43,903
Online............................ 3,276 5,938 7,095 10,439 6,258 10,771 13,219
Retail fulfillment................ 5,638 7,610 9,520 9,202 6,946 10,061 10,168
----------- --------- --------- ----------- ----------- --------- ---------
Total net revenues.............. 37,515 53,589 55,113 74,375 47,574 88,804 67,290
Cost of revenues.................... 23,499 33,361 34,913 45,193 29,793 51,847 42,098
----------- --------- --------- ----------- ----------- --------- ---------
Gross profit........................ 14,016 20,228 20,200 29,182 17,781 36,957 25,192
----------- --------- --------- ----------- ----------- --------- ---------
Operating expenses:
Marketing and sales............... 9,792 14,689 13,609 17,327 14,455 33,065 19,684
Technology and development........ 409 185 534 665 1,127 1,807 2,273
General and administrative........ 3,280 3,730 3,305 5,518 2,348 3,273 4,906
Depreciation and amortization..... 905 905 958 1,400 1,532 1,676 2,836
----------- --------- --------- ----------- ----------- --------- ---------
Total operating expenses...... 14,386 19,509 18,406 24,910 19,462 39,821 29,699
----------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)............. (370) 719 1,794 4,272 (1,681) (2,864) (4,507)
----------- --------- --------- ----------- ----------- --------- ---------
Other income (expense), net......... 1,724 (13) 56 71 (227) (623) (378)
Income taxes........................ 524 273 718 1,666 (552) (1,010) (1,363)
----------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................... $ 830 $ 433 $ 1,132 $ 2,677 $ (1,356) $ (2,478) $ (3,522)
----------- --------- --------- ----------- ----------- --------- ---------
----------- --------- --------- ----------- ----------- --------- ---------
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 28,
1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- ----------- ----------- --------- ---------
Net revenues:
Telephonic........................ 76.2% 74.8% 69.9% 73.6% 72.3% 76.5% 65.2%
Online............................ 8.7 11.0 12.9 14.0 13.2 12.2 19.6
Retail fulfillment................ 15.1 14.2 17.2 12.4 14.5 11.3 15.2
----------- --------- --------- ----------- ----------- --------- ---------
Total net revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................... 62.6 62.3 63.3 60.8 62.6 58.4 62.6
----------- --------- --------- ----------- ----------- --------- ---------
Gross profit........................ 37.4 37.7 36.7 39.2 37.4 41.6 37.4
----------- --------- --------- ----------- ----------- --------- ---------
Operating expenses:
Marketing and sales............... 26.1 27.4 24.7 23.3 30.4 37.2 29.2
Technology and development........ 1.1 0.3 1.0 0.9 2.4 2.0 3.4
General and administrative........ 8.7 7.0 6.0 7.4 4.9 3.7 7.3
Depreciation and amortization..... 2.4 1.7 1.7 1.9 3.2 1.9 4.2
----------- --------- --------- ----------- ----------- --------- ---------
Total operating expenses........ 38.3 36.4 33.4 33.5 40.9 44.8 44.1
----------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)............. (0.9) 1.3 3.3 5.7 (3.5) (3.2) (6.7)
----------- --------- --------- ----------- ----------- --------- ---------
Other income (expense), net......... 4.5 (0.0) 0.1 0.1 (0.5) (0.7) (0.6)
Income taxes........................ 1.4 0.5 1.3 2.2 (1.2) (1.1) (2.0)
----------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................... 2.2% 0.8% 2.1% 3.6% (2.8)% (2.8)% (5.3)%
----------- --------- --------- ----------- ----------- --------- ---------
----------- --------- --------- ----------- ----------- --------- ---------
Our quarterly results are subject to seasonal fluctuations. Historically,
revenues have been highest in the fourth fiscal quarter, due to a number of
major floral gifting occasions, including Mother's Day, Easter and graduations.
Due to our acquisition of Plow & Hearth, which generates more revenues in our
second fiscal quarter due to Christmas and Thanksgiving, our second fiscal
quarter revenues in fiscal 1999 increased significantly from historical levels.
We expect our second fiscal quarter revenues to represent a larger proportion of
our total revenues in the future.
It is difficult for us to forecast our revenues or earnings accurately. We
believe that period-to-period comparisons of our operating results may not be
meaningful and should not be
31
relied upon as an indication of future performance. We do not have a backlog,
and almost all of our net revenues are derived from transactions that are
consummated and fulfilled on the same day, the next day or shortly thereafter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through loans
from our Chief Executive Officer, which were repaid in June 1996, cash flow from
operations and a sale of class C common stock in January 1995. In addition, to
finance acquisitions, we have issued promissory notes to sellers and entered
into a $30.0 million credit agreement that provides for an $18.0 million term
loan and a $12.0 million revolving credit facility. Additionally, we have a $4.5
million revolving credit line with another bank. At March 28, 1999, $2.8 million
was outstanding under this revolving credit line and we had $2.3 million in cash
and equivalents. In May 1999, we issued preferred stock yielding us net proceeds
of $102.6 million in a private placement.
We used $9.7 million in cash to fund operations during the nine months ended
March 28, 1999, principally to fund our net loss as well as increases in
accounts receivable and inventories. This use of cash was offset in part by
increases in accounts payable and accrued expenses, due primarily to our revenue
growth. We generated $5.8 million, $10.7 million and $9.5 million in cash from
operations in fiscal 1996, 1997 and 1998, respectively.
We used $1.7 million in cash for investing activities in the nine months
ended March 28, 1999. We used $4.0 million, $4.2 million and $25.5 million in
cash for investing activities in fiscal 1996, 1997 and 1998, respectively. In
each period, cash used for investing activities related primarily to the
purchase of property, equipment and investments in our systems infrastructure
and, in fiscal 1998, the acquisition of Plow & Hearth. For the nine months ended
March 28, 1999, we generated cash by liquidating investments yielding proceeds
of $5.4 million. In fiscal 1998, we used $15.2 million, net of cash acquired,
related to the Plow & Hearth acquisition.
We generated $5.2 million in cash from financing activities in the nine
months ended March 28, 1999 and $13.4 million in fiscal 1998. In the nine months
ended March 28, 1999, financing activities included net borrowings of $6.2
million under our credit facility and revolving lines of credit and an increase
in our mortgage notes payable of $1.1 million related to the expansion of the
Plow & Hearth credit facility. In fiscal 1998, we borrowed $15.5 million to
finance the Plow & Hearth acquisition, offset in part by repayments of capital
leases and seller acquisition notes and the purchase into treasury of $133,000
of outstanding class A and B common stock. In fiscal 1997, we used $1.7 million
in financing activities related to the repayment of capital leases and
promissory notes issued to sellers. Finally, in 1996 we used $3.0 million in
financing to repay capital leases and related party loans as well as purchased
into treasury $3.0 million of outstanding class A and B common stock.
Our material capital commitments consist of borrowings under our credit
facility, promissory notes issued to sellers, obligations outstanding under
capital and operating leases and payments owing to AOL. Pursuant to our
agreement with AOL, we are obligated to pay $10.8 million to AOL during the
four-year term of this agreement. In addition, we are required to share a small
portion of our AOL-derived revenue with AOL. Pursuant to the agreement, we paid
AOL $3.3 million in fiscal 1998 and approximately $5.6 million during the nine
months ended March 28, 1999. A scheduled payment of $2.5 million will be made in
July 1999.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional
32
equity or debt securities. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. There can be
no assurance that financing will be available in amounts or on terms acceptable
to us, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish
21(st) century dates from 20(th) century dates. As a result, computer systems
and software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
OUR STATE OF READINESS
We have made a preliminary assessment of the state of our operating and
administrative systems including our telecommunications systems, our order
processing and data collection systems and our internet related systems to
assess our state of Year 2000 readiness. Our assessment plan consists of:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally developed software and
systems; and
- obtaining assurances or warranties from third-party vendors and licensors
of material hardware, software and services that are related to the
delivery of our services.
To date, our assessment has determined that our critical business systems
are all Year 2000 compliant, except our call routing system, and that most of
our other systems are Year 2000 compliant. We expect all of our internal
systems, including the call routing system, to be fully Year 2000 compliant by
October 1999. All material commercial software and hardware on which we depend
is either Year 2000 compliant or will be upgraded to be compliant in the normal
course of business through the installation of upgrades or replacements. Our
material hardware, software and service vendors have informed us that the
products we use, or will be using as upgrades or replacements, to support our
operations are Year 2000 compliant. Our Web site hosting service, Fry
Multimedia, has represented to us that its hardware and software systems are
Year 2000 compliant.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, we have not incurred any significant costs attributable to Year
2000 compliance. Our recent information technology investments have been in
support of our expanding operating and decision support requirements and to the
extent they involved a replacement of an existing system, also accommodated Year
2000 compliance. We do, however, expect to incur approximately $1.0 million in
the third calendar quarter to make our call routing system Year 2000 compliant.
Other than these costs, we are not currently aware of any material operational
issues or costs associated with preparing our systems for the Year 2000.
Nonetheless, we may experience material unexpected costs caused by undetected
errors or defects in the technology used in our systems or because of the
failure of a material vendor to be Year 2000 compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a material
system or vendor, or the Internet generally, to be Year 2000 compliant could
harm the operation of our systems or have other unforeseen, material adverse
consequences to us. We are also subject to external Year 2000-related failures
or disruptions that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions. All of these factors could materially adversely affect
our business.
33
CONTINGENCY PLANS
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have developed no contingency plans to address situations that might occur if
technologies on which we depend are not Year 2000 compliant. The results of our
Year 2000 assessment and testing, and the responses received from third-party
vendors and service providers will be taken into account in determining the need
for and nature and extent of any contingency plans.
34
BUSINESS
OVERVIEW
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products
and gifts. With the development of our online business and a strategic
acquisition, we have continuously expanded our product offerings, most recently
to include home and garden merchandise. As a result, we have developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption.
We believe the 1-800-FLOWERS brand is one of the most recognized brands in
the floral industry. We offer more than 1,500 varieties of fresh-cut and
seasonal flowers, plants and floral arrangements and more than 6,000 SKUs of
gifts and home and garden products, including gift baskets, gourmet foods,
garden accessories and casual lifestyle furnishings. We provide our customers
the choice of purchasing our products online, by calling us toll-free or by
visiting our owned or franchised retail stores.
Today, the Internet is our fastest growing sales channel. For the nine
months ended March 28, 1999, online revenues were $30.2 million, representing an
85.3% increase over the same period in the previous fiscal year.
We believe we have been and continue to be a leader in implementing
integrated technologies and systems that support our online and telephonic sales
channels and our fulfillment operations. Because many of our products must be
handled delicately and delivered promptly to ensure customer satisfaction and
freshness, we have developed significant experience in fulfilling our customers'
orders reliably, quickly and cost-effectively.
As of December 31, 1998, we had sold our products to more than 6.7 million
customers, of which 2.7 million had made a purchase from us in the previous
twelve months. Our total net revenues for the nine months ended March 28, 1999
were $203.8 million.
In May 1999, we completed a private placement of preferred stock yielding us
net proceeds of $102.6 million. The investors include Benchmark Capital Partners
and SOFTBANK America Inc., both leading Internet-focused investment firms, and
Forum Holding BV, an affiliate of LVMH Moet Hennessey Louis Vuitton S.A.
THE ORIGINS OF 1-800-FLOWERS.COM
Our business began in 1976, when James F. McCann, our Chairman and Chief
Executive Officer, acquired a single retail florist in New York City. We
expanded to 14 retail locations by 1986, when we changed our business strategy
to take advantage of the rapid emergence of toll-free calling. We acquired the
right to use the toll-free telephone number 1-800-FLOWERS, adopted it as our
corporate identity and began to aggressively build a national brand around it.
We believe we were one of the first companies to embrace this new way of
conducting business.
To support the growth of our toll-free business and to provide superior
customer service, we began developing an operating infrastructure that
incorporated the best available technologies. Over time, we implemented:
- a sophisticated transaction processing system that facilitated rapid order
entry and fulfillment;
- a redundant, fault tolerant telecommunications system; and
- multiple customer service centers to handle increasing call volume.
To enable us to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, we
created BloomNet, a nationwide network of approximately 1,500 local florists
selected by us for their high-quality products,
35
superior customer service and order fulfillment and delivery capabilities.
In the early 1990s, we recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
medium. Leveraging our previous investments in our infrastructure, we were able
to quickly develop and implement an online presence. As a result, we were one of
the first companies to market products online through CompuServe beginning in
1992 and AOL beginning in 1994 (keyword: flowers). In April 1995, we opened our
fully functional, e-commerce Web site (WWW.1800FLOWERS.COM) and subsequently
entered into strategic relationships with AOL and Microsoft Network, among
others, to build our online brand and customer base.
Our online presence has enabled us to expand the number and types of
products we can effectively offer. Since 1995, we have expanded our online
product offerings of flowers and gifts and added complementary home and garden
merchandise through our April 1998 acquisition of Plow & Hearth.
1-800-FLOWERS.COM TODAY
[Graphic consisting of four circles arranged around the periphery, each
containing a depiction of one category of products and labeled "Floral",
"Garden", "Home" and "Gifts". In the center of graphic are the Company name and
logo and the words "Brand", "Product Selection", "Customer Relationships",
"Technology Infrastructure" and "Fulfillment Capabilities".]
We believe our success in selling floral, gift and home and garden products is
attributable to the following key elements of our business:
OUR BRAND. We believe that 1-800-FLOWERS is one of the most recognized
brands in the floral industry. The strength of our brand has enabled us to
extend our product offerings to complementary products, including gifts and home
and garden merchandise, and to attract a significant number of customers to our
Web site. We continue to invest heavily in building our brand through strategic
online relationships and extensive marketing, advertising and public relations
programs. We believe our brand is characterized by:
- Convenience. Our customers may purchase floral, gift and home and garden
products online or by calling our toll-free telephone number from the home
or office 24 hours a day, seven days a week. We offer a variety of
delivery options, including same-day or next-day service throughout the
United States.
- Quality. High-quality products are critical to our continued brand
strength. We offer our customers a 100% satisfaction guarantee on all of
our products.
- Selection. Over the course of a year, we offer more than 1,500 varieties
of fresh-cut and seasonal flowers, plants and floral arrangements, and
more than 6,000 SKUs of gifts and home and garden products, including gift
baskets, gourmet foods, garden accessories and casual lifestyle
furnishings.
- Customer Service. We ensure a high level of customer service by training
our agents to assist our customers over the telephone and online to select
the appropriate flowers or gifts and to monitor order fulfillment.
OUR PRODUCT SELECTION. We continuously expand our product offerings to
offer a better shopping experience for our customers. Our merchandising team
works closely with manufacturers and suppliers to select and design our
principal floral, gift and home and garden merchandise as well as other products
that meet the seasonal and other special needs of our customers.
Because we offer a wide selection of products, we create the opportunity to
have a relationship with customers who purchase products not only for gifting
occasions but also for everyday consumption.
36
OUR CUSTOMER RELATIONSHIPS. Through our direct contact with our customers,
we collect information and maintain a database about our customers. This
information includes the customer's name, address, e-mail address, telephone
number, demographic information, individual preferences, shopping and buying
patterns and other key attributes. We use this information to improve our
customers' experience with us by offering products that meet their needs, to
target promotional offers, to identify future consumption and giving occasions
and to send gift reminders and e-mail messages, including our electronic
newsletter. As of December 31, 1998, our total database of customers numbered
approximately 6.7 million. We also gather information about the recipients of
our products, including their name, address, telephone number and the products
received.
We also market our products to businesses for gifting, incentive and reward
programs. As of March 28, 1999, approximately 2,900 corporate customers had made
a purchase from us within the previous 12 months. These customers, which are
served by our Corporate Gift Services division, include NationsBank/Bank of
America, IBM, Omnipoint, Ford Motor Co. and Scudder Investments. We currently
provide many of our large corporate customers with an account manager, a team of
floral and gifting coordinators and a customized, password-protected area of our
Web site. In addition, each employee of our corporate customers is entitled to
receive special offers and discounts on personal purchases.
OUR TECHNOLOGY INFRASTRUCTURE. We believe we have been and continue to be a
leader in implementing new technologies and systems to give our customers the
best possible experience with us, whether online or over the telephone. Our Web
site has been designed to be secure, fast and easy to use. To serve our
telephone customers, we have implemented a centrally managed telecommunications
system.
We process both online and telephonic orders through a common transaction
processing system. This system selects the florist or other vendor to fulfill a
customer's order, electronically transmits the order for fulfillment and
captures the customer's profile and purchasing history. In addition, our
customer service representatives are electronically linked to this system,
enabling them to facilitate placement of an order and subsequently track
customer and order information.
OUR FULFILLMENT CAPABILITIES. Fresh-cut and seasonal flowers and floral
arrangements are perishable and often sent as gifts. We have developed
significant experience in fulfilling our customers' orders reliably, quickly and
cost-effectively. Most of our customers' purchases of floral products are
fulfilled through our BloomNet network of approximately 1,500 florists or one of
our owned or franchised retail stores. This allows us to deliver our floral
products on a same-day or next-day basis to ensure freshness and to meet our
customers' need for prompt delivery. In addition, we are better able to ensure
consistent product quality and presentation and offer a greater variety of
arrangements, which we believe creates a better experience for our customers and
gift recipients. We select BloomNet members for their high-quality products,
superior customer service and order fulfillment and delivery capabilities.
To ensure reliable and efficient communication of online and telephonic
orders to our BloomNet members, we created BloomLink, a proprietary
Internet-based communications system. A majority of our BloomNet members have
adopted BloomLink since its introduction in January 1998. We also have the
ability to arrange for delivery of floral products internationally through
independent wire services.
We fulfill most of our gift basket and gourmet food items primarily through
electronic connection to third-party suppliers that ship products directly to
the customer by next-day or other delivery method chosen by the customer. We
select our third-party vendors based upon the quality of their products, their
37
reliability and their ability to meet our volume requirements.
We package and ship our home and garden products from our advanced 185,000
square foot fulfillment center located in Madison, Virginia by next-day or other
delivery method chosen by the customer. We are currently enlarging this facility
to approximately 300,000 square feet to support our anticipated future growth.
OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers, gifts and
products for the home and garden. The key elements of our strategy to achieve
this objective are:
AGGRESSIVELY EXTEND OUR BRAND. Our goal is to make the 1-800-FLOWERS.COM
brand synonymous with flowers, gifts and home and garden products. To do this,
we intend to invest in building our brand and in communicating the benefits and
convenience of shopping with 1-800-FLOWERS.COM. We intend to significantly
increase our marketing expenditures to:
- maintain and develop new strategic online relationships;
- expand our Internet advertising and promotion;
- broaden our television, radio, print and outdoor advertising campaigns;
and
- increase our public relations programs, such as community events, radio
and television demonstrations and trade conferences.
We intend to market other high-quality brands in addition to
1-800-FLOWERS.COM. We may accomplish this through internal development,
co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses.
EXPAND OUR OFFERINGS OF GIFTS AND HOME AND GARDEN PRODUCTS. To broaden our
relationships with our existing customers, we intend to offer more products
designed for everyday occasions and sentiments, as well as products for the home
and garden. To do this, we intend to expand our relationships with product
manufacturers or acquire businesses with complementary product lines.
ENHANCE OUR CUSTOMER RELATIONSHIPS. We intend to enhance our relationships
with our customers, encouraging more frequent and more extensive use of our Web
site, by introducing enhanced product-related content and interactive features.
We will also continue to personalize the features of our Web site and increase
our use of both customer and recipients' information to target product
promotions, remind our customers of upcoming occasions and convey other
marketing messages. In addition, we are committed to continuing to make shopping
and visiting WWW.1800FLOWERS.COM an easy, secure and pleasurable experience for
our customers.
We believe we have a significant opportunity to expand our corporate
accounts. We intend to focus greater resources on developing customized programs
for our corporate customers to meet their gifting needs and those of their
employees.
INCREASE THE NUMBER OF ONLINE CUSTOMERS. Our goal is to increase the number
of customers placing orders through our Web site. To achieve this goal, we
intend to:
- actively promote our Web site through Web portals and online networks;
- aggressively expand our online affiliate program, in which independent Web
sites link directly to our Web site;
- aggressively market our Web site in our advertising campaigns;
- promote our Web site to our existing telephonic customers; and
- facilitate access to our Web site for our corporate customers by
developing direct links from their internal corporate networks.
38
CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE. We will continue to make
significant investments and use the best available technologies in order to
improve the functionality of our Web site and our underlying operations. In
particular, we intend to:
- continue to improve the speed and ease of use of our Web site;
- improve our transaction processing system to facilitate order tracking and
to enhance the interface with our accounting and financial systems;
- enhance our ability to analyze our database of customer information and
conduct personalized one-to-one marketing; and
- further expand the functionality and features of BloomLink.
CONTINUE TO IMPROVE OUR FULFILLMENT CAPABILITIES. We intend to improve our
fulfillment capabilities to make our operations more efficient by:
- strengthening our relationships with our BloomNet member florists and
increasing the number of BloomLink installations in their stores;
- evaluating and implementing alternative means of fulfillment, such as
centralized production and logistics partnering; and
- continuing to improve our operations that support our gift and home and
garden product lines.
