AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1999
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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 Organization) Classification Code Number) Identification Number)
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1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
(516) 237-6000
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. / /
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.
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 JULY 22, 1999.
6,000,000 Shares
[LOGO]
1-800-FLOWERS.COM, INC.
This is an initial public offering of shares of class A common stock of 1-800-FLOWERS.COM, Inc. All of the 6,000,000 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 $16 and $18 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
Per Share Total
----------- ---------
Initial public offering price................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to 1-800-FLOWERS.COM.............. $ $
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The underwriters expect to deliver 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
Prospectus dated , 1999.
[GRAPHICS]
[front inside cover - 1-800-FLOWERS.COM logo with the words "Flowers are just the beginning...". In the background are products offered by 1-800-FLOWERS.COM, including the words floral arrangements, farm direct, roses, single varieties, green plants, blooming plants, preplanted bulbs, silk flowers, herbs, seeds, tools, etc. Gatefold-across top are words "Connecting the people of the world through their personal expressions!" Five photos of the 1-800-FLOWERS.COM Web site. Along bottom are the words "1-800-FLOWERS.COM-SM- product line includes fresh-cut and seasonal flowers, plants, floral arrangements, gift baskets, gourmet foods, garden accessories, and casual lifestyle furnishings."]
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.
1-800-FLOWERS.COM, INC.
OUR BUSINESS
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products and gifts, in terms of number of customers and revenue. As of March 28, 1999, we had sold our products to approximately 7.2 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.
With the development of our online business and a strategic acquisition, we have continuously expanded our product offerings, most recently to include gourmet foods and 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 online presence through strategic relationships with Internet companies, 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 stock keeping units, or SKUs, of gifts, gourmet foods and home and garden products, including garden accessories and casual lifestyle furnishings. We are committed to providing our individual and corporate customers the best possible shopping experience through superior service and a 100% satisfaction guarantee.
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 order fulfillment. We have implemented a transaction processing system that processes orders arising online and telephonically and a centrally managed telecommunications network that can serve as a platform for future growth.
Many of our products must be handled delicately and delivered promptly to ensure customer satisfaction and freshness. We fulfill our products through a network, known as the "BloomNet" network, of approximately 1,500 independent local florists with whom we have non-exclusive arrangements, our owned or franchised stores, third party suppliers and our advanced fulfillment center.
In May 1999, we completed a private placement of preferred stock. The investors included Benchmark Capital Partners and SOFTBANK America Inc., both prominent Internet-focused investment firms, and Waelinvest S.A., an affiliate of LVMH Moet Hennessy Louis Vuitton S.A. A representative from each of Benchmark and SOFTBANK has joined our board of directors. The private placement yielded us net proceeds of $101.6 million, which we intend to use together with the proceeds of this offering to further our strategy of becoming the leading e-commerce
provider of flowers, gifts, gourmet foods and home and garden merchandise. All of the outstanding preferred stock will convert into class A common stock upon the effectiveness of this offering. The private placement investors will hold, in the aggregate, 25.0% of the total economic interest and 3.8% of the total voting interest of the outstanding common stock after this offering.
OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers, gifts, gourmet foods and products for the home and garden. We intend to meet this objective by:
- aggressively extending our brand from flowers and gifts to gourmet foods and home and garden products;
- expanding our offerings of gifts, gourmet foods 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 order 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.
THE OFFERING
Shares offered by 1-800-FLOWERS.COM........... 6,000,000 shares of class A common stock
Shares to be outstanding after this
offering.................................... 21,375,472 shares of class A common stock
40,246,205 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.
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Investors should be aware that their interest in 1-800-FLOWERS.COM will be diluted upon the issuance of:
- 1,237,500 shares of class B common stock upon the exercise of options outstanding as of July 7, 1999 at a weighted average exercise price of $1.73 per share;
- 200,000 shares of class A common stock upon the exercise of options outstanding as of July 7, 1999 and up to 9,700,000 additional shares of class A common stock that could be issued under our 1999 stock incentive plan; and
- 2,371,040 shares of class A common stock upon the exercise of an outstanding warrant at a nominal exercise price.
DESCRIPTION OF COMMON STOCK
Holders of class A common stock generally have the same rights as the holders of class B common stock, except that holders of class A common stock have one vote per share and holders of class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of class A common stock and class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into class A common stock at any time on a one-for-one basis and each share of class B common stock will automatically convert into one share of class A common stock upon its transfer, with limited exceptions.
After this offering, the class A common stock will control 5.0% of the total voting interest and 34.7% of the total economic interest of our common stock and the class B common stock will control 95.0% of the total voting interest and 65.3% of the total economic interest of our common stock. James F. McCann, our Chairman and Chief Executive Officer, will control 77.2% of the total voting interest of the common stock. The ownership of our common stock after this offering is represented by the following:
NUMBER OF SHARES
---------------------------- ECONOMIC VOTING
CLASS A CLASS B INTEREST INTEREST
------------- ------------- ------------- -----------
Affiliates of 1-800-FLOWERS.COM.............................. 9,600 37,523,245 60.9% 88.5%
Non-affiliates............................................... 21,365,872 2,722,960 39.1 11.5
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EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS A 10-FOR-1 STOCK SPLIT OF OUR CLASS A AND B COMMON STOCK TO BE EFFECTED PRIOR TO COMPLETION OF THIS OFFERING; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
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
------------------------------------------------------- ------------------------
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................................... $ 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........................................ $ 0.01 $ 0.02 $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
Diluted...................................... 0.01 0.02 0.01 0.06 0.07 0.03 (0.20)
Shares used in the calculation of net income
(loss) per common share:
Basic........................................ 48,530 48,600 47,050 44,140 44,120 44,140 44,000
Diluted...................................... 48,530 49,780 49,420 46,740 46,610 46,750 44,000
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The following summary balance sheet data as of March 28, 1999 is presented:
- on an actual basis;
- on a pro forma basis to reflect the May 1999 private placement and the use of a portion of the proceeds from the private placement to redeem all outstanding class C common stock; and
- on a pro forma as adjusted basis to reflect the automatic conversion of all shares of series A preferred stock into class A common stock at the effectiveness of this offering and our sale of shares of class A common stock in this offering at an assumed initial public offering price of $17 per share, after deducting the underwriting discount and estimated offering expenses, and the use of a portion of the proceeds from this offering to repay existing debt and redeem outstanding stock and stock options.
AS OF MARCH 28, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents......................................................... $ 2,632 $ 99,982 $ 166,942
Working capital (deficit).................................................... (9,490) 87,860 154,820
Total assets................................................................. 86,599 183,949 251,509
Long-term liabilities........................................................ 38,640 38,640 14,340
Redeemable class C common stock.............................................. 19,020 -- --
Total stockholders' equity (deficit)......................................... (7,919) 108,451 200,311
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The summary unaudited pro forma combined financial data provided below give effect to our acquisition of Plow & Hearth in April 1998 as if the acquisition had been completed on June 30, 1997. 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
-------------- --------------- ---------------
PRO FORMA PRO FORMA ACTUAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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........................................................ $ 0.04 $ (0.01) $ (0.20)
Diluted...................................................... 0.04 (0.01) (0.20)
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 44,120 44,140 44,000
Diluted...................................................... 46,610 44,140 44,000
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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 WHICH MAY REDUCE THE TRADING PRICE OF OUR CLASS A COMMON STOCK
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 relationships with Internet companies;
- increase the number of products we offer; and
- enhance our technological infrastructure and order fulfillment capabilities.
Although we have been profitable in the past, we expect to incur losses for the foreseeable future as a result of these expenditures. In order to achieve and maintain profitability, we will need to generate revenues significantly above historical levels. We cannot assure you that we will achieve sufficient revenues for profitability. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future.
OUR QUARTERLY OPERATING RESULTS MAY SIGNIFICANTLY FLUCTUATE AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS
Our future revenues and results of operations may fluctuate significantly due to a combination of factors, many of which are outside of our control. The most important of these factors include:
- seasonality;
- the timing and effectiveness of our marketing programs;
- the timing and effectiveness of capital expenditures;
- our ability to enter into or renew marketing agreements with Internet companies; and
- competition.
We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenue in relation to our expenses, our operating results will suffer. Our operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that, in future periods, our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our class A common stock to fall.
Consumer spending on flowers, gifts and other products we sell may vary with general economic conditions. If general economic conditions deteriorate and our customers have less disposable income, consumers will likely spend less on our products and our quarterly operating results will suffer.
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.
IF OUR CUSTOMERS DO NOT FIND OUR EXPANDED PRODUCT LINES APPEALING, OUR REVENUES MAY NOT GROW AND OUR NET INCOME WILL DECREASE
Our business historically has focused on offering floral and gift products. We have expanded our product lines in the gift, gourmet food and home and garden categories, particularly with our acquisition of Plow & Hearth in April 1998, and we expect to incur significant costs in marketing these new products. If our customers do not find our expanded product lines appealing, we may not generate sufficient revenue to offset their related costs and our net income will decrease.
IF WE FAIL TO DEVELOP AND MAINTAIN OUR BRAND, WE WILL NOT INCREASE OR MAINTAIN OUR CUSTOMER BASE OR OUR REVENUES
We must develop and maintain the 1-800-FLOWERS.COM brand to expand our customer base and our revenues. In addition, we may introduce or acquire other brands in the future. We believe that the importance of brand recognition will increase as we expand our product offerings. Many of our customers may not be aware of the non-floral products we offer. We intend to substantially increase our expenditures for creating and maintaining brand loyalty and raising awareness of our additional product offerings. However, if we fail to advertise and market our products effectively, we may not succeed in establishing our brands, we will lose customers and our revenues will decline.
Our success in promoting and enhancing the 1-800-FLOWERS.COM brand will also depend on our success in providing our customers high-quality products and a high level of customer service. If our customers do not perceive our products and services to be of high quality, the value of the 1-800-FLOWERS.COM brand would be diminished, we will lose customers and our revenues will decline.
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC ONLINE RELATIONSHIPS THAT GENERATE A SIGNIFICANT AMOUNT OF TRAFFIC COULD LIMIT THE GROWTH OF OUR BUSINESS
We expect that in the future a significant portion of our online customers will purchase our products at our AOL online store or come to our Web site from third party Web sites with which we have strategic relationships, including AOL, Excite and the Microsoft Network. If these third-parties do not attract a significant number of visitors, we will not receive a significant number of online customers from these relationships and our revenues will decrease or not grow. In addition, we plan to enter into more of these relationships and we may pay significant fees to do so. There is strong competition to establish relationships with leading Internet companies, and we may not successfully enter into additional relationships. We may also be required to pay significant fees to maintain and expand existing relationships. The cost of maintaining our relationships with third party Internet companies for the nine months ended March 28, 1999 was approximately $4.3 million. Our online revenues will suffer if we fail to enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their cost.
IF LOCAL FLORISTS AND OTHER THIRD-PARTY VENDORS DO NOT FULFILL ORDERS TO OUR CUSTOMERS' SATISFACTION, OUR CUSTOMERS MAY NOT SHOP WITH US AGAIN
Floral orders placed by our customers are fulfilled by local florists, a majority of which are either part of the BloomNet network of approximately 1,500 independent florists or are stores that we own or franchise. Except for the stores we own, we do not directly control any of these florists. In addition, many of the
non-floral products we sell are manufactured and delivered to our customers by independent third-party vendors. If customers are dissatisfied with the performance of the local florist or other third-party vendors, they may not utilize our services when placing future orders and our revenues will decrease.
IF A FLORIST DISCONTINUES ITS RELATIONSHIP WITH US, OUR CUSTOMERS MAY EXPERIENCE DELAYS IN SERVICE OR DECLINES IN QUALITY AND MAY NOT SHOP WITH US AGAIN
Many of our arrangements with local florists for order fulfillment, including arrangements with BloomNet florists, are not formalized in writing. Of those relationships which have been formalized in writing, including arrangements with BloomNet florists, most may be terminated with 10 days notice. If a florist discontinues its relationship with us, we will be required to obtain a suitable replacement located in the same area, which may cause delays in delivery or a decline in quality, leading to customer dissatisfaction and loss of customers.
IF A SIGNIFICANT AMOUNT OF CUSTOMERS ARE NOT SATISFIED WITH THEIR PURCHASE, WE WILL BE REQUIRED TO INCUR SUBSTANTIAL COSTS TO ISSUE REFUNDS, CREDITS OR REPLACEMENT PRODUCTS
We offer our customers a 100% satisfaction guarantee on our products. If customers are not satisfied with the products they receive, we will either send the customer another product or issue the customer a refund or a credit. Our net income could decrease if a significant number of customers request replacement products, refunds or credits.
INCREASED SHIPPING COSTS AND LABOR STOPPAGES MAY ADVERSELY AFFECT SALES OF OUR NON-FLORAL PRODUCTS
Our non-floral products are delivered to customers either directly from the manufacturer or from our warehouse in Virginia. We have established relationships with the United States Postal Service, Federal Express, United Parcel Service and other common carriers for the delivery of these products. If these carriers were to raise the prices they charge to ship our goods, our customers might choose to buy comparable products locally to avoid shipping charges. In addition, these carriers may experience labor stoppages, which could impact our ability to deliver products on a timely basis to our customers and adversely affect our customer relationships.
IF WE FAIL TO CONTINUOUSLY IMPROVE OUR WEB SITE, WE WILL NOT ATTRACT OR RETAIN CUSTOMERS
If our potential or existing customers do not find our Web site a convenient place to shop, we will not attract or retain customers and our sales will suffer. To encourage the use of our Web site, we must continuously improve its accessibility, content and ease of use. If our competitors' Web sites are perceived as easier to use or better able to satisfy customer needs, our customer traffic and our business would be adversely affected.
COMPETITION IN THE FLORAL, GIFT, GOURMET FOOD AND HOME AND GARDEN INDUSTRIES IS INTENSE AND A FAILURE TO RESPOND TO COMPETITIVE PRESSURE COULD RESULT IN LOST REVENUES
There are many companies that offer products in the floral, gift, gourmet food and home and garden categories. In the floral category, our competitors include:
- 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, gourmet food and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products and is highly fragmented. Products in these categories may be purchased from a number of outlets, including mass merchants, retail specialty shops, online retailers and mail-order catalogs.
Competition is intense and we expect it to increase. Increased competition could result in:
- 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 results of operations.
IF WE DO NOT ACCURATELY PREDICT CUSTOMER DEMAND FOR OUR PRODUCTS, WE MAY LOSE CUSTOMERS OR EXPERIENCE INCREASED COSTS
In the past, we did not need to maintain significant inventory of products. However, as the volume of non-floral products we offer has expanded, we intend to increase inventory levels and the number of products maintained in our warehouses. Because we have limited experience offering many of our non-floral products through our Web site, we may not predict inventory levels accurately. If we overestimate customer demand for our products, excess inventory and outdated merchandise could accumulate, tying up working capital and potentially resulting in reduced warehouse capacity and inventory losses due to damage, theft and obsolescence. If we underestimate customer demand, we will disappoint customers who may turn to our competitors. Moreover, the strength of the 1-800-FLOWERS.COM brand could be diminished due to misjudgments in merchandise selection.
IF THE SUPPLY OF FLOWERS FOR SALE BECOMES LIMITED, THE PRICE OF FLOWERS WILL RISE OR FLOWERS MAY BE UNAVAILABLE AND OUR REVENUES AND GROSS MARGINS COULD DECLINE
A variety of factors affect the supply of flowers in the United States and the price of our floral products. If the supply of flowers available for sale is limited due to weather conditions or other factors, prices for flowers will likely rise and customer demand for our floral products may be reduced, causing our revenues and gross margins to decline. Alternatively, we may not be able to obtain high quality flowers in an amount 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 LEAD TO INEFFICIENCIES IN CONDUCTING OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
Our expansion efforts have significantly strained our operational and financial systems. To accommodate our growth, we recently implemented new or upgraded operating and financial systems, procedures and controls. Any failure to integrate these initiatives in an efficient manner could adversely affect our business. In addition, our systems, procedures and controls may prove to be inadequate to support our future operations.
OUR FRANCHISEES MAY DAMAGE OUR BRAND OR INCREASE OUR COSTS BY FAILING TO COMPLY WITH OUR FRANCHISE AGREEMENTS OR OUR OPERATING STANDARDS
As of 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.
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 settle our customers' floral orders utilizing their service. If we cannot renew these arrangements or enter similar arrangements on commercially reasonable terms, our results of operations could suffer. In addition, these companies may eliminate or modify the rebate structure they have in place with us. Any adverse modification to these rebate structures could also cause our results of operations to suffer.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT CREDIT CARD FRAUD
A failure to adequately control fraudulent credit card transactions would reduce our net sales and our gross margins because we do not carry insurance against this risk. We have developed technology to help us to detect the fraudulent use of credit card information. Nonetheless, to date, we have suffered losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder's signature.
A FAILURE TO INTEGRATE THE SYSTEMS AND OPERATIONS OF ANY ACQUIRED BUSINESS, INCLUDING PLOW & HEARTH, WITH OUR OPERATIONS MAY DISRUPT OUR BUSINESS
We have acquired complementary businesses and may continue to do so in the future. We are currently in the process of integrating the Web site, operations, systems and personnel of Plow & Hearth. In particular, we will migrate Plow & Hearth's transaction processing system to our transaction processing system, automate fulfillment by the Madison, Virginia fulfillment center of home and garden merchandise ordered from us and migrate the internal operating and financial functions of Plow & Hearth to those of 1-800-FLOWERS.COM. If we are unable to fully integrate Plow & Hearth or any future acquisition, our business and operations could suffer, our management will be distracted and our expenses may increase.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY
OUR REVENUES WILL NOT GROW IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR COMMERCE
We expect to derive an increasing amount of our revenue from electronic commerce, and intend to extensively market our non-floral products online. If the Internet is not accepted as a medium for commerce, our revenues will not grow as we expect and our business will suffer. A number of factors may inhibit Internet usage, including:
- 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.
A LACK OF SECURITY OVER THE INTERNET MAY CAUSE INTERNET USAGE TO DECLINE AND CAUSE US TO EXPEND CAPITAL AND RESOURCES TO PROTECT AGAINST SECURITY BREACHES
A significant barrier to electronic commerce over the Internet has been the need for secure transmission of confidential information and transaction information. Internet usage could decline if any well-publicized compromise of security occurred. As a result, we may be required to expend capital and resources to protect against or to alleviate these problems.
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 revenues will decrease and our reputation could be harmed if we experience frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season.
IF FRY MULTIMEDIA AND AT&T DO NOT ADEQUATELY MAINTAIN OUR WEB SITE AND TELEPHONE SERVICE, WE MAY EXPERIENCE SYSTEM FAILURES AND OUR REVENUES WILL DECREASE
We are dependent on Fry Multimedia to host and maintain our Web site and on AT&T to provide telephone services to our customer service centers. If Fry Multimedia or AT&T experience system failures or fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our services. If we do not maintain our Web site or our telephone service, we will be unable to generate revenue. Our future success depends upon these third-party relationships because we do not have the resources to maintain our Web site or our telephone service without these or other third parties. We may not be able to maintain these relationships or replace them on financially attractive terms. Failure to do so may disrupt our operations or require us to incur significant unanticipated costs.
INTERRUPTIONS IN FTD'S MERCURY SYSTEM OR A REDUCTION IN OUR ACCESS TO THIS SYSTEM MAY DISRUPT ORDER FULFILLMENT AND CREATE CUSTOMER DISSATISFACTION
A significant portion of our customers' orders were communicated to the fulfilling florist through FTD's Mercury system. The Mercury system is an order processing and messaging network used to facilitate the transmission of floral orders between florists. The Mercury system has in the past experienced interruptions in service. If the Mercury system experiences interruptions in the future, we would experience difficulties in fulfilling our customers' orders and many of our customers might not continue to shop with us.
In addition, we have been engaged in discussions with FTD regarding decreasing our level of access to the Mercury system. FTD is one of our competitors, and any material decrease or elimination of our access to Mercury by FTD would adversely impact our ability to fulfill orders in a timely fashion during peak periods and may result in lost revenues and customers.
YEAR 2000 PROBLEMS MAY DISRUPT OUR OPERATIONS AND SUBJECT US TO INCREASED EXPENSES
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. In addition, the vast majority of purchases by our customers are made with credit cards, and our financial condition may be adversely affected to the extent our customers are unable to use their credit cards due to Year 2000 issues that are not rectified by the customers' credit card vendors or third party credit card transaction processors. For a discussion of Year 2000 issues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure".
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. Mr. James F. McCann, our Chairman and Chief Executive Officer, will control 77.2% 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 growth to suffer and force us to expend time and resources in locating and training additional personnel.
MANY GOVERNMENTAL REGULATIONS MAY IMPACT THE INTERNET, WHICH COULD AFFECT OUR ABILITY TO CONDUCT BUSINESS
Any new law or regulation, or the application or interpretation of existing laws, may decrease the growth in the use of the Internet or our Web site. We expect there will be an increasing number of laws and regulations pertaining to the Internet in the United States and throughout the world. These laws or regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. This could decrease the demand for our products, increase our costs or otherwise adversely affect our business.
REGULATIONS IMPOSED BY THE FEDERAL TRADE COMMISSION MAY ADVERSELY AFFECT THE GROWTH OF OUR INTERNET BUSINESS OR OUR MARKETING EFFORTS
The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations may include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. These regulations may also include enforcement and redress provisions. Moreover, even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above. We may become a party to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts may adversely affect our ability to collect demographic and personal information from users, which could adversely affect our marketing efforts.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR BRAND
Unauthorized use of our intellectual property by third parties may damage our brand and our reputation and will likely result in a loss of customers. It may be possible for third parties to obtain and use our intellectual property without authorization. Third parties have in the past infringed or misappropriated our intellectual property or similar proprietary rights. We believe infringements and
misappropriations will continue to occur in the future. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR ABILITY TO CONDUCT BUSINESS
We cannot be certain that our products do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be a party to legal proceedings and claims relating to the intellectual property of others from time to time in the ordinary course of our business. We may incur substantial expense in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt our ability to conduct business.
IF STATES BEGIN IMPOSING STATE SALES AND USE TAXES, WE MAY LOSE SALES OR INCUR SIGNIFICANT EXPENSES IN SATISFACTION OF THESE OBLIGATIONS
At present, except for our retail operations, we do not collect sales or other similar taxes in respect of sales and shipments of our products in states other than New York, Texas, Arizona, Florida, Georgia and Virginia. However, various states have sought to impose state sales tax collection obligations on out-of-state direct marketing companies such as ours. A successful assertion by one or more of these states that we should have collected or be collecting sales tax on the sale of our products could result in additional costs and corresponding price increases to our customers. Any imposition of state sales and use taxes on our products sold over the Internet may decrease customers' demand for our products and our revenue. The U.S. Congress has passed legislation limiting for three years the ability of states to impose taxes on Internet-based transactions. Failure to renew this legislation could result in the broad imposition of state taxes on e-commerce.