OUR PRODUCTS
We offer a wide range of products, including fresh-cut and seasonal flowers,
floral arrangements, gifts and home and garden merchandise. In addition to
selecting our core products, our merchandising team works closely with
manufacturers and suppliers to select and design products that meet the seasonal
and other special needs of our customers. Over the course of a year, our product
selection consist of:
FLOWERS AND PLANTS. We offer more than 1,300 varieties of fresh-cut and
seasonal flowers and floral arrangements for all occasions and holidays. We also
offer more than 200 varieties of popular plants for the home and garden.
GIFTS. We offer more than 200 SKUs of gifts, including gift baskets, dolls,
plush toys, balloons, bath and spa items, wreaths and ornaments. In addition, we
offer more than 100 SKUs in the specialty food and gourmet categories, including
candies, chocolates, nuts, cookies and fruits.
HOME. We offer more than 2,500 SKUs for the home, including candles and
lighting, vases, kitchen items and accents, casual lifestyle furniture and home
accessories.
GARDEN. We offer more than 3,000 SKUs for the garden, including outdoor
furniture, tools and accessories, pottery, nature-related products, clothing and
footwear.
OUR WEB SITE
We offer floral, gift and home and garden products through our
1-800-FLOWERS.COM Web site (WWW.1800FLOWERS.COM). Customers may come to our Web
site directly or may be referred to us by our strategic online partners. Our
online partners include AOL.com, Excite and Microsoft Network and more than
3,000 members of our online affiliate program, which we initiated in February
1999. In addition, our customers can shop at our AOL store (keyword: flowers).
We also offer home and garden products through the Plow & Hearth Web site
(WWW.PLOWHEARTH.COM). We intend to integrate the Plow & Hearth Web site into our
1-800-FLOWERS.COM Web site to provide our customers the ability to purchase
floral, gift and home and garden products conveniently in a single visit. As of
December 27, 1998, approximately 400,000 customers had made a purchase through
our Web site or our AOL store in the previous twelve months.
39
Our Web site allows customers to easily browse and purchase our products,
promotes brand loyalty and encourages repeat purchases by providing an inviting
customer experience. Our Web site offers customers detailed product information,
complete with photographs, contests, home decorating and how-to tips,
information on floral trends, gift-giving suggestions and information about
special events and offers. We have designed our Web site to be fast, secure and
easy to use and to enable customers to order products with minimal effort. Our
Web site includes the following key features:
SEARCHING. We have incorporated sophisticated search capabilities, which
enable customers to search for products by category, occasion, price, flower
type or keyword. We also have a "Gift Ideas" section that provides popular gift
ideas for each occasion.
PERSONALIZATION. We utilize our Web site to enhance the direct relationship
with our customers. The "My Flower Shop" area of our site enables customers to
establish their floral and gift preferences, which personalizes and simplifies
their visits. "My Flower Shop" members are also provided with an online address
book of names and addresses of their gift recipients, access to their purchasing
history and e-mail notification of specials and events at our local retail
stores. Our customers can also register for our "Gift Reminder Program," in
which we send them an e-mail reminder a few days prior to an occasion to remind
them of the occasion and to recommend specific flowers and gifts.
SECURITY. We use secure server software to encrypt the customer's credit
card number prior to transmitting it over the Internet.
DELIVERY. We offer customers a variety of delivery and shipping options,
including same-day or next-day delivery by the fulfilling local florist and a
number of delivery options through Federal Express, United Parcel Service, the
United States Postal Service and other common carriers.
CUSTOMER SERVICE. Through our seven customer service centers, we offer
service and support to our customers 24 hours a day, seven days a week over the
telephone. We also provide real-time online messaging and e-mail support to our
customers. We intend to enhance our ability to provide a high level of customer
service through the use of new Internet-based technologies.
PRIVACY. We recognize the importance of maintaining the privacy of our
customers. We use the information gathered from our customers and others who
have registered on our Web site from time to time to send our own promotional
materials. We periodically make information available to selected third parties
for direct marketing purposes. However, customers may elect not to receive our
promotional information or instruct us not to make their information available
to third parties. We also gather information concerning how visitors use and
navigate our Web site. We use this information only internally to better allow
us to serve our customers. Our current online privacy policy is set forth on our
Web site.
MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to strengthen our 1-800-
FLOWERS.COM brand, build customer loyalty, increase the number of online and
telephonic customers, encourage repeat purchases and develop additional product
revenue opportunities. We also intend to develop and market other high-quality
brands in addition to 1-800-FLOWERS.COM through internal development,
co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses. We market and promote our brand and products as
follows:
OUR STRATEGIC ONLINE RELATIONSHIPS. We promote our products through
strategic relationships with leading Web portals and online networks. Our key
relationships include:
- America Online. We have worked with AOL since 1994 and maintain a separate
online 1-800-FLOWERS.COM store for the convenience of AOL's subscribers.
We are the exclusive provider of fresh-cut flowers and plants through
40
AOL's proprietary online service and AOL.com, subject to a limited number
of exceptions. In addition, we are prominently promoted through banner and
other advertisements across AOL's online service and AOL.com. Our
agreements with AOL extend through June 2001.
- Microsoft Network. Our products, advertisements and links to our Web site
are prominently featured on Microsoft Network's online shopping channel.
Our agreement with Microsoft Network extends through September 1999.
- Excite. Our products and links to our Web site are also prominently
featured on Excite's shopping channel. Our agreement with Excite extends
through June 1999 and may be renewed, at our option, through June 2000.
- StarMedia Network. Through our relationship with StarMedia Network, we are
developing Spanish and Portuguese language versions of our Web site.
OUR ONLINE AFFILIATE PROGRAM. In addition to securing alliances with
frequently visited Web sites, in February 1999 we established an affiliate
network that has grown to more than 3,000 Web sites operated by third parties.
These Web sites earn commissions by referring customers from their sites to our
Web site. Affiliates include AT&T WorldNet, Earthlink/ Sprint, Gateway 2000,
HomeArts, About.com and PCWorld Online.
TRADITIONAL MEDIA. We utilize traditional media, such as television, radio,
print and outdoor advertising, to market our brand and products. Traditional
media allows us both to reach a large number of customers and to target
particular market segments.
DIRECT MAIL AND CATALOGS. We use our direct mail promotions and catalogs to
increase the number of new customers and to introduce additional products to our
existing customers. Through the use of PLOW & HEARTH'S catalogs, we intend to
cross-promote our floral and gift products to our home and garden customers as
well as home and garden products to our floral and gift customers. For the nine
months ended March 28, 1999, we mailed a total of approximately 28.6 million
catalogs, including PLOW & HEARTH and AMERICAN COUNTRY HOME. We believe these
catalogs will attract additional customers to our WWW.1800FLOWERS.COM and
WWW.PLOWHEARTH.COM Web sites.
CO-MARKETING AND PROMOTIONS. We have established a number of significant
co-marketing relationships and promotions to advertise our products. For
example, we have established co-marketing arrangements with United, American and
Delta airlines as well as American Express, VISA and MasterCard, among others.
41
FULFILLMENT OPERATIONS
Our customers primarily place orders for our products online or over the
telephone. Our fulfillment operations are represented in the following diagram:
[Graphical representation of fulfillment operations, consisting of three
headings labeled "Channel", "Fulfillment" and "Products". Under the heading
"Channel" are depictions of a computer terminal, with the caption "Online", and
a telephone sales agent, with the caption "Telephonic". Under the heading
"Fulfillment" is a map of the United States with scattered dots representing our
retail stores and the caption "1500 BloomNet Stores" and depictions of other
types of fulfillment facilities and the captions "Owned & Franchised Florists",
"Unaffiliated Florists", "Direct from Vendor" and "Our Fulfillment Centers".
Under the heading "Products" are depictions of our various product offerings and
the captions "Flowers & Plants", "Gifts" and "Home and Garden".]
FLOWERS AND PLANTS. Most of our floral orders are fulfilled through our
BloomNet network of approximately 1,500 florists or one of our owned or
franchised retail stores. This allows us to deliver a majority of our floral
products on a same-day or next-day basis to ensure freshness and to meet our
customers' need for prompt delivery. In addition, we are better able to ensure
consistent product quality and presentation and offer a greater variety of
arrangements, which we believe creates a better experience for our customers and
gift recipients. A majority of our BloomNet members and many of our owned or
franchised stores are connected to us electronically via BloomLink, an
Internet-based electronic communications system. Where we are not connected to
our BloomNet partners or our owned and franchised stores via BloomLink, we
utilize an independent wire service to transmit an order to the fulfilling
florist. In addition, we also ship to the customer directly from growers.
We own and operate 34 retail stores, located primarily in the New York and
Los Angeles metropolitan areas. In addition, we have 87 franchised stores,
located primarily in California. Our owned stores serve as important local
points of fulfillment and enable us to test new products and marketing programs.
We do not expect to materially increase the number of owned or franchised retail
stores in the foreseeable future.
GIFTS. Most of our gift products are shipped directly to the customer by
third-party product suppliers using next-day or other delivery method selected
by the customer.
HOME AND GARDEN. We fulfill most purchases of home and garden merchandise
from our Madison, Virginia fulfillment center using next-day or other delivery
method selected by the customer. In calendar year 1998, we shipped more than
800,000 packages from this facility. Construction is currently underway to
expand this facility from 185,000 square feet to approximately 300,000 square
feet, which will approximately double our shipping capacity. This facility
employs advanced technology for receiving, packaging, shipping and inventory
control.
TECHNOLOGY INFRASTRUCTURE
We believe we have an advanced technology platform. Our technology
infrastructure, primarily consisting of our Web site, transaction processing,
customer databases and telecommunications systems, is built and maintained for
reliability, scalability, security and flexibility. To minimize the risk of
service interruptions from unexpected component or telecommunications failure,
maintenance and upgrades, we have built redundancy into those components of our
systems that we have identified as critical. Since July 1, 1997, we spent a
total of $21.3 million on our technology infrastructure. We plan to continue to
invest in technologies that will improve and expand our e-commerce and
telecommunication capabilities.
42
Our Web site and BloomLink are hosted and maintained by Fry Multimedia, a
hosting and online services company headquartered in Ann Arbor, Michigan. In
addition to Fry Multimedia's two hosting facilities, we also intend to co-locate
the hosting of our Web site and BloomLink with a third-party vendor to provide
additional back-up and system redundancy.
Our transaction processing system selects the florist or vendor to fulfill
the order and captures customer profile and history in a customized Oracle
database. Through the use of customized software applications, we are able to
retrieve, sort and analyze customer information to enable us to better serve our
customers and target our product offerings. We expect to develop or license
additional software applications to expand our ability to analyze and use this
information.
Our seven customer service centers and many of our third party product
suppliers are connected electronically to our transaction processing system to
permit the rapid transmission of, and access to, critical order and customer
information. In addition, BloomLink electronically connects us to a majority of
the retail florists in our BloomNet network and 56 of our owned or franchised
stores.
Our operation center is located in our headquarters in Westbury, New York.
We provide comprehensive facility management services, including human and
technical monitoring of all production servers, 24 hours per day, seven days per
week.
COMPETITION
The growing popularity and convenience of e-commerce has given rise to mass
merchants on the Internet. In addition to selling their products over the
Internet, many of these retailers sell their products through a combination of
channels by maintaining a Web site, a toll-free phone number and physical
locations. These mass merchants offer an expanding variety of products and are
attracting an increasing number of customers. Some of these merchants have
expanded their offerings to include competing products and may continue to do so
in the future. These mass merchants, as well as other potential competitors, may
be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- adopt more aggressive pricing policies; and
- make more attractive offers to potential employees, distribution partners
and retailers.
In addition, we face intense competition in each of our individual product
categories. In the floral industry, our competitors include:
- retail floral shops, some of which maintain toll-free telephone numbers;
- online floral retailers;
- catalog companies that offer floral products;
- floral telemarketers and wire services; and
- supermarkets and mass merchants with floral departments.
Similarly, the gift, home and garden categories are highly competitive. Each
of these categories encompasses a wide range of products and is highly
fragmented. Products in these categories may be purchased from a number of
outlets, including mass merchants, telemarketers, retail specialty shops, online
retailers and mail-order catalogs.
We believe our brand strength, product selection, customer relationships,
technology infrastructure and fulfillment capabilities position us to compete
effectively against our current and potential competitors. However, increased
competition could result in:
- price reductions, decreased revenues and lower profit margins;
- loss of market share; and
- increased marketing expenditures.
43
These and other competitive factors may adversely impact our business and
results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Internet is rapidly evolving and there are few laws or regulations
directly applicable to e-commerce. Legislatures are considering an increasing
number of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
- user privacy;
- pricing;
- content;
- connectivity;
- intellectual property;
- distribution;
- taxation;
- liabilities;
- antitrust; and
- characteristics and quality of products and services.
Further, the growth and development of the market for online services may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of any
additional laws or regulations may impair the growth of the Internet or
commercial online services. This could decrease the demand for our services and
increase our cost of doing business. Moreover, the applicability to the Internet
of existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on our
business, financial condition and results of operations.
States or foreign countries might attempt to regulate our business or levy
sales or other taxes relating to our activities. Because our products and
services are available over the Internet anywhere in the world, multiple
jurisdictions may claim that we are required to do business as a foreign
corporation in one or more of those jurisdictions. Our failure to qualify as a
foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties. States or foreign governments may charge us
with violations of local laws.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our service marks, trademarks, trade secrets, domain names and
similar intellectual property as critical to our success. We have applied for or
received trademark and/or service mark registration for, among others, the marks
"1-800-FLOWERS.COM", "1-800-FLOWERS", and "Plow & Hearth". We also have rights
to numerous domain names, including WWW.1800FLOWERS.COM, WWW.FLOWERS.COM and
WWW.PLOWHEARTH.COM. In addition, we have developed a transaction processing
system and operating systems as well as marketing data, including customer
information databases.
We rely on trademark, unfair competition and copyright law, trade secret
protection and contracts such as confidentiality and license agreements with our
employees, customers, partners and others to protect our proprietary rights.
Despite our precautions, it may be possible for competitors to obtain and/or use
our proprietary information without authorization or to develop technologies
similar to ours and independently create a similarly functioning infrastructure.
Furthermore, the protection of proprietary rights in Internet-related industries
is uncertain and still evolving. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States. Our means of protecting our proprietary rights in the United States or
abroad may not be adequate.
We intend to continue to license certain technology from third parties,
including Oracle, Microsoft and AT&T, for our communications technology and the
software that underlies our
44
business systems. The market is evolving and we may need to license additional
technologies to remain competitive. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate licensed technology into our operations.
Third parties have in the past infringed or misappropriated our intellectual
property or similar proprietary rights. We believe infringements and
misappropriations will continue to occur in the future. We intend to police
against infringement or misappropriation. However, we cannot guarantee we will
be able to enforce our rights and enjoin the alleged infringers from their use
of confusingly similar trademarks, servicemarks, telephone numbers and domain
names.
In addition, third parties may assert infringement claims against us. We
cannot be certain that our technologies or marks do not infringe valid patents,
trademarks, copyrights or other proprietary rights held by third parties. We may
be subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business.
Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running our business.
EMPLOYEES
As of April 29, 1999, we had 1,464 full-time and 227 part-time employees, of
which 185 worked in administration, 887 in customer service and 619 in retail
and fulfillment operations. During peak periods, we substantially increase the
number of customer service and retail and fulfillment personnel. Our personnel
are not represented under collective bargaining agreements and we consider our
relations with our employees to be good.
45
PROPERTIES
Our headquarters and one of our customer service centers are located in
approximately 71,000 square feet office space in Westbury, New York, under a
lease that expires in May 2005. In addition, we own an approximately 185,000
square foot fulfillment center in Madison, Virginia, with an additional 115,000
square feet under construction, and lease an approximately 27,000 square foot
local distribution center in Phoenix, Arizona and an approximately 24,000 square
foot local distribution center in Denver, Colorado. We lease a total of
approximately 53,000 square feet for our customer service centers in:
- Westbury, New York;
- Marietta, Georgia;
- San Antonio, Texas;
- Phoenix, Arizona;
- Madison, Virginia;
- Bethpage, New York; and
- Long Beach, California.
As of March 28, 1999, we leased approximately 239,000 gross square feet for
our owned or franchised retail stores. Most of the existing stores are leased by
1-800-FLOWERS.COM with lease terms typically ranging from five to 20 years. Most
of our leases provide for a minimum rent plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require us
to pay insurance, utilities, real estate taxes and repair and maintenance
expenses.
LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings and litigation
incidental to the normal conduct of our business. We are not currently involved
in any material legal proceedings or litigation.
46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and key employees of 1-800-FLOWERS.COM,
their ages as of May 20, 1999 and the positions held by them are set forth
below:
NAME AGE POSITION
- ---------------------------------- --- --------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS:
James F. McCann................... 47 Chairman and Chief Executive Officer
Christopher G. McCann............. 38 Director and Senior Vice President
John W. Smolak.................... 50 Senior Vice President--Finance and Administration
Peter G. Rice..................... 53 President--Plow & Hearth
Kerry W. Coin..................... 51 Vice President--Retail and Fulfillment
Kenneth J. Mesnik................. 49 Vice President--Merchandising
T. Guy Minetti.................... 48 Director
Jeffrey C. Walker................. 43 Director
KEY EMPLOYEES:
Donna M. Iucolano................. 35 Vice President--Interactive Services
Vincent J. McVeigh................ 38 Vice President--Customer Service Centers
Thomas G. Hartnett................ 35 Vice President--Development
William E. Shea................... 40 Treasurer and Vice President--Finance
Guru P. Ghosh..................... 54 Vice President--Information Technology
Brian McGee....................... 35 Vice President--Real Estate and Construction
JAMES F. MCCANN has been our Chairman and Chief Executive Officer since our
inception in 1992. Prior to that, Mr. McCann founded Flora Plenty, a chain of 14
flower shops in the New York metropolitan area. Mr. McCann is a member of the
boards of directors of Gateway 2000, OfficeMax, Inc., PETCO Animal Supplies,
Inc., the National Retail Federation and Very Special Arts, as well as the
boards of Hofstra University and Winthrop-University Hospital. James F. McCann
is the brother of Christopher G. McCann.
CHRISTOPHER G. MCCANN has been our Senior Vice President and one of our
directors since our inception in 1992. Prior to joining us, Mr. McCann was
President of Flora Plenty. Mr. McCann serves on the board of directors of
Neoware, Inc. and is a member of the Advisory Board of the Marist College School
of Management, the National Retail Federation Marketing Committee and the
Society of American Florists Marketing Committee. Christopher G. McCann is the
brother of James F. McCann.
JOHN W. SMOLAK has been our Senior Vice President--Finance and
Administration since January 1999. From February 1995 until joining us, Mr.
Smolak was senior vice president and chief financial officer of Lechters, Inc.,
a national housewares specialty retailer. Prior to that, Mr. Smolak was senior
vice president of finance and administration of Jungle Jim's Playlands, Inc.
PETER G. RICE, President--Plow & Hearth, was co-founder of The Plow &
Hearth, Inc. and served as its President and Chairman of the Board since its
inception in November 1980. Mr. Rice was also involved in the formation of Blue
Ridge Mountain Sports, a retail chain of backpacking/outdoor stores, and Phoenix
Products, a manufacturer of kayaks. He is a director of the New England Mail
Order Association and a member of the U.S. Senate Productivity and Quality Award
Board for Virginia.
KERRY W. COIN has been our Vice President--Retail and Fulfillment since
January 1999. From February 1998 until joining us, Mr. Coin was an independent
consultant.
47
From August 1996 until February 1998, Mr. Coin was the president and chief
operating officer of Diedrich Coffee, a California-based purveyor of gourmet
coffee. Prior to that, Mr. Coin founded and served as president and chief
executive officer of Boston West, the largest area developer of Boston Chicken,
from January 1993.
KENNETH J. MESNIK has been our Vice President--Merchandising since January
1999. From May 1993 until joining us, Mr Mesnik was the Senior Vice President of
Federated Merchandising. Prior to that, Mr. Mesnik served as Vice President of
May Company in charge of home furnishings from January 1990.
T. GUY MINETTI has been one of our directors since December 1993. Mr.
Minetti serves as President of Bayberry Advisors, an investment banking firm
which he founded in March 1989. In September 1993, Mr. Minetti co-founded
American Sports Products Group Inc., a holding company which has acquired nine
niche sporting goods manufacturers. Prior to forming Bayberry, Mr. Minetti was a
Managing Director at Kidder, Peabody & Company.
JEFFREY C. WALKER has been one of our directors since February 1995. Mr.
Walker has been General Managing Partner of Chase Capital Partners, the private
equity division of The Chase Manhattan Corporation, since 1988, and a General
Partner thereof since 1984. Mr. Walker is a director of the Monet Group, Guitar
Center, House of Blues and Domain.
DONNA M. IUCOLANO has been our Vice President--Interactive Services since
August 1998. Prior to that role, Ms. Iucolano held various positions within
1-800-
FLOWERS.COM since her arrival in June 1994, including Director, Manager and
Marketing Coordinator of our interactive services division. Before joining us,
Ms. Iucolano was a marketing and creative services consultant to educational and
other non-profit organizations.