PRODUCT LIABILITY CLAIMS MAY SUBJECT US TO INCREASED COSTS
Several of the products we sell, including perishable food products, may expose us to product liability claims in the event that the use or consumption of these products results in personal injury. Although we have not experienced any material losses due to product liability claims to date, we may be a party to product liability claims in the future and incur significant costs in their defense. Product liability claims often create negative publicity, which could materially damage our reputation and our brand. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur.
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 result in lost business opportunities. See "Use of Proceeds".
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY, PARTICULARLY BECAUSE WE HAVE INTERNET OPERATIONS
Following this offering, the price at which our class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of companies with Internet operations. As a
result, investors may experience a material decline in the market price of our class A common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management's attention and resources.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR STOCK PRICE
38,642,325 shares of our common stock could be sold in the public market 180 days after the offering. Sales of a large number of these shares could have an adverse effect on the market price of our class A common stock by increasing the number of shares available on the public market. 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.
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 several 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.
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 $93.4 million, assuming an initial public offering price of $17 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 $106.8 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 bears interest at LIBOR plus 2.25% per year (7.31% at March 28, 1999) and matures on the earlier of the consummation of this offering and July 3, 2000 that 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 bears interest at LIBOR plus 2.25% per year (7.31% at March 28, 1999) and matures simultaneously with the term loan that was used for working capital and general corporate purposes; and
- $8.4 million to redeem all outstanding Plow & Hearth common stock not held by us and Plow & Hearth stock options.
As of the date of this prospectus, we have not made any specific expenditure plans with respect to the remaining proceeds of this offering. Therefore, we cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this offering. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.
We currently intend to use the remaining proceeds over time:
- to fund our marketing activities;
- to enhance our infrastructure;
- to enter into strategic relationships with Internet companies;
- to expand our product offerings; and
- for other general corporate purposes.
The principal purposes of this offering are to increase our working capital, to create a public market for our common stock, to facilitate future access to the public capital markets and to increase our visibility in the marketplace.
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.
CAPITALIZATION
The following table shows our capitalization as of March 28, 1999:
- on an actual basis;
- on a pro forma basis to reflect (1) the May 1999 private placement of 984,493 shares of preferred stock for net proceeds of $101.6 million, (2) the use of $19.0 million of the proceeds from the private placement to redeem all 348,220 shares of outstanding class C common stock from Chase Venture Capital Associates and James F. McCann, (3) the investment by Chase of $14.7 million to purchase 143,053 shares of preferred stock, (4) the issuance to Chase of 263,452 shares of class A common stock and James F. McCann of 84,768 shares of class B common stock in connection with the redemption of the class C common stock, and (5) the elective conversion of 3,836,560 shares of class B common stock into class A common stock by some of our investors and the automatic conversion of 428,070 shares of class A common stock into class B common stock; 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 $17 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 $18.0 million of existing debt and redeem $8.4 million of outstanding stock and stock options, and (3) the automatic conversion of each outstanding share of our preferred stock into ten shares of class A common stock. 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
--------------------------
ACTUAL PRO FORMA
------------ ------------
(IN THOUSANDS)
Long-term debt and obligations under capital leases, excluding current portion................. $ 28,148 $ 28,148
Redeemable class C common stock, non-voting; 1,000,000 shares authorized, 348,220 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 shares authorized (pro forma as adjusted):
Series A preferred stock, no shares authorized, issued or outstanding (actual); 1,200,000
shares authorized, 1,127,546 shares issued and outstanding (pro forma); no shares
authorized, issued or outstanding (pro forma as adjusted)............................... -- 117,370
Common Stock, $0.01 par value, 101,500,000 shares authorized (actual); 400,000,000 shares
authorized (pro forma and pro forma as adjusted):
Class A common stock, one vote per share; 500,000 shares authorized, 480,870 shares
issued and 428,070 shares outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)....................................... 5 --
Class B common stock, non-voting; 100,000,000 shares authorized, 48,849,930 shares issued
and 43,569,930 shares outstanding (actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................................................... 488 --
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); 4,100,012
shares issued and outstanding (pro forma); 21,375,472 shares issued and outstanding (pro
forma as adjusted)...................................................................... -- 41
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);
45,579,005 shares issued and 40,246,205 shares outstanding (pro forma and pro forma as
adjusted)............................................................................... -- 456
Additional paid-in capital................................................................... 3,419 6,046
Retained earnings (deficit).................................................................. (7,148) (10,779)
Deferred compensation........................................................................ (1,575) (1,575)
Treasury stock, at cost; 52,800 shares of class A common stock and 5,280,000 shares of class
B common stock (actual); 5,332,800 shares of class B common stock (pro forma and pro forma
as adjusted)............................................................................... (3,108) (3,108)
------------ ------------
Total stockholders' equity (deficit)........................................................... (7,919) 108,451
------------ ------------
Total capitalization........................................................................... $ 39,249 $ 136,599
------------ ------------
------------ ------------
PRO FORMA
AS ADJUSTED
------------
Long-term debt and obligations under capital leases, excluding current portion................. $ 10,148
Redeemable class C common stock, non-voting; 1,000,000 shares authorized, 348,220 shares issued
and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro
forma as adjusted)........................................................................... --
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 shares authorized (pro forma as adjusted):
Series A preferred stock, no shares authorized, issued or outstanding (actual); 1,200,000
shares authorized, 1,127,546 shares issued and outstanding (pro forma); no shares
authorized, issued or outstanding (pro forma as adjusted)............................... --
Common Stock, $0.01 par value, 101,500,000 shares authorized (actual); 400,000,000 shares
authorized (pro forma and pro forma as adjusted):
Class A common stock, one vote per share; 500,000 shares authorized, 480,870 shares
issued and 428,070 shares outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)....................................... --
Class B common stock, non-voting; 100,000,000 shares authorized, 48,849,930 shares issued
and 43,569,930 shares outstanding (actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................................................... --
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); 4,100,012
shares issued and outstanding (pro forma); 21,375,472 shares issued and outstanding (pro
forma as adjusted)...................................................................... 214
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);
45,579,005 shares issued and 40,246,205 shares outstanding (pro forma and pro forma as
adjusted)............................................................................... 456
Additional paid-in capital................................................................... 216,603
Retained earnings (deficit).................................................................. (12,279)
Deferred compensation........................................................................ (1,575)
Treasury stock, at cost; 52,800 shares of class A common stock and 5,280,000 shares of class
B common stock (actual); 5,332,800 shares of class B common stock (pro forma and pro forma
as adjusted)............................................................................... (3,108)
------------
Total stockholders' equity (deficit)........................................................... 200,311
------------
Total capitalization........................................................................... $ 210,459
------------
------------
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The number of shares of common stock outstanding after this offering (pro forma as adjusted) does not include:
- 1,237,500 shares of class B common stock issuable upon exercise of options outstanding as of July 7, 1999 at a weighted average exercise price of $1.73 per share;
- 200,000 shares of class A common stock issuable upon exercise of options outstanding as of July 7, 1999 and up to 9,700,000 additional shares of class A common stock that could be issued under our 1999 stock incentive plan; and
- 2,371,040 shares of class A common stock issuable upon the exercise of an outstanding warrant at a nominal exercise price.
DILUTION
Our pro forma net tangible book value as of March 28, 1999 was approximately $77.3 million, or $1.39 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 completion of 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 $168.6 million, or $2.74 per share. This represents an immediate increase in pro forma net tangible book value of $1.35 per share to existing stockholders and an immediate dilution of $14.26 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....................... $ 17.00
Pro forma net tangible book value per share at March 28, 1999....... $ 1.39
Increase in pro forma net tangible book value per share attributable
to this offering.................................................. 1.35
---------
Pro forma net tangible book value per share after the offering........ 2.74
---------
Dilution per share to new investors................................... $ 14.26
---------
---------
|
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 $17 per share, before deducting the estimated underwriting discount and offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- ---------------- ----------- --------------
Existing stockholders....................... 55,621,677 90.3% $ 121,282,000 54.3% $ 2.18
New investors............................... 6,000,000 9.7 102,000,000 45.7 17.00
------------- --------- ---------------- -----
Total..................................... 61,621,677 100.0% $ 223,282,000 100.0%
------------- --------- ---------------- -----
------------- --------- ---------------- -----
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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 1,237,500 shares of class B common stock with a weighted average exercise price of $1.73 per share and a warrant outstanding to purchase 2,371,040 shares of class A common stock at a nominal exercise price. To the extent that any of these options or the warrant are exercised, there will be further dilution to new investors. See "Capitalization".
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 was completed on June 30, 1997. 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 was completed at the assumed times and the interim period financial data do not purport to be indicative of future operations and should not be construed as representative of future operations.
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.
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.......................... $ 0.01 $ 0.02 $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ $ 0.01 $ 0.02 $ 0.01 $ 0.06 $ 0.07 $ 0.03 $ (0.20)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Shares used in the calculation of
net income (loss) per common
share:
Basic.......................... 48,530 48,600 47,050 44,140 44,120 44,140 44,000
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ 48,530 49,780 49,420 46,470 46,610 46,750 44,000
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
|
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
-------------- --------------- ---------------
PRO FORMA PRO FORMA ACTUAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.......................................... 67,819 50,491 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................................. 95,502 70,591 88,982
-------------- --------------- ---------------
Operating income (loss)........................................ 5,161 890 (9,052)
Other income (expense), net.................................... 521 596 (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........................................................ $ 0.04 $ (0.01) $ (0.20)
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... $ 0.04 $ (0.01) $ (0.20)
-------------- --------------- ---------------
-------------- --------------- ---------------
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 44,120 44,140 44,000
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... 46,610 44,140 44,000
-------------- --------------- ---------------
-------------- --------------- ---------------
|
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 TO THOSE STATEMENTS, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
1-800-FLOWERS.COM is a leading e-commerce provider of floral products and gifts, in terms of number of customers and revenue, and has recently expanded its product offerings to include gourmet foods and home and garden merchandise.
Approximately 95% of our total net revenues consist of the selling price of merchandise and service and shipping charges, net of returns and credits.
A majority of our floral and floral-related gift products are fulfilled by members of the BloomNet network of approximately 1,500 independent florists or one of our owned or franchised stores. We 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 the communication system of a third-party. Our remittance to the fulfilling florist is processed either through a third-party wire service that reconciles and effects payments between sending and fulfilling florists, called a clearinghouse, or is directly paid by us. Consistent with industry practice, we remit 80% of the value of the merchandise sold to a wire service for settlement with the fulfilling florist. It is customary for the wire service to retain a 7% fee for its services. Additionally, when settling directly with the fulfilling florist, we remit between 71% and 74% of the value of the merchandise sold. It is also industry practice for the clearinghouse to credit back to the originating florist a rebate for payments processed through the clearinghouse. 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 our non-floral related gift products and gourmet foods are shipped by us, members of BloomNet 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, gourmet foods 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 33 owned stores and 87 franchised stores. Retail fulfillment revenues also include revenues attributable to our wholesale business, fees paid to us by members of the 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.
With respect to the acquisition of Plow & Hearth, we entered into an agreement with a number of Plow & Hearth's stockholders and optionholders, whose shares and options, amounting to 12,668 and 28,334, respectively, we did not purchase in the acquisition. According 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. 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 $8.4 million of the proceeds of this offering to purchase these stockholders' and optionholders' Plow & Hearth stock and stock options.
In fiscal 1999, we determined that our online revenues were likely to become the key revenue and profitability drivers of our business going forward. In fiscal 1998, our online revenues had reached $26.7 million, or 12.1% of our total net revenues. This represented an increase of 65.8% over online revenues of $16.1 million in fiscal 1997. Our online revenues in fiscal 1997 represented an increase of 62.0% over online revenues of $9.9 million in fiscal 1996, which in turn represented an increase of 122.3% over online revenues of $4.5 million in fiscal 1995. Conversely, our telephonic business had slowed from a 27% growth rate in fiscal 1996 to 16% in fiscal 1997 and to 3% in fiscal 1998, net of $11.4 million of Plow & Hearth revenues in fiscal 1998 resulting from its acquisition. In addition, because opening new retail stores involved significant capital investments, management attention and operating losses until the new stores reached profitability, we determined that our retail stores should be a complement to an Internet-focused distribution strategy.
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. None of these 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.
RESULTS OF OPERATIONS
The following table provides 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 a $4.0 million increase due to the growth 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,
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
establish and maintain strategic relationships with Internet companies, costs
associated with retail store,
customer service center and fulfillment center operations and the operating
expenses of 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 $13.6 million of catalog
printing and circulation expenditures resulting from the Plow & Hearth
acquisition, a $4.5 million increase in our online and traditional media
advertising campaigns and a $7.6 million increase in payroll in support of
increased order fulfillment and customer service activities. We expect marketing
and sales expenses to increase significantly in future periods as we implement
our strategy to expand our base of strategic relationships with Internet
companies and to pursue an aggressive branding and marketing campaign.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses consist primarily of payroll and operating expenses of our information technology group, costs associated with 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 a $1.1 million increase in payroll and related expenses for staff additions to the technology team, a $2.0 million increase in development costs incurred to enhance the content and functionality of our Web site and our transaction processing system and a $434,000 increase in web hosting fees. 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 million, 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 of approximately $675,000 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 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 July 1997 acquisition of a wholesale supplier of fresh-cut flowers and floral arrangements to the supermarket industry, which generated $5.0 million in net revenues in fiscal 1998.
COST OF REVENUES. Cost of revenues increased 19.0%, from $115.1 million in fiscal 1997 to $137.0 million in fiscal 1998. The increase was in line with the increase in total net revenues. 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 a $5.5 million increase in payroll in support of order fulfillment and customer service activities, $2.6 million of catalog expenditures resulting from the Plow & Hearth acquisition and an increase of $1.8 million resulting from the expansion of our online presence through an online marketing agreement with AOL, which became effective in May 1997. These increases were offset, in part, by a $3.0 million decrease in traditional marketing that contributed to the decrease as a percentage of net revenues.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses increased 28.6%, from $1.4 million in fiscal 1997 to $1.8 million in fiscal 1998 as a result of an increase in web hosting fees of $340,000. In addition to recognized product development expenses, 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 an $856,000 increase in professional fees related to our retail fulfillment operations, successful trademark defense costs and a charge to earnings in June 1998 of $1.6 million related to an increase in the Plow & Hearth put liability.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $3.3 million in fiscal 1997 to $4.2 million in fiscal 1998. The increase relates to the higher level of depreciable assets in fiscal 1998 as well as the depreciable assets acquired and goodwill created by the Plow & Hearth acquisition.
OTHER INCOME (EXPENSE), NET. Other income, net increased from $674,000 for fiscal 1997 to $1.7 million for fiscal 1998. The increase was primarily attributable to a $1.5 million dividend from a minority investment partially offset by increased interest expense related to borrowings incurred to finance 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 29, 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. Telephonic revenues increased 13.6% from $127.9 million for fiscal 1996 to $145.3 million for fiscal 1997 and online revenues increased 62.6% from $9.9 million for fiscal 1996 to $16.1 million for fiscal 1997. These increases were primarily the result of the growth of our telephonic and online customer base. Retail fulfillment revenues increased 63.4% from $15.3 million in fiscal 1996 to $25.0 million in fiscal 1997, primarily due to the to the acquisition of a wholesale supplier of fresh-cut flowers and floral arrangements to the supermarket industry in September 1996, which generated $7.1 million in net revenues in fiscal 1997.
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 the 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 a $2.0 million increase in personnel costs supporting the customer service centers as well as a $1.4 million 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 primarily consisted of a $262,000 increase in salary and related expenses of additional 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 order 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.
QUARTERLY RESULTS OF OPERATIONS
The following tables provide unaudited quarterly statement of operations data for the last seven quarters and 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.
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 $ 38,499 $ 54,733 $ 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 9,519 9,203 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 13,608 17,328 14,455 33,065 19,684
Technology and development........ 409 185 534 666 1,127 1,807 2,273
General and administrative........ 3,280 3,730 3,305 5,517 2,348 3,273 4,907
Depreciation and amortization..... 905 905 958 1,400 1,871 2,015 2,157
----------- --------- --------- ----------- ----------- --------- ---------
Total operating expenses...... 14,386 19,509 18,405 24,911 19,801 40,160 29,021
----------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)............. (370) 719 1,795 4,271 (2,020) (3,203) (3,829)
----------- --------- --------- ----------- ----------- --------- ---------
Other income (expense), net......... 1,724 (13) 56 73 (227) (623) (378)
Income taxes (benefit).............. 524 273 718 1,666 (677) (1,071) (1,178)
----------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................... $ 830 $ 433 $ 1,133 $ 2,678 $ (1,570) $ (2,755) $ (3,029)
----------- --------- --------- ----------- ----------- --------- ---------
----------- --------- --------- ----------- ----------- --------- ---------
|
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 28,
1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- ----------- ----------- --------- ---------
(AS A PERCENTAGE OF TOTAL NET REVENUES)
Net revenues:
Telephonic........................ 76.3% 74.7% 69.8% 73.6% 72.2% 76.6% 65.2%
Online............................ 8.7 11.1 12.9 14.0 13.2 12.1 19.7
Retail fulfillment................ 15.0 14.2 17.3 12.4 14.6 11.3 15.1
----------- --------- --------- ----------- ----------- --------- ---------
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........ 8.8 7.0 6.0 7.4 4.9 3.7 7.3
Depreciation and amortization..... 2.4 1.7 1.7 1.9 3.9 2.3 3.2
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Total operating expenses........ 38.4 36.4 33.4 33.5 41.6 45.2 43.1
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Operating income (loss)............. (1.0) 1.3 3.3 5.7 (4.2) (3.6) (5.7)
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Other income (expense), net......... 4.6 (0.0) 0.1 0.1 (0.5) (0.7) (0.6)
Income taxes benefit................ 1.4 0.5 1.3 2.2 (1.4) (1.2) (1.8)
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Net income (loss)................... 2.2% 0.8% 2.1% 3.6% (3.3)% (3.1)% (4.5)%
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Our quarterly results may experience seasonal fluctuations. Historically, revenues have been highest in the fourth fiscal quarter, due to a number of major floral gifting occasions, including Mother's Day, 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 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 with a bank 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 $2.6 million in cash and equivalents. In May 1999, we issued preferred stock yielding us net proceeds of $101.6 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:
- an aggregate of $18.0 million outstanding at March 28, 1999 under our credit agreement that bears interest at LIBOR plus 2.25% per annum (7.31% at March 28, 1999);
- promissory notes issued to sellers in connection with prior acquisitions by us in the aggregate principal amount of $4.5 million, which bear interest at rates ranging from 6.5% to 12% per annum and mature at dates ranging from September 1999 to November 2004, all of which are secured by either the stock or assets of various subsidiaries of 1-800-FLOWERS.COM;
- obligations outstanding under capital and operating leases; and
- obligations to pay $11.5 million to AOL during the term of our agreements with AOL. In addition, we are required to share a small portion of our AOL-derived revenue with AOL. Through March 28, 1999 we have paid $7.5 million to AOL under these agreements. Of the remaining $4.0 million, $3.0 million is payable in July 1999 and $500,000 is payable during each of the fiscal years ending June 2000 and June 2001.
As of March 28, 1999, we were in default of covenants contained in our credit agreement. The lender under the credit agreement has waived these defaults and the credit agreement has been amended to provide that all amounts outstanding under the credit agreement will become due upon the effectiveness of this offering and to reduce the revolving credit line to $5.0 million. We have allocated a portion of the proceeds of this offering to repay the amounts outstanding under the credit facility and we do not believe the repayment of the credit facility will adversely impact our liquidity.
At March 28, 1999, our known commitments for the subsequent twelve months totalled approximately $15.2 million and were comprised of fees related to online marketing agreements, expenses under our operating leases, interest expense and the current portion of long term debt excluding the credit facility to be repaid from the proceeds of this offering. 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 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.
As part of our effort to assess our Year 2000 readiness, we identified our suppliers and vendors, sent letters requesting Year 2000 compliance statements, recorded their responses, and investigated alternative products and services for those suppliers not prepared for Year 2000.
Our critical systems fall into six categories: transaction processing, call management, telecommunications, fulfillment, finance and interactive applications. The core transaction processing and infrastructure systems are internally maintained and hosted. Interactive-based applications, which are our Web site and BloomLink, are hosted at Fry Multimedia. To date, our assessment has determined that these critical business systems are all Year 2000 compliant, except our call routing system, which we expect to be fully Year 2000 compliant by October 1999.
1-800-FLOWERS.COM's non-critical and non-information technology systems, which include security and mailing systems, mail room facilities for automated postage, fire and backup generator systems and company-wide paging and alert systems, have been tested and/or represented to us as Year 2000 compliant.
The non-information technology systems of Plow & Hearth, including those used for picking, packing, shipping, receiving and security, were upgraded as part of an overall warehouse expansion project in 1998. As a result, all of these systems have been identified, assessed and found to be Year 2000 compliant.
All material commercial software and hardware on which we depend is either Year 2000 compliant or will be upgraded to be compliant in the normal course of business through the installation of upgrades or replacements. Our material hardware, software and service vendors have informed us that the products we use, or will be using as upgrades or replacements, to support 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. Our internal critical business systems are dependent on the software and hardware products of four vendors: Oracle, Sun, Microsoft and AT&T. Oracle and Sun have represented to us that their products are Year 2000 compliant. We are in the process of migrating our current Microsoft software applications to Year 2000
compliant software released by Microsoft, which we expect to complete by October 1999. We expect our AT&T products to be upgraded for compliance by October 1999, with the exception of AT&T's dynamic call routing software, which we expect to replace by October 1999 with GeoTel software, which has been represented to us as Year 2000 compliant.
We have not yet contacted our major suppliers of fresh products (flowers and plants) and hard goods for their Year 2000 compliance. We expect to initiate and complete our assessment of these suppliers by October 1999. Our business is not dependent on any one supplier. If one or more of these suppliers are not Year 2000 compliant, we will obtain our fresh products and hard goods from alternative suppliers that are Year 2000 compliant.