VINCENT J. MCVEIGH has been our Vice President--Customer Service Centers
since September 1998. He joined us in May 1991 as a BloomNet manager, assisting
in the development of our independently owned BloomNet affiliates. He was
promoted to general manager of the New York customer service center in May 1993,
and then in October 1995 to Director of Call Center Operations. From February
1988 until joining us, Mr. McVeigh worked with Hyundai Motor America as a
district manager.
THOMAS G. HARTNETT has been our Vice President--Development since January
1999. Prior to that role, Mr. Hartnett held various positions within
1-800-FLOWERS.COM since his arrival in August 1991, including Controller,
director of Store Operations and Vice President of Retail Operations. From June
1984 until joining us, Mr. Hartnett was a certified public accountant at Ernst &
Young.
WILLIAM E. SHEA has been our Treasurer and Vice President of Finance since
August 1998. Prior to that role, Mr. Shea served as our Corporate Controller
after joining us in April 1996. From 1980 until joining us, Mr. Shea was a
certified public accountant with Ernst & Young.
GURU P. GHOSH has been our Vice President--Information Technology since July
1996. From August 1989 until joining us, Mr. Ghosh was the director of
information technology at Independence Blue Cross, a nationwide health insurance
company. Prior to that, Mr. Ghosh was a senior vice president at Prudential
Securities Incorporated from January 1984.
BRIAN MCGEE has been our Vice President--Real Estate and Construction since
February 1996. From August 1990 until joining us, Mr. McGee was the Northeast
construction manager for Blockbuster Entertainment Corp.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to our third amended and restated certificate of incorporation,
which will become effective upon consummation of this offering, our board of
directors will be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These
48
provisions, when coupled with the provision of our third amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees. We
intend to expand the size of our board after this offering.
Mr. Walker had originally been elected to our board of directors pursuant to
an agreement we entered into with Chase. The provision of this agreement
providing Chase with the right to select one of our directors has terminated in
connection with the amendment to the Chase agreement. However, Mr. Walker will
remain on our board following this offering.
BOARD COMMITTEES
The audit committee reports to the board regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls. The audit committee consists of Messrs. Minetti and James F. McCann.
After this offering, an additional outside director will be added to the audit
committee.
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors. In
addition, the compensation committee reviews bonus and stock compensation
arrangements for all of our other employees. The current members of the
compensation committee are Messrs. Minetti, Walker and James F. McCann.
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
DIRECTOR COMPENSATION
Directors currently do not receive a stated salary from 1-800-FLOWERS.COM
for their service as members of the board of directors, although by resolution
of the board they may receive a fixed sum and reimbursement for expenses in
connection with the attendance at board and committee meetings. We currently do
not provide additional compensation for committee participation or special
assignments of the board of directors.
We have entered into an agreement with Bayberry Advisors, Inc., pursuant to
which Bayberry provides us with consulting and advisory services. T. Guy
Minetti, one of our directors, serves as Bayberry's President and owns 70% of
its outstanding stock, and James F. McCann, our Chairman and Chief Executive
Officer, owns 30% of its outstanding stock. We pay Bayberry a retainer fee of
$100,000 per year for these services. In connection with our April 1998
acquisition of Plow & Hearth, we paid Bayberry advisory fees in the amount of
$210,000, against which the $100,000 retainer for that year was credited.
In July 1998, we granted Mr. Minetti options to purchase shares of
class B common stock with an exercise price of $ per share for his services on
our board of directors.
EMPLOYMENT CONTRACTS
We have entered into employment agreements with each of John W. Smolak,
Peter G. Rice and Kerry W. Coin.
Mr. Smolak's employment agreement with us became effective on January 4,
1999. The annual salary for Mr. Smolak is $260,000, with the possibility of a
bonus of up to 30% of his salary. In addition, he has received options to
purchase shares of our class B common stock, which options vest at the rate
of 25% per year beginning on the first anniversary of the date of grant. Mr.
Smolak is not entitled to any compensation from us after his employment is
terminated, except that if Mr. Smolak's employment is terminated within the
first 12 months following his
49
commencement of employment, then we will continue to pay his salary for a period
of six months following the date of termination.
Mr. Rice has entered into an employment agreement with Plow & Hearth, which
became effective April 3, 1998. The agreement terminates on April 3, 2001, with
automatic one year renewals unless prior notice is given. Mr. Rice's annual
salary is $200,000 and he is eligible to participate in Plow & Hearth's annual
profit sharing bonus plan. Upon termination without cause, Mr. Rice is entitled
to an amount equal to his salary through the end of the agreement, any amounts
earned, accrued or owing but not yet paid as of the date of the termination and
other benefits, if any, as are payable to or for the benefit of Mr. Rice as of
the date of his termination until the end of the agreement.
Mr. Coin's agreement with us became effective on January 18, 1999. Mr.
Coin's annual salary is $170,000, with the possibility of a bonus of up to 25%
of his salary. In addition, Mr. Coin is entitled to receive options to purchase
shares of our class B common stock, which options vest at the rate of 25%
per year beginning on the first anniversary of the date of grant. Mr. Coin is
not entitled to any compensation from us after his employment is terminated,
except that if Mr. Coin's employment is terminated within the first 12 months
following his commencement of employment, then we will continue to pay his
salary for a period of six months following the date of termination.
Each of these executives has agreed not to compete with us or solicit our
clients or other employees during their term of employment and for two years
immediately following their termination. Each of these executives is also bound
by confidentiality provisions, which prohibit the executive from, among other
things, disseminating or using confidential information about our clients in any
way that would be adverse to us.
We are in the process of finalizing employment agreements for James F.
McCann and Christopher G. McCann, which we expect will include similar
non-competition and confidentiality provisions. We expect these agreements to be
in place prior to the consummation of this offering.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended June 28, 1998 to our Chief Executive Officer and to our most
highly compensated executive officer, other than the Chief Executive Officer,
whose salary and bonus for that fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
---------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------
-------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#)
- ------------------------------------------------------------- ------------- ----------- ---------------------------
James F. McCann.............................................. $ 1,229,930 $ -- --
Chairman and Chief Executive Officer
Christopher G. McCann........................................ 191,667 42,600 --
Senior Vice President
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant options to either our Chief Executive Officer or the named
executive officer for the fiscal year ended June 28, 1998. In addition, we have
never granted any stock appreciation rights to our Chief Executive Officer or
the named executive officer.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of June
28, 1998
50
by our Chief Executive Officer and the named executive officer. No options were
exercised during fiscal 1998 by either of these executive officers. There was no
pubic trading market for the common stock as of June 28, 1998. Accordingly, the
value of unexercised in-the-money options at fiscal year-end is based on the
assumed initial public offering price of $ per share, less the exercise
price per share, multiplied by the number of shares underlying the options. All
options indicated are to purchase shares of class B common stock.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR-END
---------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- --------------- ----------------- ------------- ---------------
James F. McCann...................................... -- -- $ -- $ --
Christopher G. McCann................................
STOCK OPTION PLANS
1997 STOCK OPTION PLAN
Our 1997 Stock Option Plan was adopted by the board of directors in January
1997 and was subsequently approved by the stockholders in December 1997. Options
to purchase shares of class B common stock have been granted under the
1997 Plan. No further options will be granted under the 1997 Plan.
The 1997 Plan is administered by the compensation committee. This committee
has complete discretion to determine which eligible individuals in our employ or
service (including officers, non-employee board members and consultants) are to
receive option grants, the exercise price of each such option, the time or times
when such option grants are to be made, the number of shares subject to each
such grant, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the federal tax laws, the vesting schedule
to be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding.
The exercise price for the shares of our class B common stock subject to
option grants made under the 1997 Plan may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee.
In the event of an acquisition of 1-800-FLOWERS.COM, whether by merger or
asset sale, each outstanding option which is not to be assumed by the successor
corporation will automatically accelerate in full.
The board may amend or modify the 1997 Plan at any time, subject to any
required stockholder approval.
51
CERTAIN TRANSACTIONS
In January 1995, we entered into an investment agreement with the
predecessor of Chase Venture Capital Associates whereby Chase purchased 26,345
shares of our class C common stock and warrants to purchase 237,104 shares of
class A common stock with a nominal exercise price for an aggregate of $10.0
million, in both cases prior to adjustment for the redemption of our class C
common stock and -for-1 stock split. Chase currently holds over 5% of our
class A common stock, assuming exercise of their warrants, and Jeffrey C.
Walker, one of our directors, is a managing partner of Chase. In connection with
the private placement completed in May 1999, we entered into an amendment to the
investment agreement, whereby Chase agreed to allow us to redeem the class C
common stock owned by them in exchange for shares of class A common stock
and approximately $14.9 million. We sold shares of preferred stock to Chase in
our May 1999 private placement for a purchase price equal to the $14.9 million
proceeds from the redemption of their class C common stock. In connection with
the private placement, Chase has waived its registration rights for this
offering, but retained registration rights for the future pursuant to the
investors' rights agreement described below. See "Description of Capital
Stock--Registration Rights" for a description of these registration rights.
Concurrent with the closing of the May 1999 private placement, we redeemed
the 8,747 shares of existing class C common stock owned by Mr. James McCann in
exchange for $4.4 million and shares of class A common stock.
In March 1999, we entered into a credit agreement with The Chase Manhattan
Bank, an affiliate of Chase Venture Capital Associates and Jeffrey C. Walker,
whereby Chase agreed to provide us with a term loan of $18.0 million and a
revolving loan commitment of $12.0 million. At March 28, 1999, the amount of
indebtedness to Chase outstanding was $18.0 million. The term loan matures in
March 2004 and the revolving loan commitment terminates in September 2000. In
connection with this offering, we have amended the terms of the credit agreement
to provide, among other things, that the indebtedness outstanding under the
credit agreement matures on the earlier of the consummation of this offering and
July 3, 2000. We intend to use a portion of the proceeds from this offering to
repay all of our outstanding indebtedness under the credit facility.
In connection with our acquisition of 88% of the outstanding common stock of
Plow & Hearth, we entered into a stockholders agreement, pursuant to which the
remaining stockholders of Plow & Hearth have the right to either convert their
shares of Plow & Hearth and Plow & Hearth options granted under one of its
option plans into cash or shares of our class A common stock after the
completion of this offering. In connection with this offering, we have amended
the Plow & Hearth stockholders agreement to provide that each of these minority
holders will have their interests redeemed upon consummation of this offering
for an aggregate of $8.4 million. In addition, we have amended Plow & Hearth's
other option plan so that upon consummation of this offering, 40% of these
options will accelerate and be redeemed for an aggregate of $354,000 and the
remaining 60% will terminate. Peter G. Rice, an executive officer, will receive
an aggregate of $4.0 million pursuant to these amendments.
In connection with our private placement of preferred stock to Forum
Holding, SOFTBANK, Benchmark and other investors and the amendment to our Chase
investment agreement, we entered into an investors' rights agreement with these
investors and James F. McCann and Christopher G. McCann. Pursuant to the
investors' rights agreement, we will be required to register the stock held by
these investors and Messrs. McCann upon their request. See "Description of
Capital Stock-- Registration Rights" for a description of these registration
rights.
52
We have entered into an agreement with Bayberry Advisors, Inc., pursuant to
which Bayberry provides us with consulting and advisory services. T. Guy
Minetti, one of our directors, serves as Bayberry's President and owns 70% of
its outstanding stock, and James F. McCann, our Chairman and Chief Executive
Officer, owns 30% of its outstanding stock. We pay Bayberry a retainer fee of
$100,000 per year for these services. In connection with our April 1998
acquisition of Plow & Hearth, we paid Bayberry advisory fees in the amount of
$210,000, against which the $100,000 retainer for that year was credited.
In July 1998, we loaned Christopher G. McCann, our Senior Vice President, an
amount of $67,631 at an interest rate of 7% per annum. Mr. Christopher McCann
repaid those borrowings in May 1999.
We maintain life insurance for each of our executive officers in the amount
of $50,000 and also maintain a directors and officers insurance policy.
We have adopted a policy providing that all future material transactions
between us and our officers, directors and other affiliates must:
- be approved by a majority of the members of our Board of Directors and by
a majority of the disinterested members of our Board of Directors; and
- be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
53
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of , 1999 and as adjusted to
reflect the sale of class A common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- each executive officer named in the Summary Compensation Table; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o 1-800-FLOWERS.COM, 1600 Stewart Avenue, Westbury, New York
11590. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options or warrants held by such persons that are exercisable within 60 days of
, 1999, but excludes shares of common stock underlying options held
by any other person. Percentage of beneficial ownership is based on shares of
class A common stock, assuming conversion of our preferred stock, and
shares of class B common stock outstanding as of , 1999 and shares of
class A common stock outstanding after completion of this offering.
PERCENTAGE OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER
OWNED THE OFFERING THE OFFERING
------------------------ ------------------------ ------------------------
NAME OF BENEFICIAL OWNER A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
James F. McCann(1)...................................
Christopher G. McCann(2).............................
T. Guy Minetti(3)....................................
Jeffrey C. Walker(4).................................
Chase Venture Capital Associates(5)..................
Benchmark Capital Partners(6)........................
SOFTBANK America Inc.(7).............................
All directors and executive officers as a group (7
persons)(8)........................................
- ------------------------------
(1) Includes shares of class B common stock held by a limited partnership,
of which Mr. McCann is a general partner and exercises control.
(2) Includes (a) shares of class B common stock held by a limited
partnership, of which Mr. McCann is a general partner and exercises control
and (b) shares of class B common stock issuable upon the exercise of
currently exercisable stock options and options which vest within 60 days.
(3) Includes shares of class B common stock issuable upon the exercise of
currently exercisable stock options and options which vest within 60 days.
The address of Mr. Minetti is c/o Bayberry Advisors, 70 West Red Oak Lane,
White Plains, New York 10604.
(4) All shares indicated as owned by Mr. Walker are included because of Mr.
Walker's affiliation with Chase Venture Capital Associates. Mr. Walker
disclaims beneficial ownership of all shares owned by Chase. Mr. Walker's
address is c/o Chase Venture Capital Associates, 380 Madison Avenue, 12th
Floor, New York, New York 10017.
(5) Includes shares of class A common stock subject to currently exercisable
warrants. The address of Chase is 380 Madison Avenue, 12th Floor, New York,
New York 10017.
(6) Benchmark's address is 2480 Sand Hill Road, Suite 200, Menlo Park,
California 94025.
(7) SOFTBANK's address is 10 Langley Road, Suite 202, Newton Center,
Massachusetts 02159.
(8) Includes shares of class B common stock issuable upon the exercise of
currently exercisable stock options and options which vest within 60 days.
54
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our third amended and restated certificate of incorporation, which will
become effective upon the completion of this offering, authorizes the issuance
of up to 200,000,000 shares of class A common stock, par value $.01 per share,
200,000,000 shares of class B common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of ,1999
shares of class A common stock were outstanding, shares of class B common
stock were outstanding and shares of preferred stock were outstanding.
Each outstanding share of preferred stock will be automatically converted into
shares of class A common stock upon consummation of this offering. As of
May 17, 1999, we had 66 stockholders.
No additional shares of class B common stock may be issued except (a) upon
the exercise of stock options existing upon the closing of this offering or (b)
in connection with a stock split or stock dividend on the class B common stock
in which the class A common stock is similarly split or receives a similar
dividend.
COMMON STOCK
Holders of our class A and class B common stock have identical rights,
except that holders of class A common stock are entitled to one vote for each
share held of record and holders of class B common stock are entitled to 10
votes for each share held of record on all matters submitted to a vote of the
stockholders, including the election of directors. Stockholders do not have
cumulative voting rights. Holders of class A common stock and class B common
stock vote together as a single class on all matters presented to the
stockholders for their vote or approval, except as may be required by Delaware
law. Each share of class B common stock is convertible at any time, at the
option of the holder, into one share of class A common stock. Each share of
class B common stock shall convert automatically into on share of class A common
stock upon transfer, with limited exceptions for related party and estate
planning transfers. Once transferred and converted to class A common stock, the
class B common stock shall be terminated and shall not be reissued. None of the
class A common stock or the class B common stock may be subdivided or combined
in any manner unless the shares of the other class are subdivided or combined in
the same proportion.
Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of our common stock are entitled to receive ratably
dividends, if any, as may be declared by the board of directors out of legally
available funds. In case of a liquidation, dissolution or winding up of
1-800-FLOWERS.COM, the holders of common stock will be entitled to share ratably
in the net assets legally available for distribution to shareholders after
payment of all of our liabilities and the liquidation preferences of any
preferred stock then outstanding. Holders of common stock have no preemptive or
subscription rights and no conversion rights except as described above. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of class A common stock are, and the shares of class A common
stock sold in this offering when issued and paid for will be, fully paid and
non-assessable.
The rights, preferences and privileges of holders of common stock are
subject to the rights of the holders of shares of any series of preferred stock
that we may designate and issue in the future. After the closing of this
offering, there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Our board of directors has the authority, without further action by the
stockholders, to issue from time to time shares of preferred
55
stock in one or more series. The board of directors may fix the number of
shares, designations, preferences, powers and other special rights of the
preferred stock. The preferences, powers, rights and restrictions of different
series of preferred stock may differ. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to holders
of common stock or adversely affect the rights and powers, including voting
rights, of the holders of common stock. The issuance may also have the effect of
delaying, deferring or preventing a change in control of 1-800-FLOWERS.COM. We
have no plans to issue any preferred stock.
REGISTRATION RIGHTS
We have entered into an investors' rights agreement with Forum Holding,
SOFTBANK, Benchmark, Chase, James F. McCann, Christopher G. McCann and other
investors. Pursuant to this agreement, these parties will have the right to
require us to register shares of class A common stock they own, or will own upon
the conversion of their preferred stock at the closing of this offering, on
various occasions. One year after the completion of this offering, a majority in
interest of Forum Holding, SOFTBANK, Benchmark and Chase will have the right to
require us on one occasion to register their stock. In addition, one year after
this offering, these investors, as well as Messrs. McCann, have the right to
require us to register their shares of stock at any time we propose to register
any of our common stock for offerings to the public. The investors and Messrs.
McCann can also require us to register their shares on a registration statement
on Form S-3 up to two times per year. These registration rights expire on the
earlier of the third anniversary of this offering and the date on which all
shares held by these parties can be sold pursuant to Rule 144 under the
Securities Act of 1933, as amended, and are subject to customary limitations. We
have agreed to pay the offering expenses in connection with the registration of
these shares, other than underwriters' commissions.
WARRANTS
We have issued warrants to purchase an aggregate of shares of class A
common stock to Chase Capital Partners. Each warrant entitles Chase to purchase
one share of class A common stock for a nominal purchase price. The exercise
price and number and kind of shares are subject to adjustment upon a stock
split, stock dividend or other recapitalization of our common stock. The
warrants do not give Chase any voting or other rights until exercised for shares
of class A common stock.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law, or
DGCL, regulating corporate takeovers. This section prevents Delaware
corporations from engaging under specified circumstances in a "business
combination", which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder", or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date such stockholder became an "interested stockholder" unless:
- the transaction in which such stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained this status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who are
directors and also officers; or
- on or after the date the business combination is approved by the board of
directors and authorized at an annual
56
or special meeting of stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Our third amended and restated certificate of incorporation will provide
that, upon the completion of this offering, our board of directors will be
divided into three classes of directors with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of 1-800-FLOWERS.COM and may maintain the incumbency of the board
of directors, because the classification of the board of directors generally
increases the difficulty of replacing a majority of the directors. In addition,
our third amended and restated certificate of incorporation will provide that
directors may be removed only for cause and only by the vote of the holders of
66.67% of the combined voting power of the outstanding class A and class B
common stock, which also will increase the difficulty of replacing a majority of
directors. Our third amended and restated certificate of incorporation will
eliminate the right of stockholders to act by written consent without a meeting
and our amended and restated bylaws eliminate the right of stockholders to call
special meetings of stockholders. The third amended and restated certificate of
incorporation and amended and restated bylaws will not provide for cumulative
voting in the election of directors. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of 1-800-FLOWERS.COM. These and other provisions may
have the effect of deferring hostile takeovers or delaying changes in control or
management of 1-800-
FLOWERS.COM. The amendment of any of these provisions would require approval by
holders of at least 66.67% of the combined voting power of the outstanding class
A and class B common stock.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise.
Our third amended and restated certificate of incorporation provides for
indemnification of our directors and officers against, and absolution of,
liability to us and our stockholders. We maintain directors' and officers'
liability insurance covering certain liabilities that may be incurred by our
directors and officers in connection with the performance of our duties.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the class A common stock is ChaseMellon
Shareholder Services, LLC.
LISTING
We have applied to list our class A common stock on the Nasdaq National
Market under the trading symbol "FLWS".
57
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our class A common stock in the public
market could adversely affect prevailing market prices of our class A common
stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our class A common stock, assuming no exercise of the
underwriters' over-allotment option, and shares of class B common stock,
assuming no exercise of outstanding options. Each share of class B common stock
is convertible at any time, at the option of the holder, into one share of class
A common stock. Each share of class B common stock shall convert automatically
into one share of class A common stock upon their transfer, with limited
exceptions for related party and estate planning transfers. Of the outstanding
shares, all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining shares of class A and class B common stock held
by existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 under the Securities Act, which rules are
summarized below.
LOCK-UP AGREEMENTS
All of our executive officers, directors, key employees and significant
stockholders, who together will hold an aggregate of shares of class A or
class B common stock following this offering, have signed lock-up agreements
under which they agreed not to transfer or dispose of, directly or indirectly,
any shares of common stock or any securities convertible into or exercisable or
exchangeable for shares of common stock, for a period of 180 days after the date
of this prospectus. Transfers or dispositions can be made sooner:
- with the prior written consent of Goldman, Sachs & Co.;
- in the case of transfers to specified trusts; or
- as a bona fide gift.
As a result of these lock-up agreements and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:
- approximately restricted securities will be eligible for immediate
sale on the date of this prospectus;
- approximately restricted securities will be eligible for sale
beginning 90 days after the date of this prospectus, subject in some cases
to compliance with Rule 144;
- approximately additional restricted securities will be eligible for
sale beginning 180 days after the effective date of this offering upon
expiration of the lock-up agreements, subject in some cases to compliance
with Rule 144; and
- the remainder of the restricted securities will be eligible for sale from
time to time thereafter, subject in some cases to compliance with Rule
144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of class A common stock then outstanding, which
will equal approximately shares immediately after this offering; or
58
- the average weekly trading volume of the class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of shares of our class A
common stock or their transferees will be entitled to certain rights with
respect to the registration of their shares under the Securities Act. See
"Description of Capital Stock-Registration Rights".
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of class A common stock that may
be issued upon the conversion of class B common stock reserved for issuance
under our 1997 Stock Plan. As of April 30, 1999, options to
purchase shares of class B common stock were issued and outstanding.
Upon the expiration of the lock-up agreements described above, at
least shares of class B common stock will be subject to vested options,
based on options outstanding as of April 30, 1999. Such registration statement
is expected to be filed and effective as soon as practicable after the effective
date of this offering. Accordingly, shares registered under such registration
statement will, subject to vesting provisions and Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the 180-day lock-up agreements expire.
LEGAL MATTERS
The validity of the class A common stock offered hereby will be passed upon
for 1-800-FLOWERS.COM by Brobeck, Phleger & Harrison LLP, New York, New York.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
59
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 28, 1999, June 28, 1998 and June 29,
1997, and for the nine months ended March 28, 1999 and for each of the three
years in the period ended June 28, 1998, as set forth in their report. We have
included our consolidated financial statements and schedule in this prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The consolidated financial statements of The Plow & Hearth, Inc. as of
December 31, 1996 and December 31, 1997 and for the years ended December 31,
1996 and December 31, 1997 included in this prospectus have been so included in
reliance upon the report of KPMG LLP, independent certified public accountants,
given on the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the class A common stock to be sold in this
offering. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to 1-800-FLOWERS.COM and the
class A common stock, reference is made to the registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete, and in each case reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our Commission filings, including the
registration statement, will also be available to you on the Commission's
Internet site (http://www.sec.gov).
We intend to furnish to our stockholders annual reports containing financial
statements audited by our independent auditors and to make available to our
stockholders quarterly reports containing unaudited financial data for the first
three quarters of each fiscal year.
60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets as of June 29, 1997, June 28, 1998 and March 28,
1999...................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1996,
June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998
(unaudited) and March 28, 1999............................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1996, June 29, 1997 and June 28, 1998 and the nine months
ended March 28, 1999...................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998
(unaudited) and March 28, 1999............................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
THE PLOW & HEARTH, INC.
Independent Auditors' Report................................................ F-28
Consolidated Balance Sheets as of December 31, 1996 and 1997................ F-29
Consolidated Statements of Income for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1998 (unaudited)................ F-30
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996 and 1997 and the three months ended March 31, 1998
(unaudited)............................................................... F-31
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1997 and the three months ended March 31, 1998 (unaudited)............ F-32
Notes to Consolidated Financial Statements.................................. F-33
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Consolidated Statement of Operations for the
year ended June 28, 1998.................................................. F-43
Unaudited Pro Forma Consolidated Statement of Operations for the nine months
ended March 29, 1998...................................................... F-44
Notes to Unaudited Pro Forma Consolidated Statements of Operations.......... F-45
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of March 28, 1999,
June 28, 1998 and June 29, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the nine months
ended March 28, 1999 and for each of the three years in the period ended June
28, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
1-800-FLOWERS.COM, Inc. and Subsidiaries at March 28, 1999, June 28, 1998 and
June 29, 1997, and the consolidated results of their operations and their cash
flows for the nine months ended March 28, 1999 and for each of the three years
in the period ended June 28, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Melville, New York
May 20, 1999
F-2
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- --------------- ---------------
ASSETS
Current assets:
Cash and equivalents.......................................... $ 11,443 $ 8,873 $ 2,632
Short-term investments........................................ 3,210 5,034 --
Receivables, net.............................................. 6,520 8,432 10,966
Inventories................................................... 786 4,971 8,060
Prepaid and other............................................. 538 1,026 1,318
Recoverable income taxes...................................... -- -- 3,217
Deferred tax assets........................................... 738 1,637 1,175
--------------- --------------- ---------------
Total current assets...................................... 23,235 29,973 27,368
Property, plant and equipment at cost, net...................... 8,486 19,379 24,832
Investments..................................................... 2,854 1,383 987
Capitalized investment in leases................................ 2,149 1,837 1,529
Notes receivable, net........................................... 1,243 902 780
Licenses, goodwill and other.................................... 6,163 28,272 31,103
--------------- --------------- ---------------
Total assets.................................................... $ 44,130 $ 81,746 $ 86,599
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 15,448 $ 20,790 $ 27,037
Accrued expenses.............................................. 2,625 3,101 4,321
Current maturities of long-term debt and obligations under
capital leases.............................................. 2,055 3,287 5,500
Income taxes payable.......................................... 1,132 845 --
--------------- --------------- ---------------
Total current liabilities................................. 21,260 28,023 36,858
Long-term debt and obligations under capital leases............. 6,591 22,463 28,148
Deferred tax liabilities........................................ 168 1,332 237
Deferred rent and other liabilities............................. 2,697 2,904 3,955
Management put liability........................................ -- 8,660 6,300
--------------- --------------- ---------------
Total liabilities............................................... 30,716 63,382 75,498
Redeemable Class C common stock, $.01 par value, 100,000 shares
authorized, 34,822 shares issued and outstanding, stated at
liquidation and redemption value.............................. 16,084 17,692 19,020
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 200,000 shares authorized,
none issued................................................. -- -- --
Class A common stock, $.01 par value, 50,000 shares
authorized, 48,087 shares issued............................ 0 0 0
Class B common stock, $.01 par value, 10,000,000 shares
authorized, 4,884,993 shares issued......................... 49 49 49
Additional paid-in capital.................................... 2,183 2,183 3,863
Accumulated other comprehensive income........................ 5 14 --
Retained earnings (deficit)................................... (1,932) 1,534 (7,148)
Deferred compensation......................................... -- -- (1,575)
Treasury stock, at cost--5,140 Class A and 514,000 Class B
shares in 1997 and 5,280 Class A and 528,000 Class B shares
in 1998 and 1999............................................ (2,975) (3,108) (3,108)
--------------- --------------- ---------------
Total stockholders' equity (deficit)...................... (2,670) 672 (7,919)
--------------- --------------- ---------------
Total liabilities and stockholders' equity (deficit)............ $ 44,130 $ 81,746 $ 86,599
--------------- --------------- ---------------
--------------- --------------- ---------------
SEE ACCOMPANYING NOTES.
F-3
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------- --------------------------------
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- -------------- -------------- --------------- ---------------
(UNAUDITED)
Net revenues......................... $ 153,128 $ 186,430 $ 220,592 $ 146,217 $ 203,668
Cost of revenues..................... 92,820 115,078 136,966 91,773 123,738
-------------- -------------- -------------- --------------- ---------------
Gross profit......................... 60,308 71,352 83,626 54,444 79,930
Operating expenses:
Marketing and sales................ 42,952 47,464 55,417 38,089 67,204
Technology and development......... 851 1,411 1,794 1,128 5,207
General and administrative......... 11,556 12,338 15,832 10,315 10,528
Depreciation and amortization...... 2,247 3,287 4,168 2,768 6,043
-------------- -------------- -------------- --------------- ---------------
Total operating expenses....... 57,606 64,500 77,211 52,300 88,982
-------------- -------------- -------------- --------------- ---------------
Operating income (loss).............. 2,702 6,852 6,415 2,144 (9,052)
Other income (expense):
Interest income.................... 1,205 1,121 1,290 812 702
Interest expense................... (1,444) (912) (1,177) (720) (1,863)
Other, net......................... 30 465 1,541 1,637 32
-------------- -------------- -------------- --------------- ---------------
Total other income (expense)... (209) 674 1,654 1,729 (1,129)
-------------- -------------- -------------- --------------- ---------------
Income (loss) before income taxes and
minority interests................. 2,493 7,526 8,069 3,873 (10,181)
Provision (benefit) for income
taxes.............................. 1,255 3,135 3,181 1,515 (2,926)
-------------- -------------- -------------- --------------- ---------------
Income (loss) before minority
interests.......................... 1,238 4,391 4,888 2,358 (7,255)
Minority interests in operations of
consolidated subsidiaries.......... 59 (4) 186 38 (99)
-------------- -------------- -------------- --------------- ---------------
Net income (loss).................... 1,297 4,387 5,074 2,396 (7,354)
Redeemable Class C common stock
dividends.......................... (1,029) (1,462) (1,608) (1,206) (1,328)
-------------- -------------- -------------- --------------- ---------------
Net income (loss) applicable to
common stockholders................ $ 268 $ 2,925 $ 3,466 $ 1,190 $ (8,682)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Net income (loss) per common share
applicable to common stockholders:
Basic.............................. $ 0.06 $ 0.66 $ 0.79 $ 0.27 $ (1.97)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ $ 0.05 $ 0.63 $ 0.74 $ 0.25 $ (1.97)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Shares used in the calculation of net
income (loss) per common share:
Basic.............................. 4,705 4,414 4,412 4,414 4,400
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ 4,942 4,674 4,661 4,675 4,400
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
SEE ACCOMPANYING NOTES.
F-4
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, JUNE 29, 1997 AND JUNE 28, 1998 AND NINE MONTHS ENDED
MARCH 28, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
--------------------------------------------------
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER
------------------------ ------------------------ PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME
----------- ----------- --------- ------------- ----------- -------------------
Balance at July 2, 1995............... 48,087 $ 0 4,808,700 $ 48 $ 1,691 $ 70
Issuance of warrants.................. -- -- -- -- 492 --
Issuance of common stock.............. -- -- 76,293 1 -- --
Accrual of Redeemable Class C common
stock dividends..................... -- -- -- -- -- --
Purchase of treasury stock............ -- -- -- -- -- --
Comprehensive income:
Net income.......................... -- -- -- -- -- --
Unrealized loss on marketable
securities........................ -- -- -- -- -- (85)
Total comprehensive income........ -- -- -- -- -- --
----------- ----- --------- --- ----------- ---
Balance at June 30, 1996.............. 48,087 0 4,884,993 49 2,183 (15)
Accrual of Redeemable Class C common
stock dividends..................... -- -- -- -- -- --
Comprehensive income:
Net income.......................... -- -- -- -- -- --
Unrealized gain on marketable
securities........................ -- -- -- -- -- 20
Total comprehensive income........ -- -- -- -- -- --
----------- ----- --------- --- ----------- ---
Balance at June 29, 1997.............. 48,087 0 4,884,993 49 2,183 5
Accrual of Redeemable Class C common
stock dividends..................... -- -- -- -- -- --
Purchase of treasury stock............ -- -- -- -- -- --
Comprehensive income:
Net income.......................... -- -- -- -- -- --
Unrealized gain on marketable
securities........................ -- -- -- -- -- 9
Total comprehensive income........ -- -- -- -- -- --
----------- ----- --------- --- ----------- ---
Balance at June 28, 1998.............. 48,087 0 4,884,993 49 2,183 14
Accrual of Redeemable Class C common
stock dividends..................... -- -- -- -- -- --
Employee stock options................ -- -- -- -- 1,680 --
Amortization of deferred
compensation........................ -- -- -- -- -- --
Comprehensive loss:
Net loss............................ -- -- -- -- -- --
Unrealized loss on marketable
securities........................ -- -- -- -- -- (14)
Total comprehensive loss.......... -- -- -- -- -- --
----------- ----- --------- --- ----------- ---
Balance at March 28, 1999............. 48,087 $ 0 4,884,993 $ 49 $ 3,863 $ --
----------- ----- --------- --- ----------- ---
----------- ----- --------- --- ----------- ---
TOTAL
RETAINED TREASURY STOCK STOCKHOLDERS'
EARNINGS DEFERRED ---------------------- EQUITY
(DEFICIT) COMPENSATION SHARES AMOUNT (DEFICIT)
----------- --------------- --------- ----------- ---------------
Balance at July 2, 1995............... $ (5,125) $ -- -- $ -- $ (3,316)
Issuance of warrants.................. -- -- -- -- 492
Issuance of common stock.............. -- -- -- -- 1
Accrual of Redeemable Class C common
stock dividends..................... (1,029) -- -- -- (1,029)
Purchase of treasury stock............ -- -- 519,140 (2,975) (2,975)
Comprehensive income:
Net income.......................... 1,297 -- -- -- 1,297
Unrealized loss on marketable
securities........................ -- -- -- -- (85)
-------
Total comprehensive income........ -- -- -- -- 1,212
----------- ------- --------- ----------- -------
Balance at June 30, 1996.............. (4,857) -- 519,140 (2,975) (5,615)
Accrual of Redeemable Class C common
stock dividends..................... (1,462) -- -- -- (1,462)
Comprehensive income:
Net income.......................... 4,387 -- -- -- 4,387
Unrealized gain on marketable
securities........................ -- -- -- -- 20
-------
Total comprehensive income........ -- -- -- -- 4,407
----------- ------- --------- ----------- -------
Balance at June 29, 1997.............. (1,932) -- 519,140 (2,975) (2,670)
Accrual of Redeemable Class C common
stock dividends..................... (1,608) -- -- -- (1,608)
Purchase of treasury stock............ -- -- 14,140 (133) (133)
Comprehensive income:
Net income.......................... 5,074 -- -- -- 5,074
Unrealized gain on marketable
securities........................ -- -- -- -- 9
-------
Total comprehensive income........ -- -- -- -- 5,083
----------- ------- --------- ----------- -------
Balance at June 28, 1998.............. 1,534 -- 533,280 (3,108) 672
Accrual of Redeemable Class C common
stock dividends..................... (1,328) -- -- -- (1,328)
Employee stock options................ -- (1,680) -- -- --
Amortization of deferred
compensation........................ -- 105 -- -- 105
Comprehensive loss:
Net loss............................ (7,354) -- -- -- (7,354)
Unrealized loss on marketable
securities........................ -- -- -- -- (14)
-------
Total comprehensive loss.......... -- -- -- -- (7,368)
----------- ------- --------- ----------- -------
Balance at March 28, 1999............. $ (7,148) $ (1,575) 533,280 $ (3,108) $ (7,919)
----------- ------- --------- ----------- -------
----------- ------- --------- ----------- -------
SEE ACCOMPANYING NOTES.
F-5
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- --------- ------------ -----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)..................................... $ 1,297 $ 4,387 $ 5,074 $ 2,396 $ (7,354)
Reconciliation of net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization....................... 2,247 3,287 4,168 2,768 6,043
Deferred income taxes............................... 645 (170) 265 126 (633)
Management put liability............................ -- -- 1,631 -- (1,631)
Bad debt expense.................................... 319 553 383 235 231
Minority interest................................... (59) 4 (186) (38) 99
Issuance of warrants................................ 492 -- -- -- --
Amortization of deferred compensation............... -- -- -- -- 105
Loss on disposal of equipment and other............. -- -- 313 -- 151
Changes in operating items, excluding the effects of
acquisitions:
Working capital items............................. 891 2,547 (284) (3,229) (2,741)
Nonworking capital items.......................... (13) 56 (1,864) (1,493) (3,972)
----------- ----------- --------- ------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... 5,819 10,664 9,500 765 (9,702)
----------- ----------- --------- ------------ -----------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................... -- (1,057) (15,206) (939) --
Proceeds on sale of retail operations................. -- 83 -- -- --
Capital expenditures, net of noncash
expenditures--$2,071, $1,114, $561, $245 and $3,009,
for fiscal 1996, 1997, 1998 and nine months ended
March 29, 1998 and March 28, 1999, respectively..... (2,890) (1,814) (10,302) (2,965) (7,254)
(Purchases) sales of investments...................... (741) (1,305) (296) (800) 5,428
Notes receivable, net................................. (47) (97) 341 (650) 122
Other, net............................................ (336) -- -- -- --
----------- ----------- --------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES........... (4,014) (4,190) (25,463) (5,354) (1,704)
----------- ----------- --------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from bank borrowings......................... -- -- 15,500 -- 32,402
Acquisition of treasury stock......................... (2,975) -- (133) -- --
Payments of capital lease obligations................. (1,032) (1,408) (1,648) (1,523) (1,062)
Payments of related party debt........................ (1,886) -- -- -- --
Repayment of notes payable............................ (48) (262) (326) (231) (26,175)
----------- ----------- --------- ------------ -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................... (5,941) (1,670) 13,393 (1,754) 5,165
----------- ----------- --------- ------------ -----------
Net change in cash and equivalents.................... (4,136) 4,804 (2,570) (6,343) (6,241)
Cash and equivalents:
Beginning of period................................. 10,775 6,639 11,443 11,443 8,873
----------- ----------- --------- ------------ -----------
End of period....................................... $ 6,639 $ 11,443 $ 8,873 $ 5,100 $ 2,632
----------- ----------- --------- ------------ -----------
----------- ----------- --------- ------------ -----------
SEE ACCOMPANYING NOTES.
F-6
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
1-800-FLOWERS.COM, Inc. (the "Company") is a leading e-commerce provider of
floral products and gifts. Customers can purchase products through any of three
sales channels: online, by calling toll-free and by visiting one of 123 retail
stores (owned or franchised) located across the United States. The Company has
broadened its product lines to include home and garden merchandise through its
acquisition of The Plow & Hearth, Inc. ("P&H") in April 1998 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
1-800-FLOWERS.COM, Inc. and its wholly-owned and majority-owned subsidiaries and
partnerships. All significant intercompany balances and transactions have been
eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended March 29, 1998, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations and cash flows for the nine months
ended March 29, 1998 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or eliminated.
The results of operations for the nine months ended March 28, 1999, are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending June 27, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND EQUIVALENTS
Cash and equivalents consist of demand deposits with banks, highly liquid
money market funds, overnight repurchase agreements and commercial paper with
maturities of three months or less when purchased.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable are limited
due to the Company's large number of customers and their dispersion
substantially throughout the United States. A substantial portion of receivables
are related to balances owed by major credit card
F-7
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
companies. The timing of the related cash realization and fees accrued are
determined based upon agreements with these companies. Credit is also extended
to customers based upon an evaluation of the customer's financial condition and
collateral is generally not required. Allowances relating to accounts receivable
(June 29, 1997--$509,000, June 28, 1998--$784,000 and March 28, 1999-- $998,000)
have been recorded based upon previous experience and other relevant factors, in
addition to management's periodic evaluation. Credit losses have been within
management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method of accounting.
DEFERRED CATALOG COSTS
The Company capitalizes the costs of producing and distributing its
catalogs. These costs are amortized in direct proportion with actual sales from
the corresponding catalog over a period not to exceed twenty-six weeks. No costs
were deferred at June 29, 1997. The unamortized balance of deferred catalog
costs at June 28, 1998 and March 28, 1999 was approximately $669,000 and
$1,772,000, respectively, and is included in other non-current assets.
DEPRECIATION AND AMORTIZATION
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets. Amortization of assets held under capital
leases is calculated using the straight-line method over the estimated useful
life of the asset. Amortization of leasehold improvements is calculated using
the straight-line method over the shorter of the lease terms, including renewal
options expected to be exercised, or estimated useful lives of the improvements.
The useful lives of property, plant and equipment are as follows:
YEARS
-----------
Building............................................................................ 40
Leasehold improvements.............................................................. 15-20
Furniture, fixtures and equipment (including computer equipment, software
development costs and telecommunication equipment)................................ 3-5
COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
The Company follows the provisions of Statement of Position 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. These costs are amortized
over a period of three years, the estimated useful life of the software.
Internet and Web site development costs are expensed as incurred. No costs for
computer software developed for internal use were capitalized during the year
ended June 30, 1996. Capitalized computer software developed for internal use
approximated $828,000, $5,169,000, $3,860,000 and $626,000 for the years ended
June 29, 1997 and June 28, 1998 and for the nine months ended March 29, 1998 and
March 28, 1999, respectively.
F-8
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
INVESTMENTS
The Company's investments, consisting primarily of debt and equity
securities, are classified as available-for-sale and are stated at fair value,
with unrealized gains and losses, net of tax, reported in accumulated other
comprehensive income. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in other
income. The cost of investments sold is determined using the specific
identification method. Estimated fair values of investments are based on quoted
market prices on the last business day of the fiscal year. Interest, dividends
and other distributions of earnings are included in other income.