Approximately one-half of BloomNet florists use our BloomLink web-based order processing system, which is Year 2000 compliant. The remaining BloomNet florists are being approached to implement BloomLink. By the end of 1999 we expect our fulfilling florists to be electronically linked to 1-800- FLOWERS.COM either through BloomLink or one of the other available Year 2000 compliant communication systems. Our business is not dependent on any one florist or wire service. To the extent one or more BloomNet florists are not so linked, then we may use an alternative fulfilling florist.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, we have not incurred any significant costs attributable to Year 2000 compliance. Our recent information technology investments have been in support of our expanding operating and decision support requirements and to the extent they involved a replacement of an existing system, also accommodated Year 2000 compliance. We do, however, expect to incur approximately $1.0 million 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 may also experience external Year 2000-related failures or disruptions that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. All of these factors could materially adversely affect our business.
CONTINGENCY PLANS
As discussed above, we are engaged in an ongoing Year 2000 assessment and have not developed a contingency plan to address situations that might occur if technologies on which we depend are not Year 2000 compliant.
We intend to develop a contingency plan, which we expect to complete by October 1999. The results of our Year 2000 assessment and testing, and the responses received from third-party vendors and service providers will be taken into account in determining the need for and nature and extent of any contingency plans.
Based on our assessment done to date, we believe that the reasonable likely worst-case scenario with respect to Year 2000 issues could be the difficulty for customers to place orders in the event of disruption of power or communication facilities. Although these events could have an adverse effect on our business in the short-term, we do not believe that Year 2000 issues will materially and adversely affect our business, results of operations or financial condition over the long-term. No assurances can be given that our expectations will be realized.
BUSINESS
OVERVIEW
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products and gifts, in terms of number of customers and revenue. As of March 28, 1999, we had sold our products to more than 7.2 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.
We believe the 1-800-FLOWERS brand is one of the most recognized brands in the floral industry. With the development of our online business and a strategic acquisition, we have continuously expanded our product offerings, most recently to include gourmet foods and home and garden merchandise. We provide our customers the choice of purchasing our products online, by calling us toll-free or by visiting our owned or franchised retail stores.
The Internet is our fastest growing sales channel. For the 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 order fulfillment.
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;
- an advanced 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 independent local florists selected by us for their high-quality products, superior customer service and order fulfillment and delivery capabilities.
In the early 1990s, we recognized the emergence of the Internet as a significant strategic opportunity and moved aggressively to embrace this new medium. By taking advantage of our previous investments in our infrastructure, we were able to quickly develop and implement an online presence. As a result, we were one of the first companies to market products online through CompuServe beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In April 1995, we opened our fully functional, e-commerce Web site (WWW.1800FLOWERS.COM) and subsequently entered into strategic relationships with AOL, Excite and Microsoft Network, among others, to build our online brand and customer base.
Our online presence has enabled us to expand the number and types of products we can effectively offer. Since 1995, we have expanded our online product offerings of flowers, gourmet foods and gifts and added complementary home and garden merchandise through our April 1998 acquisition of Plow & Hearth.
1-800-FLOWERS.COM TODAY
[Graphic consisting of five circles arranged around the periphery, each containing a depiction of one category of products and labeled "Floral", "Garden", "Home", "Gourmet" 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, gourmet food 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, gourmet foods and home and garden merchandise, and to attract a significant number of customers to our Web site. We continue to invest heavily in building our brand through strategic online relationships and extensive marketing, advertising and public relations programs. We believe our brand is characterized by:
- Convenience. Our customers may purchase floral, gift, gourmet food and home and garden products online or by calling our toll-free telephone number from the home or office 24 hours a day, seven days a week. We offer a variety of delivery options, including same-day or next-day service throughout the United States.
- 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, gourmet foods and home and garden products, including 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, gourmet food and home and garden merchandise as well as other products that meet the seasonal and other special needs of our customers.
Because we offer a wide selection of products, we create the opportunity to have a relationship with customers who purchase products not only for gifting occasions but also for everyday consumption.
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 March 28, 1999, our total database of customers numbered approximately 7.2 million. We also gather information about the recipients of our products, including their name, address, telephone number and the products received.
We market our products to businesses for gifting, incentive and reward programs. We currently provide many of our large corporate customers with an account manager, a team of floral and gifting coordinators and a customized, password-protected area of our Web site. In addition, each employee of our corporate customers is entitled to receive special offers and discounts on personal purchases.
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 network.
We process both online and telephonic orders through the same transaction processing system. This system selects the florist or other vendor to fulfill a customer's order, electronically transmits the order for fulfillment and captures the customer's profile and purchasing history. In addition, our customer service representatives are electronically linked to this system, enabling them to facilitate placement of an order and subsequently track customer and order information.
OUR FULFILLMENT CAPABILITIES. Fresh-cut and seasonal flowers and floral arrangements are perishable and often sent as gifts. A majority of our customers' purchases of floral and floral-related gift products are fulfilled through the BloomNet network of approximately 1,500 independent florists or one of our owned or franchised retail stores. This allows us to deliver our floral products on a same-day or next-day basis to ensure freshness and to meet our customers' need for prompt delivery. In addition, we are better able to ensure consistent product quality and presentation and offer a greater variety of arrangements, which we believe creates a better experience for our customers and gift recipients. We select BloomNet members for their high-quality products, superior customer service and order fulfillment and delivery capabilities.
To ensure reliable and efficient communication of online and telephonic orders to the BloomNet members, we created BloomLink, a proprietary Internet-based communications system. At March 28, 1999, approximately one-half of the BloomNet members had adopted BloomLink since its introduction in January 1998. We also have the ability to arrange for delivery of floral products internationally through independent wire services.
We fulfill most of our gift basket and gourmet food items primarily through members of BloomNet or third-party suppliers that ship products directly to the customer by next-day or other delivery method chosen by the customer. We select our third-party vendors based upon the quality of their products, their reliability and their ability to meet our volume requirements.
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, gourmet foods and products for the home and garden. The key elements of our strategy to achieve this objective are:
AGGRESSIVELY EXTEND OUR BRAND. Our goal is to make the 1-800-FLOWERS.COM brand synonymous with flowers, gifts, gourmet foods and home and garden products. To do this, we intend to invest in building our brand and in communicating the benefits and convenience of shopping with 1-800-FLOWERS.COM. We intend to significantly increase our marketing expenditures to:
- maintain and develop new strategic relationships with Internet companies;
- 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.
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 BloomNet member florists and increasing the number of BloomLink installations in their stores;
- evaluating and implementing alternative means of fulfillment, including centralized production and logistics partnering; and
- continuing to improve our operations that support our gift, gourmet food and home and garden product lines.
OUR PRODUCTS
We offer a wide range of products, including fresh-cut and seasonal flowers, floral arrangements, gifts, gourmet foods and home and garden merchandise. In addition to selecting our core products, our merchandising team works closely with manufacturers and suppliers to select and design products that meet the seasonal and other special needs of our customers. For the years ended June 29, 1997 and June 28, 1998 and for the nine months ended March 28, 1999, the flowers and plants product category represented 92.1%, 86.9% and 72.2% of total net revenues, respectively. Additionally, for the nine months ended March 28, 1999, the home category generated 10.0% of total net revenues.
Over the course of a year, our product selection consists of:
FLOWERS AND PLANTS. We offer more than 1,300 varieties of fresh-cut and seasonal flowers and floral arrangements for all occasions and holidays. We also offer more than 200 varieties of popular plants for the home and garden.
GIFTS. We offer more than 200 SKUs of gifts, including gift baskets, dolls, plush toys, balloons, bath and spa items, wreaths and ornaments.
GOURMET FOODS. We offer more than 100 SKUs in the gourmet food category, including candies, chocolates, nuts, cookies and fruits.
HOME. We offer more than 2,500 SKUs for the home, including candles and lighting, vases, kitchen items and accents, casual lifestyle furniture and home accessories.
GARDEN. We offer more than 3,000 SKUs for the garden, including outdoor furniture, tools and accessories, pottery, nature-related products, clothing and footwear.
OUR WEB SITE
We offer floral, gift, gourmet food and home and garden products through our 1-800-FLOWERS.COM Web site (WWW.1800FLOWERS.COM). Customers may come to our Web site directly or may be referred to us by a Web site with which we have a strategic relationship. Our online partners include AOL, Excite and Microsoft Network and more than 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, gourmet food and home and garden products conveniently in a single visit. As of March 28, 1999, approximately 495,000 customers had made a purchase through our Web site or our AOL store in the previous twelve months.
Our Web site allows customers to easily browse and purchase our products, promotes brand loyalty and encourages repeat purchases by providing an inviting customer experience. Our Web site offers customers detailed product information, complete with photographs, contests, home decorating and how-to tips, information on floral trends, gift-giving suggestions and information about special events and offers. We have designed our Web site to be fast, secure and easy to use and to enable customers to order products with minimal effort. Our Web site includes the following key features:
SEARCHING. We have incorporated sophisticated search capabilities, which enable customers to search for products by category, occasion, price, flower type or keyword. We also have a "Gift Center" section that provides popular gift ideas for each occasion.
PERSONALIZATION. We utilize our Web site to enhance the direct relationship with our customers. The "My Assistant" area of our site enables customers to establish their floral and gift preferences, which personalizes and simplifies their visits. "My Assistant" members are also provided with an online address book of names and addresses of their gift recipients, access to their purchasing history and e-mail notification of specials and events at our local retail stores. Our customers can also register for our "Gift Reminder Program," in which we send them an e-mail reminder a few days prior to an occasion to remind them of the occasion and to recommend specific flowers and gifts.
SECURITY. We use secure server software to encrypt the customer's credit card number prior to transmitting it over the Internet.
DELIVERY. We offer customers a variety of delivery and shipping options, including same-day or next-day delivery by the fulfilling local florist and a number of delivery options through Federal Express, United Parcel Service, the United States Postal Service and other common carriers.
CUSTOMER SERVICE. Through our six customer service centers, we offer service and support to our customers 24 hours a day, seven days a week over the telephone. We also provide real-time online messaging and e-mail support to our customers. We intend to enhance our ability to provide a high level of customer service through the use of new Internet-based technologies.
PRIVACY. We recognize the importance of maintaining the privacy of our customers. We use the information gathered from our customers and others who have registered on our Web site from time to time to send our own promotional materials. We periodically make information available to selected third parties for direct marketing purposes. However, customers may elect not to receive our promotional information or instruct us not to make their information available to third parties. We also gather information concerning how visitors use and navigate our Web site. We use this information only internally to better allow us to serve our customers. Our current online privacy policy is set forth on our Web site.
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 any area controlled by AOL on AOL's proprietary online service and the exclusive provider of fresh-cut flowers and plants for gifting occasions on AOL.com. Under our agreements with AOL, the term "exclusive" means that AOL will not promote, market or advertise on its online service or AOL.com these products on behalf of any entity other than 1-800-FLOWERS.COM. 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. The agreement with the AOL proprietary online service may be terminated by AOL if revenue thresholds are not met or by either party upon the other's material breach, insolvency or acquisition by a competitor. The agreement with AOL.com may be terminated by either party upon the other's material breach or insolvency or by AOL upon an acquisition of 1-800-FLOWERS.COM by any entity that offers Internet connectivity.
- 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 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. Affiliates may join this program through our Web site and their participation may be terminated by them or by us at any time. To date, this program has not generated a significant amount of revenue. These Web sites earn commissions by referring customers from their sites to our Web site. Affiliates include AT&T WorldNet, Earthlink/Sprint, Gateway 2000, HomeArts, About.com and PCWorld Online.
TRADITIONAL MEDIA. We utilize traditional media, including television, radio, print and outdoor advertising, to market our brand and products. Traditional media allows us both to reach a large number of customers and to target particular market segments.
DIRECT MAIL AND CATALOGS. We use our direct mail promotions and catalogs to increase the number of new customers and to introduce additional products to our existing customers. Through the use of PLOW & HEARTH'S catalogs, we intend to cross-promote our floral and gift products to our home and garden customers as well as home and garden products to our floral and gift customers. For the 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 co-marketing relationships and promotions to advertise our products. For example, we have established co-marketing arrangements with United,
American and Delta airlines as well as American Express, VISA and MasterCard, among others. We established the American and Delta airlines relationships in the third quarter of fiscal 1999. To date, all of these relationships have not generated a significant amount of revenue.
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", "Direct from Vendor" and "Our Fulfillment Centers". Under the heading "Products" are depictions of our various product offerings and the captions "Flowers & Plants", "Gifts", "Gourmet" and "Home and Garden".]
FLOWERS AND PLANTS. A majority of our floral orders are fulfilled through the BloomNet network of approximately 1,500 independent florists or one of our owned or franchised retail stores. We select retail florists for the BloomNet network based upon the historical volume of floral purchases in a particular geographic area, the number of BloomNet florists currently serving the area and the florist's design staff, facilities, quality of floral processing, ability to fulfill orders in sufficient volume and delivery capabilities. To join BloomNet, a retail florist must submit an application to 1-800-FLOWERS.COM and be approved by our internal selection committee.
By fulfilling floral orders through BloomNet or one of our owned or franchised stores, we are able to deliver floral products on a
same-day or next-day basis to ensure freshness and to meet our customers' need for prompt delivery. Because we select these florists and receive customer feedback on their performance in fulfilling orders, we are able to ensure consistent product quality and presentation and offer a greater variety of arrangements, which we believe creates a better experience for our customers and gift recipients.
Our relationships with our BloomNet members are non-exclusive. Many florists, including many BloomNet florists, also are members of other floral fulfillment organizations. The BloomNet agreements generally are cancellable by either party with ten days notification and do not guarantee any orders, dollar amounts or exclusive territories from us to the florist.
Of the BloomNet member florists and our owned or franchised stores, approximately one-half are connected to us electronically via BloomLink, an Internet-based electronic communications system. Where we are not connected to the BloomNet partners or our owned and franchised stores via BloomLink, we utilize the communication system of an independent wire service to transmit an order to the fulfilling florist. In addition, we also ship to the customer directly from growers.
We own and operate 33 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 AND GOURMET FOODS. Our gift and gourmet food products are shipped directly to the customer by members of BloomNet or third-party product suppliers using next-day or other delivery method selected by the customer. Our business is not dependent on any one of these third-party suppliers.
HOME AND GARDEN. We fulfill purchases of home and garden merchandise from our Madison, Virginia fulfillment center or by third-party product suppliers using next-day or other delivery method selected by the customer. In 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, security and flexibility. In addition, our infrastructure is scalable, allowing it to grow with our business. To minimize the risk of service interruptions from unexpected component or telecommunications failure, maintenance and upgrades, we have built full back-up into those components of our systems that we have identified as critical. Since June 30, 1997, we spent a total of $21.3 million on our technology infrastructure, primarily due to the installation of an Oracle-based order processing and database management system and BloomLink, the upgrade of our telecommunications network, including our call management system, and desktop computers. We plan to continue to invest in technologies that will improve and expand our e-commerce and telecommunication capabilities.
Our Web site and BloomLink are hosted and maintained by Fry Multimedia, a hosting and online services company headquartered in Ann Arbor, Michigan. Fry Multimedia provides development, maintenance and hosting services to us under an agreement that extends through June 2001, which automatically renews for successive two-year periods unless we terminate the agreement. The Fry agreement may be terminated by
either party upon the other's material breach. For the nine months ended March 28, 1999, we paid to Fry Multimedia a total of $580,000 for these services. In addition to Fry Multimedia's two hosting facilities, we also intend to co-locate the hosting of our Web site and BloomLink with a third-party vendor to provide additional back-up and system redundancy.
Our transaction processing system selects the florist or vendor to fulfill the order and captures customer profile and history in a customized Oracle database. Through the use of customized software applications, we are able to retrieve, sort and analyze customer information to enable us to better serve our customers and target our product offerings. We expect to develop or license additional software applications to expand our ability to analyze and use this information.
Our six customer service centers and many of our third party product suppliers are connected electronically to our transaction processing system to permit the rapid transmission of, and access to, critical order and customer information. In addition, BloomLink electronically connects us to approximately one-half of the retail florists in the BloomNet network and 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, there are many other providers of floral products, none of which is dominant. 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, gourmet food and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products, is highly fragmented and is served by a large number of companies in addition to us, none of which is dominant. Products in these categories may be purchased from a number of outlets, including mass merchants, telemarketers, retail specialty shops, online retailers and mail-order catalogs.
We believe our brand strength, product selection, customer relationships, technology infrastructure and fulfillment capabilities position us to compete effectively against our current and potential competitors in each of our product categories. However, increased competition could result in:
- price reductions, decreased revenues and lower profit margins;
- loss of market share; and
- increased marketing expenditures.
These and other competitive factors may adversely impact our business and results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Internet is rapidly evolving and there are few laws or regulations directly applicable to e-commerce. Legislatures are considering an increasing number of laws and regulations pertaining to the Internet, including laws and regulations addressing:
- 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 technology from third parties, including Oracle,
Microsoft and AT&T, for our communications technology and the software that underlies our business systems. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate licensed technology into our operations.
Third parties have in the past infringed or misappropriated our intellectual property or similar proprietary rights. We believe infringements and misappropriations will continue to occur in the future. We intend to police against infringement or misappropriation. However, we cannot guarantee we will be able to enforce our rights and enjoin the alleged infringers from their use of confusingly similar trademarks, servicemarks, telephone numbers and domain names.
In addition, third parties may assert infringement claims against us. We cannot be certain that our technologies or marks do not infringe valid patents, trademarks, copyrights or other proprietary rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. Intellectual property litigation is expensive and time-consuming and could divert management resources away from running our business.
EMPLOYEES
As of 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.
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. Our annual rent under this lease increases from $715,000 in the first year of the lease (May 15, 1998 to May 15, 1999) to $1.7 million in the seventh year of the lease. Total rent to be paid over the life of the lease equals $10.0 million. 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; and
- Bethpage, New York.
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and key employees of 1-800-FLOWERS.COM, their ages as of July 7, 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 David Beirne...................... 35 Director Charles R. Lax.................... 40 Director Kevin J. O'Connor................. 38 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 inception. 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 a director since inception. 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. 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.
DAVID BEIRNE has been one of our directors since July 1999. Mr. Beirne has been a Managing Member of Benchmark Capital Management Co. II, L.L.C., a venture capital firm, since June 1997. Prior to joining Benchmark, Mr. Beirne founded Ramsey/Beirne Associates, an executive search firm, and served as its Chief Executive Officer from October 1987 to June 1997. Mr. Beirne serves as a director to several private companies, including ePhysician, Kana Communications, Inc., living.com, Inc., PlanetRx, Inc., Scient Corporation, TriStrata, Inc. and Webvan Group, Inc.
CHARLES R. LAX has been one of our directors since July 1999. Mr. Lax has been a general partner of SOFTBANK Technology Ventures IV, L.P. since November 1997. From March 1996 to November 1997, Mr. Lax was a Vice President of SOFTBANK Holdings Inc. Mr. Lax was previously a venture partner at Vimac Partners LLC, a venture capital firm specializing in investments in the information technology and Internet-related industries, from June 1993 to March 1996. Mr. Lax is a director of a number of private companies, including ThirdAge Media, Inc. LIMITrader Securities, Inc., Gamesville.com, Reciprocal, Inc. and several public companies, including Interliant, Inc., Art Technology Group, Inc. and Global Sports Interactive.
KEVIN J. O'CONNOR has been one of our directors since July 1999. Mr. O'Connor co-founded DoubleClick, Inc., an Internet advertising network, and has served as its Chief Executive Officer and Chairman of the Board of Directors since its inception in January 1996. From December 1995 until January 1996, Mr. O'Connor served as Chief Executive Officer of Internet Advertising Network, an Internet advertising company which he founded. From September 1994 to December 1995, Mr. O'Connor served as Director of Research for Digital Communications Associates, a data communications company (now Attachmate Corporation), and from April 1992 to September 1994, as its Chief Technical Officer and Vice President, Research.
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 since January 1997 and Vice President of Finance since August 1998. Prior to being appointed Treasurer, 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
Our board of directors is 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. Each initial director in Class I, Class II and Class III shall hold office until the annual meeting of the stockholders in 2000, 2001, and 2002, respectively. Messrs. Walker and O'Connor have been elected to Class I; Messrs. Beirne and Lax have been elected to Class II; and Messrs. James F. McCann, Christopher G. McCann and Minetti have been elected to Class III. These 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. The maximum number of directors authorized under our third amended and restated certificate of incorporation is 15.
Mr. Walker had originally been elected to our board of directors under an agreement we entered into with Chase. The provision of this agreement providing Chase with the right to select one of our directors does not extend to future director elections. In addition, Messrs. Lax and Beirne were elected to our board of directors under an agreement executed with the closing of the May 1999 private placement. Our agreement to appoint a representative of Benchmark and Softbank to our board of directors, according to which Messrs. Beirne and Lax were elected, does not extend to future director elections.
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, Christopher G. McCann and O'Connor. 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 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 compensation committee will administer our 1999 stock incentive plan. The current members of the compensation committee are Messrs. Walker, Beirne and Lax.
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 a letter 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. The original term of the letter agreement expired in 1995, but has been extended for one-year periods since its initial expiration with the current expiration date of May 2000. We pay Bayberry a retainer fee of $100,000 per year for these services. We also pay Bayberry a mutually agreed upon fee upon the closing of any transaction outside our ordinary course of business which results from the services provided by Bayberry. With respect to 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 20,000 shares of class B common stock with an exercise price of $2.00 per share for his services on our board of directors.
Each individual who first becomes a non-employee board member at any time after the completion of this offering will automatically receive an option grant for 10,000 shares on the date such individual joins the board. In addition, on the date of each annual meeting of stockholders held after the completion of this offering, each non-employee board member who is to continue to serve as a non-employee board member will automatically be granted an option to purchase 5,000 shares of class A common stock, if such individual has served on the board for at least six months.
EMPLOYMENT CONTRACTS
We have entered into employment agreements with each of James F. McCann, Christopher G. McCann, John W. Smolak, Peter G. Rice and Kerry W. Coin.
Mr. James F. McCann's employment agreement with us became effective as of July 1, 1999. The agreement is for a five year term, and on each anniversary of the agreement, the term is extended for one additional year. The annual salary for Mr. McCann is $1,000,000, with the eligibility to participate in our management incentive plan or other bonus plan, which do not currently require objective criteria to be met in order for the executive to receive the bonus. We intend to establish these objective criteria by September 30, 1999. Upon termination without good cause or resignation for good reason, Mr. McCann is entitled to severance pay in the amount of $2,500,000, plus the base salary otherwise payable to him for the balance of the then current employment term and any base salary, bonuses, vacation and unreimbursed expenses accrued but unpaid as of the termination date. Mr. McCann will also be entitled to health insurance coverage for himself and his dependents and life insurance coverage. Upon termination due to death, or for good cause or a voluntary resignation, Mr. McCann is not entitled to any compensation from us, except for the payment of any base salary, bonuses, benefits or
unreimbursed expenses accrued but unpaid as of the date of termination.