NOTES RECEIVABLE
Notes receivable are principally the result of (i) an acquired entity's land
and building sales from prior years, which mature through 2011 and bear interest
at rates ranging from 8% to 11% per annum; (ii) converting certain past due
franchise receivables into three-year promissory notes bearing interest of up to
10% per annum; (iii) the sale of certain Company-owned stores to new
franchisees; (iv) the resale of franchises and (v) the license fees associated
with certain termination agreements designed to compensate the Company for the
loss of future license fees. Gains resulting from the sale of stores described
in (iii) and the transactions in (iv) above have been deferred and are included
in other liabilities and will be recognized over the life of the related notes.
The balance of deferred gains at June 29, 1997, June 28, 1998 and March 28, 1999
are approximately $233,000, $127,000 and $103,000, respectively. Allowances
relating to such notes (1997--$423,000, 1998--$593,000 and, 1999--$258,000) have
been recorded based upon previous experience and management's periodic
evaluation of other relevant factors.
LICENSES, GOODWILL AND OTHER ASSETS
Licenses represent the fair value of franchise agreements acquired in the
Company's acquisition of Amalgamated Consolidated Enterprises, Inc. ("ACE") and
are amortized on a straight-line basis over a 16-year period.
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired. Amortization expense relating to goodwill is amortized
on a straight-line basis over periods ranging from 15 to 20 years.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash and equivalents, notes and
accounts receivable, accounts payable, and accrued liabilities approximate their
fair values principally because of the short-term nature of the significant
items. The fair value of the Company's long-term obligations are estimated based
on the current rates offered to the Company for obligations of similar terms and
maturities. Under this method, the Company's fair value of long-term obligations
was not significantly different than the stated values at June 29, 1997, June
28, 1998 and March 28, 1999.
REVENUE RECOGNITION
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, net of
returns and credits, and include customer service and shipping charges. Net
revenues are recognized upon delivery of the order to the recipient of
F-9
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
floral products and upon shipment of non-floral products. The Company provides
an allowance for sales returns in the period of sale, based upon historical
experience.
COST OF REVENUES
Cost of revenues consists primarily of florist fulfillment costs (fees paid
to wire services that serve as clearinghouses for floral orders, net of
rebates), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and the associated costs of inbound freight and outbound
shipping. Additionally, cost of revenues includes labor and facility costs
related to wholesale operations.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, catalog costs, fees paid to strategic online partners,
fulfillment (other than costs included in cost of revenues) and customer service
center expenses as well as payroll and non-payroll related expenses for those
areas engaged in marketing, selling, merchandising, customer service and
fulfillment activities. All such marketing and sales costs are expensed when
incurred.
In accordance with Statement of Position 93-7, REPORTING OF ADVERTISING
COSTS, the Company expenses all advertising costs at the time the advertisement
is first shown. Advertising expense (including the amortization of deferred
catalog costs of approximately $2,604,000, $0 and $13,771,000 for the year ended
June 28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively) was approximately $15,100,000, $16,700,000, $16,691,000,
$11,421,000 and $27,581,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist primarily of the payroll and
operating expenses for the information technology group, maintenance, support
and licensing costs pertaining to the order entry, customer service, fulfillment
and database systems as well as all costs associated with the Web site,
including designing, developing and third party hosting. All such technology and
development costs are expensed as incurred.
LONG-LIVED ASSETS
When impairment indicators are present, the Company reviews the carrying
value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analysis expected to be
generated by the asset. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds the future discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less costs to sell.
INCOME TAXES
Income taxes are provided using the liability method. Accordingly, deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as
F-10
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
determined under enacted tax laws and rates that will be in effect when the
differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("Statement 123").
SEGMENT DISCLOSURES
Effective June 29, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION ("Statement 131"). Statement 131 superseded Statement of
Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in one business
segment through any of its three access channels. The adoption of Statement 131
did not affect the Company's consolidated results of operations or financial
position.
COMPREHENSIVE INCOME
Effective June 29, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement 130").
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income (loss) or stockholders' equity
(deficit). Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption was reported separately
in stockholders' equity, to be included in comprehensive income. The related tax
effect on comprehensive income is not material for the periods presented. Prior
year consolidated financial statements have been restated to conform to the
requirements of Statement 130.
3. ACQUISITIONS
During the three years ended June 28, 1998, the Company made the
acquisitions described below, each of which has been accounted for as a
purchase. Accordingly, the consolidated financial statements include the
operating results of each business from the respective date of acquisition. No
acquisitions were consummated during the nine month period ended March 28, 1999.
THE PLOW & HEARTH, INC.
In April 1998, the Company acquired 88% of the issued and outstanding shares
of common stock of P&H (70% of the fully diluted equity of P&H due to the
existence of 28,334 outstanding management stock options). P&H is a catalog
company located in Virginia. The acquisition price was $16,100,000, exclusive of
the management put liability described below, of which $14,700,000 was financed
through the Company's credit agreement (see Note 5). The purchase price has been
F-11
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
allocated to the assets acquired and the liabilities assumed based on fair
values at the date of acquisition. The excess of the purchase price over the
estimated fair values of the net assets acquired of $19,600,000 has been
recorded as goodwill and is being amortized over 20 years.
The Company, P&H and P&H management shareholders and option holders
(collectively, "Management Stockholders") entered into a Stockholders' Agreement
effective with the acquisition. In accordance with the Management Stockholder
put option contained within the agreement, as amended, each Management
Stockholder has the right to cause P&H to purchase all of its outstanding
management stock options at a price contingent upon the operating profits of
P&H, with a minimum obligation, as defined, upon the occurrence of a put event,
as defined in the agreement, or a put period which represents the 60-day period
commencing on April 3, 2002 and terminating on June 3, 2002. Accordingly, the
Company recorded a put liability of $6,300,000 at the acquisition date. The put
liability at June 28, 1998 was adjusted to approximately $8,700,000 and,
subsequently at March 28, 1999, to $6,300,000, based on the formula defined in
the Stockholders' Agreement. This resulted in an increase and subsequent
reduction of general and administrative expenses of approximately $1,631,000 for
the year ended June 28, 1998 and the nine months ended March 28, 1999,
respectively, reflecting the option holders percentage of the increase
(decrease), with the remainder adjusted to goodwill. The Company's minimum
obligation under the put liability increases to $8,400,000 upon the completion
of an initial public offering, as defined, of the Company's common stock.
Additionally, under P&H's Amended and Restated Stock Option Plan, 35,342
shares of unissued P&H common stock are reserved for issuance. The
aforementioned 28,334 management stock options are immediately exercisable and
expire in February 2008. In April 1998, P&H issued 3,504 stock options to
management at an exercise price equal to the per share acquisition price of
$153.65. Such options do not contain the management stockholder put option as
defined in the preceding paragraph. Such options will expire ten years from the
issuance date and vest ratably over five years.
Concurrently with the acquisition of P&H, the Company also acquired an 85%
interest in Plow & Hearth, LP (the "Partnership"). P&H owns the remaining 15%.
The Partnership owns the land and distribution center/office facility of P&H and
leases the facility to P&H. The $800,000 purchase price has been allocated to
the assets acquired and the liabilities assumed based on fair values at the date
of acquisition. The purchase price approximates the estimated fair values of the
net assets acquired, including the assumption of a $2,400,000 construction loan
payable.
F-12
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
The following table reflects unaudited pro forma results of operations of
the Company and P&H on the basis that the acquisition had taken place at the
beginning of the year for each of the periods presented:
YEARS ENDED
------------------------------
JUNE 29, 1997 JUNE 28, 1998
-------------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net revenues...................................................................... $ 222,324 $ 257,747
-------------- --------------
-------------- --------------
Net income........................................................................ $ 4,468 $ 3,464
-------------- --------------
-------------- --------------
Net income applicable to common stockholders...................................... $ 3,006 $ 1,856
-------------- --------------
-------------- --------------
Net income per common share applicable to common stockholders:
Basic........................................................................... $ 0.68 $ 0.42
-------------- --------------
-------------- --------------
Diluted......................................................................... $ 0.64 $ 0.40
-------------- --------------
-------------- --------------
Shares used in the calculation of net income per common share:....................
Basic........................................................................... 4,414 4,412
-------------- --------------
-------------- --------------
Diluted......................................................................... 4,674 4,661
-------------- --------------
-------------- --------------
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated on July 1, 1996 or June 30, 1997 or of future
operations of the combined companies.
GREAT PLAINS WHOLESALE FLORISTS, INC.
In July 1997, the Company's subsidiary, Floral Works, Inc. ("Floral Works"),
acquired the business and assets of Great Plains Wholesale Florists, Inc.
("Great Plains"), a supplier of fresh cut flowers and arrangements to the
supermarket industry, for $900,000 in cash and the issuance of a $900,000
four-year seller financed note bearing interest at 6.5% per annum. The purchase
price has been allocated to the assets acquired and the liabilities assumed
based on their fair values at the date of acquisition.
The excess of the purchase price over the net assets acquired, of
approximately $1,744,000, has been recorded as goodwill and is being amortized
over 15 years. Had this acquisition been consummated as of July 1, 1996, the
unaudited pro forma consolidated net revenues and results of operations would
not have been considered material for the year ended June 29, 1997.
FLORAL WORKS, INC.
In September 1996, the Company invested $1,100,000 in cash for an 80%
interest in Floral Works, Inc. which was formed in order to acquire specific
assets and liabilities of FLS Floral Wholesalers Ltd. The purchase price has
been allocated to the assets acquired and the liabilities assumed based on fair
values at the date of acquisition. The excess of the purchase price over the
F-13
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
estimated fair value of the net assets acquired of approximately $826,000 has
been recorded as goodwill and is being amortized over 15 years.
Under certain circumstances, the Company may elect to issue shares of its
common stock in exchange for the minority stockholders' shares. Additionally,
the minority stockholders received 75 Stock Appreciation Rights ("SARs") with an
exercise price of $2,800 per right. The SARs vest ratably over 5 years and the
exercise price increases 10% annually. At March 28, 1999, 40% of the SARs are
exercisable. Since issuance, the Company has not recorded any provision related
to such SARs.
Had this acquisition been consummated as of July 3, 1995, the unaudited pro
forma consolidated net revenues and results of operations would not have been
considered material for the year ended June 30, 1996.
AMERICAN FLORAL SERVICES, INC.
In February 1994, the Company completed an investment transaction with
American Floral Services, Inc. ("AFS"), a floral wire service. The investment
consisted of the Company purchasing a minority interest in AFS Class A common
stock and 15% preferred stock and a long-term note receivable. During the year
ended June 30, 1996, the long-term note receivable was converted into additional
preferred stock of AFS. On June 30, 1997, AFS repurchased, on a pro-rata basis,
59% of its then outstanding shares of Class A common stock in the amount of
$387.16 per share. This transaction resulted in a gain on the Company's
investment in AFS of approximately $1,545,000 which was received and recorded as
other income during the year ended June 28, 1998. In addition, during the years
ended June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998
and March 28, 1999, the Company recorded $318,000, $123,000, $92,000 and
$92,000, respectively, of other income representing the accrual of cumulative
preferred stock dividends. Accrued preferred stock dividends at June 29, 1997 of
$318,000 were paid in July 1997.
4. CAPITAL STOCK INVESTMENT AGREEMENTS
In January 1995, the Company, its principal shareholder and a venture
capital firm ("Investor") entered into an Investment Agreement ("Investment
Agreement"), whereby each existing share of Common Stock was converted into one
share of Class A common stock (which shares contain all voting rights of the
Company) and 100 shares of Class B common stock. Additionally, Class C common
stock and a preferred stock class were established.
Pursuant to the Investment Agreement, the Company, upon obtaining certain
targets, has the right to draw up to $25,000,000 in funds. As of March 28, 1999,
the Company has taken $10,000,000 and based upon the structure and targets of
the Investment Agreement, an additional $10,000,000 is immediately available. In
exchange for each funds takedown, the Company provides the Investor a
predetermined number of shares of Class C common stock and warrants to acquire
shares of Class B common stock at $.02 per share. Upon the takedown of
$10,000,000 by the Company in January 1995, the Investor received 26,345 shares
of Class C common stock and warrants to acquire 237,104 shares of Class B common
stock expiring in 2005. The fair value of the warrants was estimated by the
Company at approximately $1,375,000. As of March 28, 1999, all of
F-14
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
4. CAPITAL STOCK INVESTMENT AGREEMENTS (CONTINUED)
such warrants are outstanding. The Class C common stock accrues a cumulative
dividend at the rate of 10% per annum and has a liquidation preference as to
unpaid dividends and the original investment. The Company may, at its option,
under certain terms and conditions, repurchase and/or retire the shares of Class
B and/or C common stock held by the Investor in advance of the Class C common
stock's 2005 stated redemption date, at which time the redemption value,
including accrued dividends, of the Class C common stock would be approximately
$970 per share. The Investment Agreement contains certain covenants with which
the Company is in compliance as of March 28, 1999.
On June 28, 1996, the Company retired related party debt obligations of
approximately $5,800,000, through $2,500,000 in cash and the balance in shares
of Class B and Class C common stock. Accordingly, $3,300,000 of debt was
converted to equity under terms similar to the terms of the Investment
Agreement. As such, 8,477 shares of Class C common stock and 76,293 Class B
warrants were issued. The fair value of the warrants was estimated by the
Company at approximately $492,000 and was charged to operations during the year
ended June 30, 1996. The Class B warrants were immediately exercised into 76,293
shares of Class B common stock. The redemption value, including accrued
dividends, of the Class C common stock at the 2005 stated redemption date would
be approximately $917 per share.
Additionally, upon the completion of an exchange event, as defined in the
Investment Agreement, each share of Class C common stock is convertible into one
share of preferred stock and one share of Class B common stock.
On May 8, 1998, the Company entered into a Stock Purchase Agreement with a
stockholder whereby the Company purchased 140 shares of its Class A common stock
and 14,000 shares of its Class B common stock for $133,000.
F-15
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT
The Company's long-term debt obligations are as follows:
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
Bank term loan (1).............................................. $ -- $ -- $ 18,000
Standby credit note (2)......................................... -- 15,500 --
Commercial notes and revolving credit line (3-5)................ -- 2,333 6,497
Seller financed acquisition obligations (6-11).................. 3,277 3,867 3,430
Obligations under capital leases (see Note 11).................. 5,369 4,050 5,721
------- -------------- ---------------
8,646 25,750 33,648
Less current maturities of long-term debt and obligations under
capital leases................................................ 2,055 3,287 5,500
------- -------------- ---------------
$ 6,591 $ 22,463 $ 28,148
------- -------------- ---------------
------- -------------- ---------------
- ------------------------
(1) On March 19, 1999, the Company entered into an agreement with a bank that
provided for an $18,000,000 term loan and a $12,000,000 revolving credit
line, bearing interest at LIBOR Index plus 2.25% per annum (7.31% at March
28, 1999) payable monthly. The Company received the proceeds under the term
loan during the nine-month period ended March 28, 1999 and used such
proceeds to repay amounts outstanding under its previous credit agreement.
Subsequent to March 28, 1999, the Company borrowed $3,000,000 under the
$12,000,000 revolving credit line.
As of March 28, 1999, the Company is in default of certain covenants within
the agreement. The bank has subsequently waived such defaults and amended
the agreement whereby the term loan will be due and payable on the earlier
of the Company's successful completion of an initial public offering of its
common stock or July 3, 2000. Additionally, the revolving credit line was
reduced to $5,000,000. The amended agreement contains limited restrictive
financial covenants.
(2) On April 3, 1998, the Company entered into a Credit Agreement (the
"Agreement") with a bank that provided for a $15,500,000 Standby Credit Note
and a $5,000,000 revolving credit facility. The Company borrowed the full
amount under the Standby Credit Note in connection with the acquisitions of
P&H and the Partnership (see Note 3). The Agreement requires interest to be
paid monthly. On March 19, 1999, the Company repaid amounts then outstanding
and entered into a new credit agreement with the same bank (see (1) above).
Other components of long-term debt, relating to obligations of P&H, are as
follows:
(3) $2,400,000 commercial note dated June 13, 1997 ($2,278,000 outstanding at
March 28, 1999) assumed in the P&H and the Partnership acquisitions, bearing
interest at 8.19% per annum. The note is payable in 203 equal monthly
installments of principal and interest commencing June 13, 1997.
(4) $4,500,000 revolving credit line dated September 28, 1998 ($2,789,000
outstanding at March 28, 1999) bearing interest equal to the monthly LIBOR
Index plus 1.75% per annum
F-16
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
(6.7% at March 28, 1999). Interest is paid monthly on the outstanding
principal balance. The note is payable upon expiration of the line on
September 15, 1999.
(5) $1,460,000 note dated July 1, 1998 ($1,430,000 outstanding at March 28,
1999) bearing interest equal to the monthly LIBOR Index plus 1.75% per annum
(6.7% at March 28, 1999). The note is payable in 180 equal monthly
installments of principal and interest commencing November 1, 1998.
The following notes relate to seller-financed acquisition obligations, all of
which have been collateralized by either the stock or assets of various
subsidiaries of the Company:
(6) $2,225,000 in promissory notes payable dated October 10, 1994 bearing
interest at rates between 9% and 12% per annum. Interest is paid monthly on
the outstanding principal balance until the notes have been paid in full.
The notes are payable in 60 equal monthly installments commencing November
1, 1999.
(7) $800,000 promissory note payable assumed October 10, 1994 ($133,000
outstanding at March 28, 1999) and dated September 1, 1993 bearing interest
at 12% per annum. Interest is paid monthly on the outstanding principal
balance until the note has been paid in full. The note is payable in 36
equal monthly installments commencing October 1, 1996.
(8) $200,000 promissory note payable assumed October 10, 1994 and dated
September 1, 1993 bearing interest at 9% per annum. Interest is paid monthly
on the outstanding principal balance until the note has been paid in full.
The note is payable in 60 equal monthly installments commencing November 1,
1999.
(9) $275,000 promissory note payable dated November 1, 1994 ($180,000
outstanding at March 28, 1999) bearing interest at 8% per annum. The note is
payable in 120 equal monthly installments of principal and interest
commencing December 1, 1994.
(10) $95,000 note payable assumed November 1, 1994 ($17,000 outstanding at March
28, 1999) bearing interest at 8% per annum. The note is payable in 60 equal
monthly installments of principal and interest commencing February 1, 1995.
(11) $900,000 promissory note payable dated July 1,1997 ($675,000 outstanding at
March 28, 1999) bearing interest at 6.5% per annum. The note is payable in
four equal installments of principal and interest commencing July 1, 1998.
F-17
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
As of March 28, 1999, long-term debt maturities, excluding amounts relating
to capital leases, are as follows (in thousands):
YEAR DEBT MATURITIES
- ----------------------------------------------------------------------------- ---------------
2000......................................................................... $ 3,532
2001......................................................................... 5,655
2002......................................................................... 5,658
2003......................................................................... 5,436
2004......................................................................... 5,439
Thereafter................................................................... 2,207
---------------
$ 27,927
---------------
---------------
The aggregate fair value of the long-term debt approximated the recorded
amounts at March 28, 1999.
6. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows (in thousands):
YEARS ENDED NINE MONTHS ENDED
------------------------------------- --------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- ----------- ------------- -----------
Current:
Federal............................................. $ 430 $ 2,600 $ 2,039 $ 971 $ (2,293)
State and local..................................... 180 705 877 418 --
----------- ----------- ----------- ------------- -----------
610 3,305 2,916 1,389 (2,293)
Deferred.............................................. 645 (170) 265 126 (633)
----------- ----------- ----------- ------------- -----------
$ 1,255 $ 3,135 $ 3,181 $ 1,515 $ (2,926)
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
YEARS ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 28,
1996 1997 1998 MARCH 29, 1998 1999
----------- ----------- ----------- --------------- -----------
Tax at U.S. statutory rates........................... 34.0% 34.0% 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit........ 8.0 6.0 7.5 7.5 (3.1)
Nondeductible goodwill amortization................... 4.3 1.9 2.1 2.1 3.8
Dividends received deduction.......................... -- (1.0) (4.4) (4.4) (0.2)
Other................................................. 3.3 0.8 0.2 (0.1) 0.6
Nondeductible expense................................. 6.5 -- -- -- --
(Decrease) increase in valuation allowance............ (5.8) -- -- -- 4.2
--- --- --- --- -----
50.3% 41.7% 39.4% 39.1% (28.7)%
--- --- --- --- -----
--- --- --- --- -----
F-18
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- -------------- -----------------
(IN THOUSANDS)
Deferred tax assets:
Bad debts..................................................... $ 321 $ 481 $ 400
Other accrued expenses and reserves........................... 353 1,156 775
Book in excess of tax depreciation............................ 64 -- --
State tax operating losses.................................... -- -- 334
Tax credits................................................... -- -- 93
Valuation allowance........................................... -- -- (427)
Deferred tax liabilities:
Installment sales............................................. (168) (157) (152)
Tax in excess of book depreciation............................ -- (1,175) (85)
------ ------- ------
Net deferred taxes.............................................. $ 570 $ 305 $ 938
------ ------- ------
------ ------- ------
The Company paid income taxes of approximately $1,244,000, $1,700,000,
$2,930,000, $2,194,000 and $1,726,000 for the years ended June 30, 1996, June
29, 1997 and June 28, 1998 and for the nine months ended March 29, 1998 and
March 28, 1999, respectively.
7. SUPPLEMENTARY FINANCIAL INFORMATION
PROPERTY, PLANT AND EQUIPMENT
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
Computer equipment.............................................. $ 5,948 $ 9,648 $ 14,447
Software development costs...................................... 828 5,997 6,623
Telecommunication equipment..................................... 3,547 3,854 4,207
Leasehold improvements.......................................... 2,497 3,715 6,554
Building and building improvements.............................. -- 3,463 3,848
Equipment....................................................... 1,015 1,917 2,266
Furniture and fixtures.......................................... 1,012 1,437 2,198
Land............................................................ -- 389 389
-------------- -------------- ---------------
14,847 30,420 40,532
Accumulated depreciation and amortization....................... 6,361 11,041 15,700
-------------- -------------- ---------------
$ 8,486 $ 19,379 $ 24,832
-------------- -------------- ---------------
-------------- -------------- ---------------
F-19
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
INVESTMENTS
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- -----------------
(IN THOUSANDS)
Investments available-for-sale:
Federal and municipal government bonds........................ $ 4,581 $ 5,178 $ --
Equity securities............................................. 6 275 --
Corporate notes............................................... 559 -- --
Other investments:
Equity investment in AFS...................................... 918 918 918
Other......................................................... -- 46 69
------- ------- -----
6,064 6,417 987
Less short-term investments..................................... 3,210 5,034 --
------- ------- -----
$ 2,854 $ 1,383 $ 987
------- ------- -----
------- ------- -----
Maturities of investments classified as available-for-sale were as follows
(in thousands):
JUNE 29, 1997 JUNE 28, 1998
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
Due in one year or less............................................. $ 3,134 $ 3,210 $ 5,034 $ 5,034
Due after one year.................................................. 2,002 1,930 139 144
Equity securities not due at a specific date........................ 5 6 266 275
----------- --------- ----------- ---------
$ 5,141 $ 5,146 $ 5,439 $ 5,453
----------- --------- ----------- ---------
----------- --------- ----------- ---------
LICENSES, GOODWILL AND OTHER ASSETS
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
Goodwill........................................................ $ 1,420 $ 23,259 $ 23,055
Investment in licenses.......................................... 4,927 4,927 4,927
Exclusive online marketing contract............................. -- -- 3,125
Deferred catalog costs.......................................... -- 669 1,772
Other assets.................................................... 999 1,429 1,451
------- -------------- ---------------
7,346 30,284 34,330
Accumulated amortization........................................ 1,183 2,012 3,227
------- -------------- ---------------
$ 6,163 $ 28,272 $ 31,103
------- -------------- ---------------
------- -------------- ---------------
F-20
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
Changes in operating working capital items, excluding the effects of
acquisitions:
YEARS ENDED NINE MONTHS ENDED
------------------------------- ------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(IN THOUSANDS)
Receivables................................ $ (1,381) $ (1,475) $ (1,908) $ (1,033) $ (2,765)
Inventories................................ (158) 32 (373) (169) (3,089)
Prepaid and other.......................... (1,159) 838 732 (2,207) (292)
Accounts payable........................... 3,833 1,742 3,655 317 6,247
Accrued expenses........................... (131) 278 (2,010) 945 1,220
Recoverable income taxes................... -- -- -- -- (3,217)
Taxes payable.............................. (113) 1,132 (380) (1,082) (845)
--------- --------- --------- ----------- -----------
$ 891 $ 2,547 $ (284) $ (3,229) $ (2,741)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Changes in operating nonworking capital items, excluding the effects of
acquisitions:
YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- --------- ------------ -----------
(IN THOUSANDS)
Other assets.......................................... $ (75) $ (24) $ (1,821) $ (984) $ (4,913)
Other liabilities..................................... 62 80 (43) (509) 941
--- --- --------- ------------ -----------
$ (13) $ 56 $ (1,864) $ (1,493) $ (3,972)
--- --- --------- ------------ -----------
--- --- --------- ------------ -----------
Interest paid amounted to approximately $3,360,000, $912,000, $879,000,
$720,000 and $2,113,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1999 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively.
ACCRUED EXPENSES
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
Payroll and payroll related items............................... $ 1,510 $ 1,877 $ 2,354
Credits and chargeback reserve.................................. 400 425 320
Sales and use taxes............................................. 289 61 409
Interest........................................................ -- 298 48
Other........................................................... 426 440 1,190
------- ------- -------
$ 2,625 $ 3,101 $ 4,321
------- ------- -------
------- ------- -------
F-21
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
8. PROFIT SHARING PLAN
The Company established a 401(k) Profit Sharing Plan ("401(k)") which covers
substantially all eligible employees of the Company. All full-time employees of
the Company and its subsidiaries who have attained the age of 21 are eligible to
participate upon completion of one year of service. Participants may elect to
make voluntary contributions to the 401(k) in amounts not exceeding federal
guidelines. On an annual basis the Company, as determined by its Board of
Directors, may make certain discretionary contributions. Employees are vested in
the Company's contribution based upon years of service. The Company made
contributions of $50,000, $101,000, $92,000, $63,000 and $54,000 for the years
ended June 30, 1996, June 29, 1997 and June 28, 1999 and for the nine months
ended March 29, 1998 and March 28, 1999, respectively.
9. STOCK OPTION PLAN
In January 1997, the Company's Board of Directors approved the Company's
1997 Stock Option Plan (the "Plan"). The Plan authorizes the granting to key
employees, officers, directors and consultants of the Company options to
purchase an aggregate of 598,544 shares of the Company's Class B common stock,
$0.01 par value. The options may be either Incentive Stock Options or
non-qualified stock options. The exercise price of an option shall be determined
by the Company's Board of Directors or Compensation Committee of the Board at
the time of grant, provided, however, that in the case of an Incentive Stock
Option the exercise price may not be less than 100% of the fair market value of
such stock at the time of the grant, or less than 110% of such fair market value
in the case of options granted to a 10% owner of the Company's stock. The
vesting and expiration periods of options issued under this Plan are determined
by the Company's Board of Directors or Compensation Committee as set forth in
the applicable option agreement, provided that the expiration date shall not be
later than ten years from the date of grant.
During January 1999, the Company issued stock options to employees to
purchase 20,000 shares of common stock at $20.00 per share, which was considered
to be the fair value of the common stock at that time. Soon thereafter, the
Company entered into discussions with an investor to purchase shares of common
stock at $104.26 per share; accordingly, for accounting purposes, the Company
used such per share value to record a deferred compensation charge of
$1,680,000, of which $105,000 was amortized during the nine months ended March
28, 1999, associated with the option grants in January 1999.
F-22
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
9. STOCK OPTION PLAN (CONTINUED)
The following table summarizes activity in stock options:
YEARS ENDED
-------------------------------------------------- NINE MONTHS ENDED
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
---------------------- -------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- ----------- ------------- ----------- --------- -----------
Balance, beginning of year......................... -- $ -- 42,775 $ 12.99 52,550 $ 13.61
Grants............................................. 42,775 12.99 10,250 16.14 71,200 20.00
Forfeitures........................................ -- -- (475) 11.82 -- --
--------- ------------- ---------
Balance, end of year............................... 42,775 12.99 52,550 13.61 123,750 17.29
--------- ------------- ---------
--------- ------------- ---------
Weighted-average fair value of options issued
during the period................................ $ 2.23 $ 7.28 $ 9.02
The following table summarizes information about stock options outstanding
at March 28, 1999:
WEIGHTED-
AVERAGE
REMAINING
OPTIONS OPTIONS CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE
- ---------------------------------------------------- ------------ ------------ ------------
$12.99.............................................. 42,300 25,380 2.8 years
16.14.............................................. 10,250 2,563 8.8
20.00.............................................. 71,200 39,300 9.4
------------ ------------
123,750 67,243 7.1
------------ ------------
------------ ------------
At March 31, 1999, the Company has reserved approximately 871,000 shares of
common stock for issuance under common stock options, warrants and conversion of
Class C common stock.
FAIR VALUE DISCLOSURES
Pro forma information regarding net income (loss) is required by Statement
123, which also requires that the information be determined as if the Company
had accounted for its stock options under the fair value method of that
statement. The fair value of these options was estimated at the date of grant
using the minimum value option pricing model with the following assumptions:
risk free interest rate of 6%; no dividend yield and a weighted-average expected
life of the options of 5 years at date of grant. Because the determination of
fair value of all options granted after such time as the Company becomes a
public entity will include an expected volatility factor in addition to the
factors described above, the results presented below may not be indicative of
future periods.
F-23
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
9. STOCK OPTION PLAN (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma financial information is as follows:
YEARS ENDED NINE MONTHS ENDED
------------------------------ --------------------------------
JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- -------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) applicable to common
stockholders:
As reported................................. $ 2,925 $ 3,466 $ 1,190 $ (8,682)
Pro forma................................... 2,898 3,438 1,172 (9,095)
Basic earnings (loss) per share applicable to
common stockholders:
As reported................................. $0.66 $0.79 $0.27 $(1.97 )
Pro forma................................... 0.66 0.78 0.27 (2.07 )
Diluted earnings (loss) per share applicable
to common stockholders:
As reported................................. $0.63 $0.74 $0.25 $(1.97 )
Pro forma................................... 0.62 0.74 0.25 (2.07 )
F-24
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
10. BASIC AND DILUTED EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings
(loss) per common share data:
YEARS ENDED NINE MONTHS ENDED
------------------------------------------------- ------------------------------------
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
--------------- --------------- --------------- ----------------- -----------------
(IN THOUSANDS)
Numerator:
Net income (loss)........... $ 1,297 $ 4,387 $ 5,074 $ 2,396 $ (7,354)
Redeemable Class C common
stock dividends........... (1,029) (1,462) (1,608) (1,206) (1,328)
------- ------- ------- ------- -------
Net income (loss) applicable
to common stockholders.... $268 $ 2,925 $ 3,466 $ 1,190 $ (8,682 )
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Denominator:
Denominator for basic
earnings (loss) per share-
weighted average common
shares outstanding........ 4,705 4,414 4,412 4,414 4,400
Effect of dilutive securities:
Employee stock options...... -- 23 12 24 --
Warrants.................... 237 237 237 237 --
------- ------- ------- ------- -------
Dilutive potential common
shares.................... 237 260 249 261 --
------- ------- ------- ------- -------
Denominator for diluted
earnings (loss) per share-
weighted average common
shares outstanding and
assumed conversions....... 4,942 4,674 4,661 4,675 4,400
------- ------- ------- ------- -------
------- ------- ------- ------- -------
During the nine months ended March 28, 1999, options and warrants to
purchase 342,000 shares of common stock (using the treasury stock method) were
excluded from the diluted loss per share computation as their effect would be
antidilutive. Additionally, for all periods presented, 35,000 shares of common
stock to be issued upon the conversion of Class C common stock (See Note 4) was
excluded from the diluted loss per share computation as its effect would be
antidilutive.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company currently leases office, store facilities, and equipment under
various operating leases through fiscal 2009. As leases expire, it can be
expected that in the normal course of business they will be renewed or replaced.
Most lease agreements contain renewal options and rent escalation clauses and
require the Company to pay real estate taxes, insurance, common area maintenance
and operating expenses applicable to the leased properties. The Company has also
entered into leases that are on a month-to-month basis.
The Company also leases certain computer, telecommunication and related
equipment under capital leases, which are included in property and equipment
with a capitalized cost of
F-25
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
approximately $6,500,000, $7,037,000 and $10,124,000 at June 29, 1997, June 28,
1998 and March 28, 1999, respectively, and accumulated amortization of
$3,500,000, $5,031,000 and $6,453,000 respectively. Under the terms of one of
these leases, the Company is required to maintain an irrevocable standby letter
of credit in the amount of approximately $785,000 which is renewable annually.
As of March 28, 1999, future minimum payments under noncancelable equipment
lease obligations and operating leases with initial terms of one year or more
consist of the following:
OBLIGATIONS
UNDER
EQUIPMENT OPERATING
LEASES LEASES
----------- -----------
(IN THOUSANDS)
2000...................................................................... $ 2,015 $ 4,848
2001...................................................................... 1,240 4,273
2002...................................................................... 935 4,107
2003...................................................................... 735 3,817
2004...................................................................... 95 3,457
Thereafter................................................................ 3 4,372
----------- -----------
Total minimum lease payments.............................................. 5,023 $ 24,874
-----------
-----------
Less: amounts representing interest....................................... (684)
-----------
Present value of net minimum lease payments............................... $ 4,339
-----------
-----------
The Company, through the ACE acquisition, subleases land and buildings
(which are leased from third parties) to the Company's franchisees. Certain of
the leases, other than land leases which have been classified as operating
leases, are classified as capital leases and have initial lease terms of
approximately 20 years (including option periods in some cases).
The following schedule, as of March 28, 1999, reflects the lease receipts
due from franchisees (shown as Capitalized Investment in Leases) and capital
lease payment obligations of the Company:
CAPITALIZED OBLIGATIONS
INVESTMENT IN UNDER CAPITAL
LEASES LEASES
------------- --------------
(IN THOUSANDS)
2000................................................................ $ 490 $ 409
2001................................................................ 454 401
2002................................................................ 394 359
2003................................................................ 280 245
2004................................................................ 185 177
Thereafter.......................................................... 202 202
------------- -------
Total minimum lease payments........................................ 2,005 1,793
Less interest....................................................... (476) (411)
------------- -------
Present value of net minimum lease payments......................... $ 1,529 $ 1,382
------------- -------
------------- -------
F-26
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At March 28, 1999, the aggregate future rental expense under long-term
operating leases for land and buildings and corresponding sublease rental income
under long-term operating subleases were as follows:
SUBLEASE SUBLEASE
INCOME EXPENSE
--------- ---------
(IN THOUSANDS)
2000......................................................................... $ 3,283 $ 3,216
2001......................................................................... 2,952 2,900
2002......................................................................... 2,451 2,411
2003......................................................................... 2,049 2,015
2004......................................................................... 1,781 1,749
Thereafter................................................................... 5,729 5,573
--------- ---------
$ 18,245 $ 17,864
--------- ---------
--------- ---------
In addition to the above, the Company has agreed to provide rent guarantees
for leases entered into by certain franchisees with third party landlords. At
March 28, 1999, the aggregate minimum rent due by franchisees guaranteed by the
Company during the eight-year period ending in fiscal year 2006 was
approximately $581,000.
Rent expense was approximately $5,000,0000, $5,800,000, $5,637,000,
$4,508,000 and $5,543,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999.
The Company has commitments under exclusive online marketing agreements
whereby the Company will pay a minimum of $11,500,000 over a four-year period
commencing July 1, 1997. Certain online marketing costs are capitalized and
amortized over the life of the agreement. The unamortized balance of such costs
were approximately $0 and $3,125,000 at June 28, 1998 and March 28, 1999,
respectively, and were included in other non-current assets.
LITIGATION
There are various claims, lawsuits, and pending actions against the Company
and its subsidiaries incident to the operations of its businesses. It is the
opinion of management, after consultation with counsel, that the ultimate
resolution of such claims, lawsuits and pending actions will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
12. SUBSEQUENT EVENT
On May 20, 1999, the Company completed a private placement of a series of
preferred stock, yielding net proceeds of $102.6 million. In connection with
this private placement, all shares of Redeemable Class C common stock were
redeemed at their redemption value and a portion reinvested in such preferred
stock.
F-27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Plow & Hearth, Inc.:
We have audited the accompanying consolidated balance sheets of The Plow &
Hearth, Inc. (the "Company") as of December 31, 1996 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Plow &
Hearth, Inc. as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
March 9, 1998
F-28
THE PLOW & HEARTH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
-------------- --------------
ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents (note 7)............................................. $ 4,318,609 $ 3,686,460
Accounts receivable (note 7):
Trade........................................................................ 315,054 561,292
Other........................................................................ 143,588 201,194
Inventories.................................................................... 2,132,218 3,563,486
Deferred catalog costs......................................................... 858,390 723,537
Deferred income taxes (note 6)................................................. 89,954 194,216
Prepaid expenses and other current assets...................................... 25,260 63,122
-------------- --------------
Total current assets......................................................... 7,883,073 8,993,307
-------------- --------------
Property, plant and equipment (note 3):
Land and improvements.......................................................... 345,295 345,295
Building....................................................................... 2,626,979 2,626,979
Leasehold improvements......................................................... 113,872 117,920
Furniture, fixtures and equipment.............................................. 1,755,545 1,993,735
-------------- --------------
4,841,691 5,083,929
Less accumulated depreciation and amortization................................. 1,483,781 1,755,751
-------------- --------------
Net property, plant and equipment................................................ 3,357,910 3,328,178
-------------- --------------
Deferred income taxes (note 6)................................................... 17,694 3,634
Purchased software costs, net (note 1)........................................... 136,067 130,145
Intangibles, net (note 1)........................................................ -- 20,005
Other assets, net................................................................ 43,887 43,845
-------------- --------------
197,648 197,629
-------------- --------------
$ 11,438,631 $ 12,519,114
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under capital leases
(notes 2 and 3).............................................................. $ 602,706 $ 83,769
Accounts payable............................................................... 2,890,881 1,843,734
Accrued expenses............................................................... 852,010 1,214,156
Customer deposits.............................................................. 153,021 152,283
Income taxes payable........................................................... 817,321 1,307,424
-------------- --------------
Total current liabilities.................................................... 5,315,939 4,601,366
-------------- --------------
Long-term debt and obligations under capital leases, excluding current maturities
(notes 2 and 3)................................................................ 2,588,839 2,317,222
-------------- --------------
Minority interest (note 1)....................................................... 573,347 528,818
-------------- --------------
Stockholders' equity (notes 4 and 8):
Common stock, $.10 par value, 200,000 shares authorized; issued and outstanding
107,256 and 105,356 at December 31, 1996 and 1997, respectively.............. 10,726 10,536
Additional paid-in capital..................................................... 1,397,926 1,336,366
Retained earnings.............................................................. 1,551,854 3,724,806
-------------- --------------
Total stockholders' equity....................................................... 2,960,506 5,071,708
Commitments and contingencies (notes 1, 2, 3, 5 and 8)
-------------- --------------
$ 11,438,631 $ 12,519,114
-------------- --------------
-------------- --------------
See accompanying notes to consolidated financial statements.
F-29
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
------------------------------ THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1996 1997 MARCH 31,
-------------- -------------- 1998
--------------
(UNAUDITED)
Operating revenues:
Merchandise sales, net........................................ $ 29,045,513 $ 38,996,352 $ 4,901,994
Mailing list rental income.................................... 290,569 188,495 52,994
Membership fee income......................................... 231,711 13,056 --
Shipping income, net of shipping costs........................ 418,896 433,947 (38,278)
-------------- -------------- --------------
29,986,689 39,631,850 4,916,710
-------------- -------------- --------------
Operating costs and expenses:
Cost of goods sold............................................ 16,101,851 21,653,476 2,913,920
Catalog production and marketing costs........................ 7,864,827 9,539,107 1,134,658
Selling, general and administrative expenses.................. 3,759,736 4,619,167 5,017,158
-------------- -------------- --------------
27,726,414 35,811,750 9,065,736
-------------- -------------- --------------
Income from operations.......................................... 2,260,275 3,820,100 (4,149,026)
Other income (expense):
Interest expense.............................................. (325,108) (248,449) (38,967)
Interest income............................................... 24,490 101,041 43,261
Other, net.................................................... 90,940 (37,265) (77,311)
Minority interest............................................. (25,462) (25,471) (19,713)
-------------- -------------- --------------
(235,140) (210,144) (92,730)
-------------- -------------- --------------
Income before income taxes...................................... 2,025,135 3,609,956 (4,241,756)
Income tax expense (note 6)..................................... 767,941 1,437,004 (1,689,886)
-------------- -------------- --------------
Net income...................................................... $ 1,257,194 $ 2,172,952 $ (2,551,870)
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
F-30
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ------------- ------------- --------------
Balances, December 31, 1995................ 107,006 $ 10,701 $ 1,394,851 $ 294,660 $ 1,700,212
Exercise of employee stock options ($22.50
per share) (note 4)...................... 810 81 18,144 -- 18,225
Common stock purchased ($32.50 per
share)................................... (560) (56) (18,144) -- (18,200)
Tax benefit of stock options exercised
(note 4)................................. -- -- 3,075 -- 3,075
Net income................................. -- -- -- 1,257,194 1,257,194
--------- --------- ------------- ------------- --------------
Balances, December 31, 1996................ 107,256 10,726 1,397,926 1,551,854 2,960,506
Common stock purchased ($32.50 per
share)................................... (1,900) (190) (61,560) -- (61,750)
Net income................................. -- -- -- 2,172,952 2,172,952
--------- --------- ------------- ------------- --------------
Balances, December 31, 1997................ 105,356 10,536 1,336,366 3,724,806 5,071,708
Employee stock options (unaudited)......... -- -- 3,945,826 -- 3,945,826
Net loss (unaudited)....................... -- -- -- (2,551,870) (2,551,870)
--------- --------- ------------- ------------- --------------
Balances, March 31, 1998 (unaudited)....... 105,356 $ 10,536 $ 5,282,192 $ 1,172,936 $ 6,465,664
--------- --------- ------------- ------------- --------------
--------- --------- ------------- ------------- --------------
See accompanying notes to consolidated financial statements.