Mr. Christopher G. McCann's employment agreement with us became effective as of July 1, 1999. The agreement is for a five year term, and on each anniversary of the agreement, the term is extended for one additional year. The annual salary for Mr. McCann is $250,000, with the eligibility to participate in our management incentive plan or other bonus plan, which do not currently require objective criteria to be met in order for the executive to receive the bonus. We intend to establish these objective criteria by September 30, 1999. In addition, Mr. McCann has received options to purchase 200,000 shares of our class A common stock, which options vest 25% each year over a four-year period from the date of grant, with an exercise price equal to the price of the shares being sold in this offering. Upon termination without good cause or resignation for good reason, Mr. McCann is entitled to severance pay in the amount of $500,000, plus the base salary otherwise payable to him for the balance of the then current employment term and any base salary, bonuses, vacation and unreimbursed expenses accrued but unpaid as of the termination date. Mr. McCann will also be entitled to health insurance coverage for himself and his dependents and life insurance coverage. Upon termination due to death or for good cause, or a voluntary resignation, Mr. McCann is not entitled to any compensation from us, except for the payment of any base salary, bonuses, benefits or unreimbursed expenses accrued but unpaid as of the date of such termination.
Mr. Smolak's employment agreement with us became effective on January 4, 1999 and can be terminated at any time. The annual salary for Mr. Smolak is $260,000, with the possibility of a bonus of up to 30% of his salary upon attaining performance goals established at the discretion of the Chief Executive Officer. These criteria will be established by September 30, 1999. In addition, he has received options to purchase 150,000 shares of our class B common stock with an exercise price of $2.00 per share, 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 without cause within the first 12 months following his commencement of employment, then we will continue to pay his salary, health insurance coverage and any earned bonus compensation pro rated for the time Mr. Smolak was employed during the period.
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. Mr. Rice may receive bonuses contingent upon, but not limited to, Plow & Hearth's profits, his contribution to that profit and the level of bonus paid to similarly-situated executives. 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 and can be terminated at any time. Mr. Coin's annual salary is $170,000, with the possibility of a bonus of up to 25% of his salary upon attaining performance goals established at the discretion of our Chief Executive Officer. These criteria will be established by September 30, 1999. In addition, Mr. Coin received options to purchase 50,000 shares of our class B common stock with an exercise price of $2.00 per share, 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, without cause, 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.
Under their employment agreements, Messrs. McCann are each restricted from participating in a competitive floral products business for a period of one year after a voluntary resignation or termination for good cause. In addition, Messrs. Smolak and Coin have each agreed not to compete with us during their respective terms of employment and for one year immediately following their termination and to not solicit our clients or employees during their respective terms of employment and for two years immediately following their termination. Mr. Rice has agreed not to compete with us or solicit our clients or employees during his term of employment and for two years immediately following his 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.
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 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 $17 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 IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------------------- ------------ -------------- ------------- --------------
James F. McCann..................................... -- -- $ -- $ --
Christopher G. McCann............................... 169,200 253,800 2,656,440 3,984,660
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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 1,237,500 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.
The exercise price for the shares of our class B common stock issuable upon the exercise of options granted under the 1997 Plan was determined by the board at the time of the option grant and may be paid in cash or in shares of our common stock valued at fair market value on the exercise date.
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, after obtaining any required stockholder approval.
1999 STOCK INCENTIVE PLAN
INTRODUCTION. Our 1999 stock incentive plan was adopted by the board and approved by our stockholders in July 1999. The 1999 stock incentive plan became effective upon adoption by the board. The 1999 stock incentive plan will be administered by our compensation committee.
SHARE RESERVE. 9,900,000 shares of class A common stock have been authorized for issuance under the 1999 stock incentive plan. The share reserve will automatically increase on the first trading day in January of each calendar year, beginning January 2, 2000, by an amount equal to 3% of the total number of shares of common stock outstanding on the last trading day in December in the preceding calendar year, but in no event will this annual increase exceed 2,000,000 shares. In addition, no participant in the 1999 stock incentive plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 1,000,000 shares of class A common stock in total per calendar year.
PROGRAMS. The 1999 stock incentive plan is divided into four separate programs:
- the discretionary option grant program under which eligible individuals in the employ of 1-800-FLOWERS.COM may be granted options to purchase shares of class A common stock at an exercise price determined by the plan administrator;
- the stock issuance program under which such individuals may be issued shares of class A common stock directly, through the purchase of these shares at a price determined by the plan administrator or as a bonus tied to the performance of services;
- the salary investment option grant program which may, at the plan administrator's discretion, be activated for one or more calendar years and, if so activated, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants; and
- the automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of class A common stock at an exercise price equal to 100% of the fair market value of those shares on the grant date.
PLAN FEATURES. The 1999 stock incentive plan will include the following features:
- The exercise price for any options granted under the plan may be paid in cash or in shares of class A 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.
- The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of class A common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for an appreciation distribution from 1-800-FLOWERS.COM equal to the fair market value of the vested shares of class A common stock underlying the surrendered option less the exercise price payable for those shares. 1-800-FLOWERS.COM may make the payment in cash or in shares of class A common stock.
CHANGE IN CONTROL. The 1999 stock incentive plan will include change in control provisions which may result in the accelerated vesting of outstanding option grants and stock issuances:
- In the event that 1-800-FLOWERS.COM is acquired by merger or asset sale or a board-approved sale of more than fifty percent of 1-800-FLOWERS.COM stock by its stockholders, each outstanding option under the discretionary option grant program which is not assumed or continued by the successor corporation will immediately become exercisable for all the option shares, and all unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation.
- The plan administrator may grant options which vest immediately upon an acquisition of 1-800-FLOWERS.COM or upon a hostile change of control or upon the individual's termination of service following an acquisition which results in a change in control.
AMENDMENT. The board may amend or modify the 1999 stock incentive plan at any time, pending any required stockholder approval. The 1999 stock incentive plan will terminate no later than July 6, 2009.
RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CHASE
In January 1995, we entered into an investment agreement with the predecessor of Chase Venture Capital Associates under which Chase purchased shares of our class C common stock and a warrant to purchase 2,371,040 shares of class A common stock with a nominal exercise price for an aggregate of $10.0 million. Chase currently holds over 5% of our class A common stock, assuming exercise of their warrant, and Jeffrey C. Walker, one of our directors, is a managing partner of Chase. With respect to the private placement completed in May 1999, we entered into an amendment to the investment agreement, under which Chase agreed to allow us to redeem the class C common stock owned by them in exchange for 263,452 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. With respect to the private placement, Chase has waived its registration rights for this offering, but retained registration rights for the future under the investors' rights agreement described below. See "Description of Capital Stock--Registration Rights" for a description of these registration rights.
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, under which 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. 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.
TRANSACTIONS REGARDING PLOW & HEARTH
With respect to our acquisition of 88% of the outstanding common stock of Plow & Hearth, we entered into a stockholders agreement, under 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. We have amended the Plow & Hearth stockholders agreement to provide that each of these minority holders will have their interests redeemed upon effectiveness of this offering for an aggregate of $8.4 million. In addition, we have amended Plow & Hearth's other option plan so that upon effectiveness 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 under these amendments.
TRANSACTIONS INVOLVING OUR PRIVATE PLACEMENT
With respect to our private placement of preferred stock to Waelinvest, 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. Under 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.
TRANSACTIONS WITH OUR DIRECTORS AND OFFICERS
Concurrent with the closing of the May 1999 private placement, we redeemed the existing class C common stock owned by Mr. James McCann in exchange for $4.4 million and 84,768 shares of class B common stock.
We have entered into an agreement with Bayberry Advisors, Inc., under 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. This loan was repaid in July 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.
GENERAL
We have adopted a policy providing that all future material transactions between us and our officers, directors and other affiliates must be on fair terms and be approved by either a majority of the disinterested members of our board of directors or our stockholders.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial ownership of our common stock, as of July 7, 1999 and as adjusted to reflect the sale of class A common stock offered by us in this offering, in both cases assuming conversion of our preferred stock, 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 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 July 7, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 15,375,472 shares of class A common stock, assuming conversion of our preferred stock, and 40,246,205 shares of class B common stock outstanding as of July 7, 1999 and 21,375,472 shares of class A common stock outstanding after completion of this offering.
PERCENTAGE OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
SHARES BENEFICIALLY 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)............................ -- 36,605,105 -- % 91.0% -- % 91.0%
Christopher G. McCann(2)...................... -- 3,524,940 -- 8.6 -- 8.6
T. Guy Minetti(3)............................. 9,600 20,000 * * * *
Jeffrey C. Walker(4).......................... 4,065,022 -- 22.9 -- 17.1 --
David Beirne(5)............................... 7,399,080 -- 48.1 -- 34.6 --
Charles R. Lax(6)............................. 3,836,560 -- 25.0 -- 17.9 --
Kevin J. O'Connor(7).......................... -- -- -- -- -- --
Chase Venture Capital
Associates, L.P.(8)......................... 4,065,022 -- 22.9 -- 17.1 --
Benchmark Capital Partners(9)................. 7,399,080 -- 48.1 -- 34.6 --
SOFTBANK America Inc.(10)..................... 3,836,560 -- 25.0 -- 17.9 --
Waelinvest S.A.(11)........................... 2,397,850 -- 15.6 -- 11.2 --
All directors and executive officers as a
group (11 persons)(12)...................... 15,310,262 38,150,045 86.3% 93.3% 64.5% 93.3%
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* Indicates less than 1%.
(1) Includes (a) 2,000,000 shares of class B common stock held by a limited
partnership, of which Mr. McCann is a general partner and exercises control,
(b) an aggregate of 77,500 shares of class B common stock held by two
trusts, over which Mr. McCann exercises control, and (c) 3,875,000 shares of
class B common stock for which Mr. McCann disclaims beneficial ownership
that is held by a limited partnership over which he does not exercise
control.
(2) Includes (a) 2,000,000 shares of class B common stock held by a limited partnership, of which Mr. McCann is a general partner and exercises control and (b) 606,800 shares of class B common stock issuable upon the exercise of currently exercisable stock options. If the underwriters' over-allotment option is exercised in full, Mr. McCann will sell 50,000 shares in this offering. Accordingly, in this event, Mr. McCann would beneficially own 3,474,940 shares of class B common stock, representing 8.5% of our class B common stock outstanding, after this offering.
(3) Includes 20,000 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) Includes 2,371,040 shares of class A common stock issuable upon the exercise of a currently exercisable warrant. All shares indicated as owned by Mr. Walker are included because of Mr. Walker's affiliation with Chase Venture Capital Associates. The general partner of Chase Venture Capital Associates is Chase Capital Partners, of which Mr. Walker is a general partner. The remaining general partners of Chase Capital Partners who are natural persons are John R. Baron, Christopher C. Behrens, Mitchell J. Blutt, Arnold L. Chavkin, Michael R. Hannon, Donald J. Hofmann, Stephen P. Murray, John M. B. O'Connor, Brian J. Richmand, Shahan D. Soghikian, Jonas Steinman and Damion E. Wicker. 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) All shares indicated as owned by Mr. Beirne are included because of Mr. Beirne's affiliation with the Benchmark entities. Mr. Beirne disclaims beneficial ownership of all shares owned by the Benchmark entities. Mr. Beirne's address is c/o Benchmark Capital Partners, 2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.