F-31
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
------------------------------ THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1996 1997 MARCH 31, 1998
-------------- -------------- ---------------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................................................ $ 1,257,194 $ 2,172,952 $ (2,551,870)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Employee stock options................................................... -- -- 3,945,826
Depreciation and amortization............................................ 392,480 366,022 90,340
Minority interest........................................................ 25,462 25,471 19,713
Provision for deferred income taxes...................................... (53,161) (90,202) 106,075
Provision for inventory obsolescence..................................... (5,000) 47,000 36,000
(Increase) decrease in:
Accounts receivable.................................................... 245,342 (303,844) 375,872
Inventories............................................................ 119,881 (1,478,268) (145,412)
Deferred catalog costs................................................. (418,457) 134,853 (190,414)
Income taxes refundable................................................ 93,477 -- (1,589,137)
Prepaid expenses and other current assets.............................. (586) (37,862) (35,884)
Other assets........................................................... (7,702) 9,555 --
Increase (decrease) in:
Accounts payable....................................................... 335,387 (1,047,147) (156,517)
Accrued expenses....................................................... 297,258 362,146 (925,276)
Customer deposits...................................................... 46,269 (738) (33,830)
Income taxes payable................................................... 820,396 490,103 (1,307,424)
-------------- -------------- ---------------
Net cash provided by (used in) operating activities............................ 3,148,240 650,041 (2,361,938)
-------------- -------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (62,694) (242,238) (21,916)
Purchases of software........................................................ (49,312) (82,368) (692)
Purchase of intangible assets................................................ -- (21,058) (9,699)
-------------- -------------- ---------------
Net cash used in investing activities.......................................... (112,006) (345,664) (32,307)
-------------- -------------- ---------------
Cash flows from financing activities:
Borrowings under line of credit agreement.................................... 6,848,000 2,588,000 --
Payments under line of credit agreement...................................... (6,848,000) (2,588,000) --
Proceeds from issuance of long-term debt..................................... 420,000 2,400,000 --
Principal payments on long-term debt and obligations under
capital leases............................................................. (552,938) (3,190,554) (20,773)
Financing costs for long-term debt........................................... -- (14,222) --
Common stock options exercised............................................... 18,225 -- --
Purchase of common stock..................................................... (18,200) (61,750) --
Return of capital to limited partners........................................ (70,000) (70,000) (17,500)
-------------- -------------- ---------------
Net cash used in financing activities.......................................... (202,913) (936,526) (38,273)
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents........................... 2,833,321 (632,149) (2,432,518)
Cash and cash equivalents, beginning of period................................. 1,485,288 4,318,609 3,686,460
-------------- -------------- ---------------
Cash and cash equivalents, end of period....................................... $ 4,318,609 $ 3,686,460 $ 1,253,942
-------------- -------------- ---------------
-------------- -------------- ---------------
Supplemental cash flow information:
Income taxes paid (refunded) during the period............................... $ (92,771) $ 1,037,103 $ 1,100,600
Interest paid during the period.............................................. 324,949 242,166 924
Noncash investing and financing activities:
Capital lease obligations incurred for telephone equipment................... $ 3,375 $ -- $ --
Income tax benefit from exercise of stock options............................ 3,075 -- --
See accompanying notes to consolidated financial statements.
F-32
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Plow & Hearth, Inc. ("Plow & Hearth") is a retail and catalog sales
outlet, incorporated under the laws of the Commonwealth of Virginia on April 2,
1980.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and operations of
The Plow & Hearth, Inc. and P&H, L.P. (the "Partnership") (collectively, the
"Company"). The Partnership was organized to finance the acquisition of 39.549
acres of land (the "Property") and the construction of a 108,000-square foot
distribution center/office facility (the "Facility"). The Facility is leased to
Plow & Hearth for a 20-year term. The Partnership is owned by Plow & Hearth (15
percent general partner interest with an initial $50,000 contribution) and 28
limited partners (85 percent limited partnership interest with an aggregate of
$700,000 in initial contributions). Due to the interrelationship of the
investments, loan guarantees, collateral and control among Plow & Hearth, its
stockholders and the Partnership, the accounts of the Partnership have been
consolidated with those of Plow & Hearth and all significant intercompany
transactions have been eliminated.
The Partnership agreement requires quarterly cash distributions to the
partners equal to an annual rate of 10 percent of their initial cash investment.
Total distributions to the partners amounted to $75,000 for the years ended
December 31, 1996 and 1997, of which Plow & Hearth, as general partner, received
$5,000.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31,
1998 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations and cash flows for the
three months ended March 31, 1998 have been made. Certain information and
footnote disclosures normally included in fiancial statements prepared in
accordance with generally accepted accounting principles have been condensed or
eliminated. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results to be expected for any future
interim period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents, which
consist of commercial paper and an overnight repurchase agreement aggregating
$5,317,926 and $7,841,971 at December 31, 1996 and 1997, respectively, are
stated at cost which approximates fair value.
ACCOUNTS RECEIVABLE--OTHER
Accounts receivable--other consist of amounts due for rental of the
Company's mailing list and miscellaneous receivables.
F-33
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. The allowance to
reduce inventories to the lower of cost or market was $40,000 and $87,000 at
December 31, 1996 and 1997, respectively. Cost is determined using the first-in,
first-out method.
DEFERRED CATALOG COSTS
The Company capitalizes the costs of producing and distributing its
catalogs. These costs are amortized in direct proportion with actual sales from
the corresponding catalog over a period not to exceed twenty-six weeks.
DEFERRED FINANCING COSTS
Financing costs are amortized over the life of the loan using the interest
method and are included as a component of interest expense.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
calculated by use of the straight-line and accelerated methods over the
estimated useful lives of the related assets. Amortization of assets held under
capital leases and leasehold improvements is calculated by use of the
straight-line method over the shorter of the lease terms, including renewal
options expected to be exercised, or estimated useful lives of the improvements.
The useful lives of property, plant and equipment are as follows:
YEARS
---------
Building............................................................................. 39
Leasehold improvements............................................................... 15-20
Furniture, fixtures and equipment.................................................... 5-10
PURCHASED SOFTWARE COSTS
The Company capitalizes costs for purchased software which is used
internally in operating activities. These costs are amortized over a period of
three years, the estimated useful life of the software. Amortization expense for
the years ended December 31, 1996 and 1997 was $95,905 and $88,290,
respectively. Purchased software costs consisted of the following at December
31, 1996 and 1997:
1996 1997
------------ ------------
Purchased software costs.......................................... $ 496,540 $ 578,908
Accumulated amortization.......................................... (360,473) (448,763)
------------ ------------
Purchased software costs, net..................................... $ 136,067 $ 130,145
------------ ------------
------------ ------------
F-34
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Intangibles consisted of the following at December 31, 1996 and 1997:
1996 1997
---------- -----------
Customer mailing list............................................... $ 81,405 $ 102,463
Other............................................................... 2,069 2,069
---------- -----------
83,474 104,532
Accumulated amortization............................................ (83,474) (84,527)
---------- -----------
Intangibles, net.................................................... $ -- $ 20,005
---------- -----------
---------- -----------
Amortization expense for the years ended December 31, 1996 and 1997 was
$8,466 and $1,053, respectively.
MEMBERSHIP FEE INCOME
The Company derives membership fee income from offering its customers
membership in its "Buyers' Club." An annual membership fee of $10 per customer
is recognized when received. Annual membership privileges entitle the customer
to a 5 percent discount on all purchases during the membership year and various
other special offers throughout the year. As a result of the Buyers' Club, the
Company recorded net discounts of $351,942 and $76,610 for the years ended
December 31, 1996 and 1997, respectively. This program was discontinued during
1997.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
No income taxes are payable by the partnership and none have been provided
in the accompanying financial statements. The partners include the respective
shares of the partnership's profits or losses in their individual tax returns.
HEALTH INSURANCE PLAN
The Company is partially self-insured for health claims up to an aggregate
annual claim amount of $119,000 and $103,000 at December 31, 1996 and 1997,
respectively. The Company's stop loss insurance covers aggregate annual claims
costs in excess of this limit. Self-insurance accruals are provided based upon
the liability for reported claims and an estimated liability for claims incurred
F-35
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
but not reported. Total expense under the plan amounted to $90,902 and $76,500
for the years ended December 31, 1996 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
MINORITY INTEREST
Minority interest represents the 85 percent ownership of the limited
partners of the Partnership.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(2) LINE OF CREDIT AND LONG-TERM DEBT
Plow & Hearth currently has a line of credit with Central Fidelity Bank.
Under this agreement, Plow & Hearth has a revolving line of credit under which
it can borrow up to a maximum of $2,500,000 at an interest rate of LIBOR plus
1.75 percent. The line of credit matures on June 30, 1998. The line of credit is
collateralized by Plow & Hearth's accounts receivable, inventories, equipment
and general intangibles. No amounts were outstanding under this line at December
31, 1996 or December 31, 1997.
Under the line of credit, Plow & Hearth must comply with certain restrictive
covenants. The most restrictive financial covenants relate to the ratio of debt
to tangible net worth, a fixed charge coverage ratio and a minimum equity
balance. Plow & Hearth was in compliance with these covenants at December 31,
1997.
F-36
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(2) LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Long-term debt, including obligations under capital leases, consisted of the
following at December 31, 1996 and 1997:
1996 1997
------------- -------------
Construction term loan with an interest rate of 8.19% payable in equal monthly
installments amortized over a 20-year period, due and payable in full June 2014,
collateralized by a deed of trust and assignment of all leases.................... $ 2,370,553 $ 2,367,319
Term loan with an interest rate of 8.37%, paid in full during 1997.................. 350,634 --
11.00% subordinated notes payable to seven members of Plow & Hearth's board of
directors, paid in full during 1997............................................... 425,000 --
Obligations under capital leases (note 3)........................................... 45,358 33,672
------------- -------------
3,191,545 2,400,991
Less current maturities of long-term debt and obligations under capital leases...... 602,706 83,769
------------- -------------
Long-term debt and obligations under capital leases, excluding current maturities... $ 2,588,839 $ 2,317,222
------------- -------------
------------- -------------
The construction term loan to the Partnership was used to finance the
construction of the Facility and is collateralized by a first lien deed of trust
on the Facility and an assignment of all leases with respect to the Facility
including the lease with Plow & Hearth. The loan is also unconditionally and
fully guaranteed by Plow & Hearth. The loan's financial covenants require the
Partnership to meet a debt coverage ratio of at least 1.10 to 1.00. The
Partnership was in compliance with this covenant at December 31, 1997.
As of December 31, 1997, long-term debt maturities, excluding amounts
relating to capital leases, are as follows:
YEAR MATURITY
- ------------------------------------------------------------------------------- -------------
1998........................................................................... $ 70,831
1999........................................................................... 76,920
2000........................................................................... 83,532
2001........................................................................... 90,713
2002........................................................................... 98,511
Thereafter..................................................................... 1,946,812
-------------
$ 2,367,319
-------------
-------------
F-37
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(3) LEASES
The Company is obligated under various capital leases for certain telephone
and duplicating equipment which expire in 2000. The cost and accumulated
amortization of equipment held under capital leases at December 31, 1996 and
1997 were as follows:
1996 1997
---------- ---------
Equipment............................................................. $ 60,145 $ 60,145
Accumulated amortization.............................................. (30,195) (42,175)
---------- ---------
$ 29,950 $ 17,970
---------- ---------
---------- ---------
The Company also has several noncancellable operating leases for a retail
store facility, outlet store facility and certain equipment. Total rental
expense for operating leases amounted to $183,292 and $211,707 for the years
ended December 31, 1996 and 1997, respectively.
Minimum future payments under capital leases and noncancellable operating
leases at December 31, 1997 were as follows:
CAPITAL OPERATING
LEASES LEASES
--------- -------------
1998................................................................................... $ 15,782 $ 259,382
1999................................................................................... 15,782 269,716
2000................................................................................... 6,576 222,748
2001................................................................................... -- 160,886
2002................................................................................... -- 133,286
Thereafter............................................................................. -- 22,214
--------- -------------
Total minimum lease payments........................................................... 38,140 $ 1,068,232
-------------
-------------
Less amount representing interest and administrative costs............................. 4,468
---------
Present value of net minimum lease payments............................................ 33,672
Less current installments of obligations under capital leases.......................... 12,938
---------
Obligations under capital leases, excluding current installments....................... $ 20,734
---------
---------
(4) COMMON STOCK AND COMMON STOCK OPTIONS
COMMON STOCK
The Company and its stockholders are parties to a buy-sell agreement which
imposes certain restrictions on the transferability of the Company's outstanding
stock. Under the agreement, most transfers of stock require the approval of
stockholders representing at least two-thirds of the outstanding shares of the
Company. Any stock offered for resale must first be offered, at the selling
price, to the Company and the existing stockholders (see note 8).
F-38
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED)
COMMON STOCK OPTIONS
The Company's stock option plan (the "Plan"), adopted on November 13, 1990,
provides for the issuance of stock options at a price not less than the fair
value of the shares on the date of grant. The options are exercisable for a
period not to exceed ten years from the date an option is granted. Following is
a summary of stock option activity for the years ended December 31, 1996 and
1997:
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ------------------
Outstanding at December 31, 1995.................................................. 32,128 $ 27.53
Granted in 1996................................................................... 810 32.50
Exercised in 1996................................................................. (810) 22.50
Forfeited in 1996................................................................. (810) 32.50
-----------
Outstanding at December 31, 1996.................................................. 31,318 27.66
Granted in 1997................................................................... --
Exercised in 1997................................................................. --
Forfeited in 1997................................................................. --
-----------
Outstanding at December 31, 1997 (exercise prices ranging from $22.50 to $32.50
per share)...................................................................... 31,318 27.66
-----------
-----------
Prior to October 21, 1997, the Plan included a vesting schedule based on
years of service. Effective October 21, 1997, the Company's Board of Directors
approved the immediate vesting of all
previously unvested options.
Options exercisable at December 31, 1996 and 1997 were 30,022 and 31,318,
respectively.
Effective February 28, 1998, the Company adopted The Plow & Hearth, Inc.
Amended and Restated Stock Option Plan (the "Amended Plan") to replace the
existing November 13, 1990 Plan. The Company canceled the grant of the
previously granted options and, simultaneously therewith, granted new options at
the same price and for the same number of shares, to the optionholders in
accordance with the Amended Plan. Accordingly, the Company recorded compensation
expense during the Three Months Ended March 31, 1998 of $3,945,826 (Unaudited)
representing the difference between the exercise price of the stock options and
the fair value of the common stock on the date of grant. Under the Amended Plan,
31,318 shares of unissued common stock are reserved for the exercise of
outstanding stock options and the maximum number of shares of common stock which
may be issued and sold under the Amended Plan is 31,318 shares. The new options
will expire ten years from the effective date of the Amended Plan and are
immediately exercisable.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation
expense would be recorded on the date of
F-39
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED)
grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, ("SFAS 123") was issued in October 1995 and if
fully adopted, changes the methods of recognition of cost on plans similar to
those of the Company. Adoption of SFAS 123 is optional; however, pro forma
disclosures as if the Company adopted the cost recognition requirements under
SFAS 123 in 1996 and 1997 are presented below.
The per share weighted average fair value of stock options granted during
1996 was $8.76 on the date of grant using the minimal value option pricing model
with the following weighted average assumptions: expected dividend yield 0%,
risk-free interest rate of 6.48 percent and an expected life of 5 years.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options granted during 1995 and 1996 under SFAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
1996 1997
------------- -------------
Net income:
As reported................................................... $ 1,257,194 $ 2,217,928
Pro forma..................................................... 1,248,550 2,211,889
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost for options granted prior to January
1, 1995 is not considered.
(5) 401(K) RETIREMENT PLAN
The 401(k) retirement plan covers substantially all employees who meet
eligibility requirements and provides an opportunity for employees to make tax
deferred contributions with the Company matching, at their discretion, 25
percent of the employees' contribution up to 3 percent of the employees' annual
compensation. The Company incurred $11,910 of expense related to the 401(k)
retirement plan for the year ended December 31, 1997. No Company contributions
were made in 1996.
F-40
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(6) INCOME TAXES
Income tax expense for the years ended December 31, 1996 and 1997 consists
of the following:
1996 1997
----------- -------------
Current:
Federal............................................................................. $ 691,407 $ 1,286,847
State............................................................................... 129,695 240,359
----------- -------------
Total current......................................................................... 821,102 1,527,206
----------- -------------
Deferred:
Federal............................................................................. (44,759) (75,945)
State............................................................................... (8,402) (14,257)
----------- -------------
Total deferred........................................................................ (53,161) (90,202)
----------- -------------
Total income tax expense.............................................................. $ 767,941 $ 1,437,004
----------- -------------
----------- -------------
Income tax expense for the years ended December 31, 1996 and 1997 differed
from amounts computed by applying the U.S. Federal income tax rate of 34 percent
to income before income taxes as a result of the following:
1996 1997
----------- -------------
Computed "expected" income tax expense................................................ $ 688,546 $ 1,227,385
Increase (reduction) in income tax expense resulting from:
State income tax expense, net of effect of federal income taxes..................... 80,053 149,227
Nondeductible acquisition costs..................................................... -- 40,284
Other, net.......................................................................... (658) 20,108
----------- -------------
Total income tax expense.............................................................. $ 767,941 $ 1,437,004
----------- -------------
----------- -------------
F-41
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1997 are as
follows:
1996 1997
----------- ------------
Deferred tax assets:
Depreciation......................................................................... $ 7,428 $ 9,397
Inventories.......................................................................... 76,705 137,208
Intangible assets.................................................................... 15,486 266
Allowances for returns............................................................... 82,305 151,183
Other................................................................................ 20,111 27,438
----------- ------------
Total gross deferred tax assets........................................................ 202,035 325,492
Less valuation allowance............................................................. -- --
----------- ------------
Net deferred tax assets................................................................ 202,035 325,492
----------- ------------
Deferred tax liabilities:
Deferred catalog costs............................................................... (89,167) (121,613)
Other................................................................................ (5,220) (6,029)
----------- ------------
Total gross deferred tax liabilities................................................... (94,387) (127,642)
----------- ------------
Net deferred tax asset................................................................. $ 107,648 $ 197,850
----------- ------------
----------- ------------
The Company has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1996 and 1997, since substantially
all deferred tax assets can be recognized during the carryback period available
under current tax laws.
(7) CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentration
of credit risk consist of cash equivalents and accounts receivable. The
Company's cash equivalents consisted of commercial paper and an overnight
repurchase agreement at December 31, 1996 and 1997. The Company's policy is not
to hold collateral, and the amount of loss which could be incurred in the event
the commercial paper or overnight repurchase agreement failed to perform is
equal to the Company's investment in commercial paper and overnight repurchase
agreement, less any depository insurance proceeds. Accounts receivable consist
principally of trade accounts receivable resulting primarily from credit card
sales to customers and receivables for the rental of the Company's mailing list.
Concentrations of credit risk with respect to accounts receivable are limited
due to the Company's large number of customers and their dispersion throughout
geographic regions.
(8) SUBSEQUENT EVENT
On March 9, 1998, certain stockholders of Plow & Hearth executed a stock
purchase agreement with 1-800-Flowers, Inc., providing for the purchase of 70
percent, on a fully diluted basis, of the outstanding common stock and common
stock options of Plow & Hearth. The transaction is expected to close during
April 1998.
F-42
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1-800-
FLOWERS.COM, PRO FORMA
INC. AND THE PLOW & ADJUSTMENTS
SUBSIDIARIES HEARTH, INC. (NOTE 2) PRO FORMA
----------------- ------------ ------------ -----------
Net revenues............................................... $ 220,592 $ 37,155 $ -- $ 257,747
Cost of revenues........................................... 136,966 20,118 -- 157,084
----------------- ------------ ------------ -----------
Gross profit........................................... 83,626 17,037 -- 100,663
Operating expenses:
Marketing and sales...................................... 55,417 12,075 -- 67,492
Technology and development............................... 1,794 332 -- 2,126
General and administrative............................... 15,832 4,537 -- 20,369
Depreciation and amortization............................ 4,168 285 735 5,188
----------------- ------------ ------------ -----------
Total operating expenses............................. 77,229 17,229 735 95,175
----------------- ------------ ------------ -----------
Operating income (loss).................................... 6,415 (192) (735) 5,488
Other income (expense):
Interest income.......................................... 1,290 87 -- 1,377
Interest expense......................................... (1,177) (157) (900) (2,234)
Other, net............................................... 1,541 (490) -- 1,051
----------------- ------------ ------------ -----------
1,654 (560) (900) 194
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority interests... 8,069 (752) (1,635) 5,682
Provision for income taxes................................. 3,181 (291) (342) 2,548
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................... 4,888 (461) (1,293) 3,134
Minority interests in operations of consolidated
subsidiaries............................................. 186 -- 144 330
----------------- ------------ ------------ -----------
Net income (loss).......................................... 5,074 (461) (1,149) 3,464
Redeemable Class C common stock dividends.................. (1,608) -- -- (1,608)
----------------- ------------ ------------ -----------
Net income (loss) applicable to common stockholders........ $ 3,466 $ (461) $ (1,149) $ 1,856
----------------- ------------ ------------ -----------
----------------- ------------ ------------ -----------
Net income (loss) per common share applicable to common
stockholders:
Basic.................................................... $ 0.79 $ 0.42
----------------- -----------
----------------- -----------
Diluted.................................................. $ 0.74 $ 0.40
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per common
share:
Basic.................................................... 4,412 4,412
----------------- -----------
----------------- -----------
Diluted.................................................. 4,661 4,661
----------------- -----------
----------------- -----------
SEE ACCOMPANYING NOTES.
F-43
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1-800-
FLOWERS.COM, PRO FORMA
INC. AND THE PLOW & ADJUSTMENTS
SUBSIDIARIES HEARTH, INC. (NOTE 2) PRO FORMA
----------------- ------------ ------------ -----------
Net revenues............................................... $ 146,217 $ 37,155 $ -- $ 183,372
Cost of revenues........................................... 91,773 20,118 -- 111,891
----------------- ------------ ------------ -----------
Gross profit............................................. 54,444 17,037 -- 71,481
Operating expenses:
Marketing and sales...................................... 36,089 12,075 -- 50,164
Technology and development............................... 1,128 332 -- 1,460
General and administrative............................... 10,315 4,537 -- 14,852
Depreciation and amortization............................ 2,768 285 735 3,788
----------------- ------------ ------------ -----------
Total operating expenses............................. 52,300 17,229 735 70,264
----------------- ------------ ------------ -----------
Operating income (loss).................................... 2,144 (192) (735) 1,217
Other income (expense):
Interest income.......................................... 812 87 -- 899
Interest expense......................................... (720) (157) (900) (1,777)
Other, net............................................... 1,637 (490) -- 1,147
----------------- ------------ ------------ -----------
1,729 (560) (900) 269
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority interests... 3,873 (752) (1,635) 1,486
Provision (benefit) for income taxes....................... 1,515 (291) (342) 882
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................... 2,358 (461) (1,293) 604
Minority interests in operations of consolidated
subsidiaries............................................. 38 -- 144 182
----------------- ------------ ------------ -----------
Net income (loss).......................................... 2,396 (461) (1,149) 786
Redeemable Class C common stock dividends.................. (1,206) -- -- (1,206)
----------------- ------------ ------------ -----------
Net income (loss) applicable to common stockholders........ $ 1,190 $ (461) $ (1,149) $ (420)
----------------- ------------ ------------ -----------
----------------- ------------ ------------ -----------
Net income (loss) per common share applicable to common
stockholders:
Basic.................................................... $ 0.27 $ (0.10)
----------------- -----------
----------------- -----------
Diluted.................................................. $ 0.25 $ (0.10)
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per common
share:
Basic.................................................... 4,414 4,414
----------------- -----------
----------------- -----------
Diluted.................................................. 4,675 4,414
----------------- -----------
----------------- -----------
SEE ACCOMPANYING NOTES.
F-44
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 28, 1998 AND
THE NINE MONTHS ENDED MARCH 29, 1998
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations give effect to
the acquisition by 1-800-FLOWERS.COM, Inc. and Subsidiaries ("Flowers") of The
Plow & Hearth, Inc. ("P&H") as if it occurred on June 30, 1997. Such unaudited
pro forma consolidated financial statements sets forth the historical results of
operations of Flowers for the year ended June 28, 1998 and the nine months ended
March 29, 1998, as applicable, and P&H for the nine months ended March 29, 1998.
The operations of P&H for the three months ended June 28, 1998 are included in
the operations of Flowers.
The unaudited pro forma statements of operations have been prepared by
management and should be read in conjunction with the historical financial
statements of Flowers and P&H. The statements do not purport to be indicative of
the results of operations that might have occurred if the P&H acquisition was
consummated on June 30, 1997, and do not purport to be indicative of future
results.
Management believes additional synergies and operational improvements, not
reflected in the accompanying unaudited pro forma consolidated statements of
operations, will be realized by the combined companies. Such amounts cannot be
reasonably quantified and, therefore, are not reflected in the unaudited pro
forma consolidated statements of operations.
2. PRO FORMA ADJUSTMENTS
The pro forma adjustments reflect the additional amortization required for a
full year's amortization of the intangibles acquired, additional interest
expenses incurred on the borrowings to fund the acquisition and the related tax
effects.
F-45
UNDERWRITING
1-800-FLOWERS.COM and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse
First Boston Corporation and Wit Capital Corporation are the representatives of
the underwriters.
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------- -----------
Goldman, Sachs & Co............................................................
Credit Suisse First Boston Corporation.........................................
Wit Capital Corporation........................................................
-----------
Total....................................................................
-----------
-----------
------------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from 1-800-FLOWERS.COM to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by 1-800-FLOWERS.COM. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
PAID BY 1-800-FLOWERS.COM
NO EXERCISE FULL EXERCISE
------------ -------------
Per Share...... $ $
Total.......... $ $
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
1-800-FLOWERS.COM and its directors, officers and stockholders have agreed
with the underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of
Goldman, Sachs & Co. This agreement does not apply to any existing employee
benefit plans. Please see "Shares Eligible for Future Sale" for a discussion of
certain transfer restrictions.
At the request of 1-800-FLOWERS.COM, the underwriters have reserved at the
initial public offering price up to shares of common stock for sale to
certain directors, employees and associates of 1-800-
FLOWERS.COM. There can be no assurance that any of the reserved shares will be
purchased. The number of shares available for sale to the general public in this
offering will be reduced by the number of reserved shares sold. Any reserved
shares not so purchased will be offered to the general public on the same basis
as the other shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public
U-1
offering price will be negotiated among 1-800-FLOWERS.COM and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be 1-800-FLOWERS.COM's historical performance, estimates of the
business potential and earnings prospects of 1-800-FLOWERS.COM, an assessment of
1-800-FLOWERS.COM's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital Corporation. In addition, all dealers purchasing
shares from Wit Capital in this offering have agreed to make a prospectus in
electronic format available on Web sites maintained by each of these dealers.
Other than the prospectus in electronic format, the information on such Web
sites and any information contained on any other Web site maintained by Wit
Capital Corporation or such dealers is not part of this prospectus or the
registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by 1-800-FLOWERS.COM or any underwriter in such
capacity and should not be relied on by prospective investors.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 65 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with 1-800-FLOWERS.COM, or any of its founders or significant stockholders.
1-800-FLOWERS.COM has applied to list the class A common stock on the Nasdaq
National Market under the symbol "FLWS".
In connection with this offering, the underwriters may purchase and sell
shares of class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the class A common stock. As a result, the price of
the class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
1-800-FLOWERS.COM estimates that the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$ .
1-800-FLOWERS.COM has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
U-2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO
SELL ONLY THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN
JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary.................... 3
Risk Factors.......................... 8
Cautionary Note Regarding Forward-
Looking Statements.................. 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 35
Management............................ 47
Certain Transactions.................. 52
Principal Stockholders................ 54
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 58
Legal Matters......................... 59
Experts............................... 60
Where you Can Find More Information... 60
Index to Financial Statements......... F-1
Underwriting.......................... U-1
------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION.
SHARES
1-800-FLOWERS.COM, INC.
CLASS A COMMON STOCK
------------------
[LOGO]
----------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
WIT CAPITAL CORPORATION
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses, other
than the underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the class A common stock being
registered.
SEC registration fee.............................................fee........................................... $ 41,70034,528
NASD filing fee..................................................fee................................................ 15,500
NASDAQ listing fee............................................... *fee............................................. 95,500
Legal fees and expenses.......................................... *expenses........................................ 500,000
Accountants' fees and expenses................................... *expenses................................. 300,000
Printing expenses................................................ *expenses.............................................. 350,000
Blue sky fees and expenses....................................... *expenses..................................... 5,000
Transfer Agentagent and Registrarregistrar fees and expenses................... *
Miscellaneous.................................................... *
---------
Total...................................................... $ *
---------
---------expenses................. 15,000
Miscellaneous.................................................. 184,472
----------
Total.................................................... $1,500,000
----------
----------
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or DGCL, makes
provision for the indemnification of officers and directors in terms
sufficiently broad to indemnify officers and directors under certain
circumstances from liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Section 145 of the DGCL empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise.
The certificate of incorporation of 1-800-FLOWERS.COM provides for
indemnification of our directors against, and absolution of, liability to
1-800-FLOWERS.COM and its stockholders to the fullest extent permitted by the
DGCL. 1-800-FLOWERS.COM maintains directors' and officers' liability insurance
covering certain liabilities that may be incurred by our directors and officers
in connection with the performance of their duties.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information regarding the issuance of the Registrant's
securities does not give effect to the recapitalization or subsequent split of
its common stock. Pursuant to the Registrant's recapitalization, each share of
class A common stock outstanding will be automatically converted into one share
of new class B common stock and each share of class B common stock will be
automatically converted into one share of new class B common stock. In May 1999,
each share of class C common stock was converted into one share of class B
common stock and cash. Pursuant
II-1
to the stock split, each share of common stock will be split into a to be
determined number10 shares of
shares.the same class. The Registrant has issued the following securities since May
1996:
1. On April 28, 1996, the Registrant issued 76,292 shares of class B
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
2. On June 28, 1996, the Registrant issued 8,476.97 shares of class C
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
3. From February 3, 1997 to January 18, 1999, the Registrant granted
123,750 options to purchase Class B common stock to 29 employees at exercise
prices ranging from $13.00 to $20.00.
4. InOn May 20, 1999, the Registrant issued 1,127,546 shares of preferred
stock for an aggregate amount of $117.6$117.4 million. The preferred stock
automatically converts into class A common stock upon the closing of the
initial public offering.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipients of securities in each of these transactions represented their
intention to acquire the securities for investment only and not with view to or
for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationship
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
INDEX TO EXHIBITS
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------
1.1(*) Form of Underwriting Agreement.
3.1(*3.1(++) Third Amended and Restated Certificate of Incorporation.
3.2(*) Form of Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation to be effective upon the initial public offering.
3.33.3(++) Amended and Restated By-laws.
3.4(*) Form of Amendment No. 1 to Amended and Restated By-laws to be effective upon
the initial public offering.
4.1(*4.1(++) Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2 3.3 and 3.43.3 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining the rights of holders of
Common Stock of the Registrant.
4.34.3(++) Form of Warrant.
5.1(*5.1(++) Opinion of Brobeck, Phleger & Harrison LLP.
10.110.1(++) Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C and
800-FLOWERS, Inc.
10.2(*10.2(++) Investment Agreement, dated as of January 16, 1995, among Chemical Venture
Capital Associates, Teleway, Inc. and James F. McCann.
10.3(++) Investment Agreement, dated as of January 16, 1995, among Chemical Venture
Capital Associates, Teleway, Inc. and James F. McCann.
II-2
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------
10.3* Consent and Amendment No. 1 to Investment Agreement, dated as of May 20,
1999, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and James F.
McCann.
10.410.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS, Inc. and
The Chase Manhattan Bank.
II-2
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------
10.5(+*) Interactive Marketing Agreement, dated as of May 1, 1997, between America
Online, Inc. and 800-FLOWERS, Inc.
10.6(+*) Interactive Marketing Agreement, dated as of January 1, 1998, between America
Online, Inc. and 800-FLOWERS, Inc.
10.7(+*) E-Commerce Merchant Agreement for The Plaza on MSN, with a term start date of
October 21, 1997, between The Microsoft Network, L.L.C. and 800-FLOWERS,
Inc., as amended.
10.8(+*) Sponsorship Agreement, dated as of May 1, 1998, between Excite, Inc. and
800-FLOWERS, Inc.
10.9 [Reserved]
10.1010.9(+) Development and Hosting Agreement, dated as of June 18, 1999, between Fry
Multimedia, Inc. and 800-Gifthouse, Inc.
10.10(++) 1997 Stock Option Plan, as amended.
10.1110.11(++) Stockholders' Agreement, dated as of April 3, 1998, among The Plow & Hearth,
Inc., 1-800-FLOWERS, Inc. and the Persons Set Forth on Schedule A thereto.
10.12(*10.12(++) AmendmentAmendments to Stockholders' Agreement, dated as of May 17, 1999, among The
Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc. and the Persons Set Forth on
Schedule A thereto.
10.1310.13(++) Employment Agreement, effective as of January 4, 1999, between John W. Smolak
and 1-800-FLOWERS, Inc.
10.1410.14(++) Employment Agreement, effective as of April 3, 1998, between Peter G. Rice
and 1-800-FLOWERS, Inc.
10.1510.15(++) Employment Agreement, effective as of January 18, 1999, between Kerry W. Coin
and 1-800-FLOWERS, Inc.
10.16(*10.16(++) Investors' Rights'Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the
persons designated as Investors listed therein.
10.17(*on the signature pages thereto.
10.17(++) Stock Purchase Agreement, dated as of May 20, 1999, among 1-800-FLOWERS.COM,
Inc., James F. McCann, Christopher G. McCann and the Investors listed therein.
21.1on
Schedule A thereto.
10.18(*) 1999 Stock Incentive Plan.
10.19(++) Employment Agreement, effective as of July 1, 1999, between James F. McCann
and 1-800-FLOWERS.COM, Inc.
10.20(++) Employment Agreement, effective as of July 1, 1999, between Christopher G.
McCann and 1-800-FLOWERS.COM, Inc.
21.1(++) Subsidiaries of the Registrant.
23.1(*23.1(++) Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.223.2(*) Consent of Ernst & Young LLP.
23.323.3(*) Consent of KPMG LLP.
24.124.1(++) Powers of Attorney (included in the Signature Page).
27.127.1(++) Financial Data Schedule for the year ended June 28, 1998.
27.227.2(++) Financial Data Schedule for the nine months ended March 28, 1999.
- ------------------------
(*) To be filed by amendment.
(+) Confidential treatment to be requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(++) Previously filed.
II-3
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on this 20th12th day of May,July, 1999.
1-800-FLOWERS.COM, INC.
BY: /S/ JAMES F. MCCANN
-----------------------------------------
James F. McCann
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc.
(the "Company"), hereby severally constitute and appoint James F. McCann and
John W. Smolak, and each of them individually, with full powers of substitution
and resubstitution, our true and lawful attorneys, with full powers to them and
each of them to sign for us, in our names and in the capacities indicated below,
the registration statement on Form S-1 filed with the Securities and Exchange
Commission, and any and all amendments to said registration statement (including
post-effective amendments), and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, in connection with the
registration under the Securities Act of 1933, as amended, of equity securities
of the Company, and to file or cause to be filed the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Dated: July 12, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons in
the capacities indicated below:
Dated: May 20, 1999 /s/ JAMES F. MCCANN
-------------------------
James F. McCann
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Dated: May 20, 1999 /s/ JOHN W. SMOLAK
-------------------------
John W. Smolak
Senior Vice
President--Finance and
Administration (Principal
Financial and Accounting
Officer)
II-5
Dated: May 20,July 12, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: July 12, 1999 /s/ CHRISTOPHER G.
MCCANN
-------------------------JOHN W. SMOLAK
--------------------------------------------
John W. Smolak
Senior Vice President--Finance and
Administration (Principal Financial and
Accounting Officer)
Dated: July 12, 1999 *
--------------------------------------------
Christopher G. McCann
Director, Senior Vice President
Dated: May 20,July 12, 1999 /s/ T. GUY MINETTI
-------------------------*
--------------------------------------------
T. Guy Minetti
Director
Dated: July 12, 1999 *
--------------------------------------------
Jeffrey C. Walker
Director
Dated: July 12, 1999 *
--------------------------------------------
David Beirne
Director
II-5
Dated: July 12, 1999 *
--------------------------------------------
Charles R. Lax
Director
Dated: July 12, 1999 *
--------------------------------------------
Kevin J. O'Connor
Director
*By: /s/ JOHN W. SMOLAK
--------------------------------
John W. Smolak
Attorney-in-fact
II-6
INDEX TO EXHIBITS
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -----------
1.1(*) Form of Underwriting Agreement.
3.1(++) Third Amended and Restated Certificate of Incorporation.
3.2(*) Form of Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation to be effective upon the initial public offering.
3.3(++) Amended and Restated By-laws.
4.1(++) Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining the rights of
holders of Common Stock of the Registrant.
4.3(++) Form of Warrant.
5.1(++) Opinion of Brobeck, Phleger & Harrison LLP.
10.1(++) Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C
and 800-FLOWERS, Inc.
10.2(++) Investment Agreement, dated as of January 16, 1995, among Chemical
Venture Capital Associates, Teleway, Inc. and James F. McCann.
10.3(++) Consent and Amendment No. 1 to Investment Agreement, dated as of May
20, 1999, /s/ JEFFREY C. WALKER
-------------------------
Jeffrey C. Walker
Directoramong Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and
James F. McCann.
10.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS,
Inc. and The Chase Manhattan Bank.
10.5(+) Interactive Marketing Agreement, dated as of May 1, 1997, between
America Online, Inc. and 800-FLOWERS, Inc.
10.6(+) Interactive Marketing Agreement, dated as of January 1, 1998, between
America Online, Inc. and 800-FLOWERS, Inc.
10.7(+) E-Commerce Merchant Agreement for The Plaza on MSN, with a term start
date of October 21, 1997, between The Microsoft Network, L.L.C. and
800-FLOWERS, Inc., as amended.
10.8(+) Sponsorship Agreement, dated as of May 1, 1998, between Excite, Inc.
and 800-FLOWERS, Inc.
10.9(+) Development and Hosting Agreement, dated as of June 18, 1999, between
Fry Multimedia, Inc. and 800-Gifthouse, Inc.
10.10(++) 1997 Stock Option Plan, as amended.
10.11(++) Stockholders' Agreement, dated as of April 3, 1998, among The Plow &
Hearth, Inc., 1-800-FLOWERS, Inc. and the Persons Set Forth on
Schedule A thereto.
10.12(++) Amendments to Stockholders' Agreement, dated as of May 17, 1999, among
The Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc. and the Persons Set
Forth on Schedule A thereto.
10.13(++) Employment Agreement, effective as of January 4, 1999, between John W.
Smolak and 1-800-FLOWERS, Inc.
10.14(++) Employment Agreement, effective as of April 3, 1998, between Peter G.
Rice and 1-800-FLOWERS, Inc.
10.15(++) Employment Agreement, effective as of January 18, 1999, between Kerry
W. Coin and 1-800-FLOWERS, Inc.
II-6
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of 1-800-FLOWERS.COM,
Inc. and subsidiaries (the "Company"
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -----------
10.16(++) Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the
persons designated as Investors on the signature pages thereto.
10.17(++) Stock Purchase Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc., James F. McCann, Christopher G. McCann and
the Investors listed on Schedule A thereto.
10.18(*) 1999 Stock Incentive Plan.
10.19(++) Employment Agreement, effective as of July 1, 1999, between James F.
McCann and 1-800-FLOWERS.COM, Inc.
10.20(++) Employment Agreement, effective as of July 1, 1999, between
Christopher G. McCann and 1-800-FLOWERS.COM, Inc.
21.1(++) Subsidiaries of the Registrant.
23.1(++) Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2(*) Consent of Ernst & Young LLP.
23.3(*) Consent of KPMG LLP.
24.1(++) Powers of Attorney (included in the Signature Page).
27.1(++) Financial Data Schedule for the year ended June 28, 1998.
27.2(++) Financial Data Schedule for the nine months ended March 28, 1999.
- ------------------------
(*) as of March 28, 1999, June 28, 1998 and
June 29, 1997, andTo be filed by amendment.
(+) Confidential treatment to be requested for the nine months ended March 28, 1999 and for each of the
three years in the period ended June 28, 1998, and have issued our report
thereon dated May 20, 1999 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)certain portions of this
Registration Statement. This schedule isExhibit pursuant to Rule 406 promulgated under the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Melville, New York
May 20, 1999
S-1
1-800-FLOWERS.COM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ----------- -------------- ----------------- ------------ -----------
Year ended June 28,1998:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 509,000 $ 213,000 $ 62,000(c) $ -- $ 784,000
Reserve for estimated doubtful
accounts--notes receivable......... 423,000 170,000 -- -- 593,000
----------- -------------- -------- ------------ -----------
$ 932,000 $ 383,000 $ 62,000 $ -- $1,377,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
Year ended June 29,1997:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 359,000 $ 269,000 $ -- $ (119,000)(b) $ 509,000
Reserve for estimated doubtful
accounts--notes receivable......... 185,000 284,000 -- (46,000)(b) 423,000
----------- -------------- -------- ------------ -----------
$ 544,000 $ 553,000 $ -- $ (165,000) $ 932,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
Year ended June 30, 1996:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 262,000 $ 289,000 $ -- $ (192,000)(a) $ 359,000
Reserve for estimated doubtful
accounts--notes receivable......... 155,000 30,000 -- -- 185,000
Valuation allowance on deferred tax
assets............................. 150,000 -- -- (150,000)(b) --
----------- -------------- -------- ------------ -----------
$ 567,000 $ 319,000 $ -- $ (342,000) $ 544,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
- ------------------------------
(a) Reduction in allowance
(b) Reduction in valuation allowance for deferred tax assets
(c) Increase in reserve
S-2Securities Act.
(++) Previously filed.