(6) All shares indicated as owned by Mr. Lax are included because of Mr. Lax's affiliation with Softbank. Mr. Lax disclaims beneficial ownership of all shares owned by Softbank. Mr. Lax's address is c/o Softbank America Inc., 10 Langley Road, Suite 202, Newton Center, Massachusetts 02459.
(7) Mr. O'Connor's address is c/o DoubleClick, Inc., 41 Madison Ave., 32(nd)
Floor, New York, New York, 10010.
(8) Includes 2,371,040 shares of class A common stock issuable upon the exercise of a currently exercisable warrant. The address of Chase is 380 Madison Avenue, 12th Floor, New York, New York 10017.
(9) Consists of (a) 951,870 shares of class A common stock owned by Benchmark Capital Partners II, L.P., (b) 2,543,170 shares of class A common stock owned by Benchmark Capital Partners III, L.P., and (c) 3,904,040 shares of class A common stock owned by Benchmark Investors III, L.P. Benchmark Capital Management Co. II, L.L.C. is the general partner of Benchmark Capital Partners II, L.P. and directs its investment decisions, and Benchmark Capital Management Co. III, L.L.C. is the general partner of Benchmark Capital Partners III, L.P. and Benchmark Investors III, L.P. and controls their investment decision. Both Benchmark Capital Management Co. II and Benchmark Capital Management Co. III are controlled by David Beirne, Bruce Dunlevie, J. William Gurley, Kevin Harvey, Robert Kagel and Andrew Rachleff. The address of the Benchmark entities is 2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.
(10) SOFTBANK America Inc. is an indirect wholly-owned subsidiary of SOFTBANK Corp. Approximately 43.3% of the outstanding common stock of SOFTBANK Corp. is owned by Masayoshi Son. SOFTBANK's address is 10 Langley Road, Suite 202, Newton Center, Massachusetts 02459.
(11) Waelinvest is indirectly controlled by Mr. Bernard Arnault, who also controls, indirectly, LVMH Moet Hennessy Louis Vuitton S.A. The address of Waelinvest is rue Waelhem, 102, 1030 Brussels, Belgium.
(12) Includes 2,371,040 shares of class A common stock issuable upon exercise of a currently exercisable warrant and 626,800 shares of class B common stock issuable upon the exercise of currently exercisable stock options and options which vest within 60 days.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our third amended and restated certificate of incorporation 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 shares of class B common stock are converted into shares of class A common stock, the number of shares classified as class B common stock will be reduced and the number of shares classified as class A common stock shall be increased on a one-for-one basis. Each outstanding share of preferred stock will be automatically converted into an equal number of shares of class A common stock upon completion of this offering and the simultaneous 10-for-1 stock split of our common stock. As of July 7, 1999, assuming the conversion of our preferred stock, 15,375,472 shares of class A common stock were outstanding and 40,246,205 shares of class B common stock were outstanding. As of July 7, 1999, we had 75 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 one 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. The class B common stock does not have any restrictions on transfer, except as imposed by the federal securities laws and upon execution of lock-up agreements. The class B common stock is not being registered under the federal securities laws in this offering and we have no plans to do so in the future.
Except as limited by any 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 may be affected by 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 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 Waelinvest, SOFTBANK, Benchmark, Chase, James F. McCann, Christopher G. McCann and other investors. Under 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. An aggregate of 53,269,757 shares of class A common stock can be registered under the agreement. One year after the completion of this offering, a majority in interest of the parties to the agreement other than Messrs. McCann and 1-800-FLOWERS.COM 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 or the date on which all shares held by these parties can be sold under Rule 144 under the Securities Act of 1933, as amended, and have customary limitations. We have agreed to pay the offering expenses in connection with the registration of these shares, other than underwriters' commissions.
WARRANT
We have issued a warrant to purchase an aggregate of 2,371,040 shares of class A common stock to Chase Capital Partners for a nominal purchase price. The exercise price and number and kind of shares will be adjusted upon a stock split, stock dividend or other recapitalization of our common stock. The warrant does not give Chase any voting or other rights until exercised for shares of class A common stock.
CHARTER AND BYLAWS PROVISIONS AND DELAWARE LAWS RELATING TO ANTI-TAKEOVER PROTECTION
We are governed by 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 persons, for three years following the date that stockholder became an "interested stockholder" unless:
- the transaction in which that 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 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 provides that our board of directors is 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 provides that directors 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 increases the difficulty of replacing a majority of directors. Our third amended and restated certificate of incorporation eliminates 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 do 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 requires 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 under
Section 174 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 liabilities that may be incurred by our directors and officers in connection with the performance of their duties.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the class A common stock is American Stock Transfer & Trust Company, New York, New York.
LISTING
We have applied to list our class A common stock on the Nasdaq National Market under the trading symbol "FLWS".
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 21,375,472 shares of our class A common stock, assuming no exercise of the underwriters' over-allotment option, and 40,246,205 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 they are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 55,621,677 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 directors, officers and key employees listed in the section of this prospectus entitled "Management" and stockholders, who together will hold an aggregate of 54,017,797 shares of class A or class B common stock, representing 97.1% of our common stock prior to 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 1,603,880 restricted securities will be eligible for immediate sale on the date of this prospectus;
- approximately 704,050 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 38,642,325 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 213,755 shares immediately after this offering; or
- 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 governed by manner of sale requirements 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 those 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 under a compensatory stock plan or other written agreement is eligible to resell the shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
One year after completion of this offering, the holders of 53,269,757 shares of our class A common stock or their permitted transferees will be entitled to require us to register 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 1,237,500 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 and the 9,900,000 shares of class A common stock that may be issued under our 1999 stock incentive plan. As of July 7, 1999, options to purchase 1,237,500 shares of class B common stock were issued and outstanding and options to purchase 200,000 shares of class A common stock were issued and outstanding. This registration statement for the option shares is expected to be filed and effective as soon as practicable after the effective date of this offering.
Upon the expiration of the lock-up agreements described above, at least 769,050 shares of class B common stock will be issuable under vested options, based on options outstanding as of July 7, 1999. Accordingly, shares registered under such registration statement will, except as they may be limited by 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. Brobeck, Phleger & Harrison LLP currently owns 9,600 shares of series A preferred stock, and Alexander D. Lynch, a partner of Brobeck, Phleger & Harrison LLP, currently owns 8,640 shares of series A preferred stock. The underwriters are represented on legal matters related to this offering by Hale and Dorr LLP, Boston, Massachusetts.
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 reports. 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 reports, 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.
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.
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.
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-29
Consolidated Balance Sheets as of December 31, 1996 and 1997................ F-30
Consolidated Statements of Income for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1997 and 1998 (unaudited)....... F-31
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-32
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1997 and the three months ended March 31, 1997 and 1998 (unaudited)... F-33
Notes to Consolidated Financial Statements.................................. F-34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Consolidated Statement of Operations for the
year ended June 28, 1998.................................................. F-45
Unaudited Pro Forma Consolidated Statement of Operations for the nine months
ended March 29, 1998...................................................... F-46
Notes to Unaudited Pro Forma Consolidated Statements of Operations.......... F-47
|
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, except for the second
paragraph
of Note 12--Capital Transactions as
to which
the date is , 1999
The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in the second paragraph of Note 12--Capital Transactions to the consolidated financial statements.
Ernst & Young LLP
Melville, New York
July 22, 1999
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
Goodwill, net of accumulated amortization of $146 in 1997, $534
in 1998 and $1,384 in 1999.................................... 1,274 22,725 21,671
Investment in licenses, net of accumulated amortization of $837
in 1997, $1,175 in 1998 and $1,418 in 1999.................... 4,090 3,752 3,509
Other........................................................... 799 1,795 5,923
--------------- --------------- ---------------
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, 348,220 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, 10,000,000 shares authorized,
none issued................................................. -- -- --
Class A common stock, $.01 par value, 200,000,000 shares
authorized, 480,870 shares issued........................... 5 5 5
Class B common stock, $.01 par value, 200,000,000 shares
authorized, 48,849,927 shares issued........................ 488 488 488
Additional paid-in capital.................................... 1,739 1,739 3,419
Accumulated other comprehensive income........................ 5 14 --
Retained earnings (deficit)................................... (1,932) 1,534 (7,148)
Deferred compensation......................................... -- -- (1,575)
Treasury stock, at cost--51,400 Class A and 5,140,000 Class B
shares in 1997 and 52,800 Class A and 5,280,000 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
--------------- --------------- ---------------
--------------- --------------- ---------------
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SEE ACCOMPANYING NOTES.
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.............................. $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ $ 0.01 $ 0.06 $ 0.07 $ 0.03 $ (0.20)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Shares used in the calculation of net
income (loss) per common share:
Basic.............................. 47,050 44,140 44,120 44,140 44,000
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ 49,420 46,740 46,610 46,750 44,000
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
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SEE ACCOMPANYING NOTES.
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 RETAINED
---------------------- ----------------------- PAID-IN COMPREHENSIVE EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (DEFICIT)
--------- ----------- ---------- ----------- ----------- ------------------- -----------
Balance at July 2, 1995............ 480,870 $ 5 48,087,000 $ 481 $ 1,253 $ 70 $ (5,125)
Issuance of warrants............... -- -- -- -- 492 -- --
Issuance of common stock........... -- -- 762,927 7 (6) -- --
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,029)
Purchase of treasury stock......... -- -- -- -- -- -- --
Comprehensive income:
Net income....................... -- -- -- -- -- -- 1,297
Unrealized loss on marketable
securities..................... -- -- -- -- -- (85) --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 30, 1996........... 480,870 5 48,849,927 488 1,739 (15) (4,857)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,462)
Comprehensive income:
Net income....................... -- -- -- -- -- -- 4,387
Unrealized gain on marketable
securities..................... -- -- -- -- -- 20 --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 29, 1997........... 480,870 5 48,849,927 488 1,739 5 (1,932)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,608)
Purchase of treasury stock......... -- -- -- -- -- -- --
Comprehensive income:
Net income....................... -- -- -- -- -- -- 5,074
Unrealized gain on marketable
securities..................... -- -- -- -- -- 9 --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 28, 1998........... 480,870 5 48,849,927 488 1,739 14 1,534
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,328)
Employee stock options............. -- -- -- -- 1,680 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Comprehensive loss:
Net loss......................... -- -- -- -- -- -- (7,354)
Unrealized loss on marketable
securities..................... -- -- -- -- -- (14) --
Total comprehensive loss....... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at March 28, 1999.......... 480,870 $ 5 48,849,927 $ 488 $ 3,419 $ -- $ (7,148)
--------- ----- ---------- ----- ----------- --- -----------
--------- ----- ---------- ----- ----------- --- -----------
TOTAL
TREASURY STOCK STOCKHOLDERS'
DEFERRED ---------------------- EQUITY
COMPENSATION SHARES AMOUNT (DEFICIT)
--------------- --------- ----------- ---------------
Balance at July 2, 1995............ $ -- -- $ -- $ (3,316)
Issuance of warrants............... -- -- -- 492
Issuance of common stock........... -- -- -- 1
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,029)
Purchase of treasury stock......... -- 5,191,400 (2,975) (2,975)
Comprehensive income:
Net income....................... -- -- -- 1,297
Unrealized loss on marketable
securities..................... -- -- -- (85)
-------
Total comprehensive income..... -- -- -- 1,212
------- --------- ----------- -------
Balance at June 30, 1996........... -- 5,191,400 (2,975) (5,615)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,462)
Comprehensive income:
Net income....................... -- -- -- 4,387
Unrealized gain on marketable
securities..................... -- -- -- 20
-------
Total comprehensive income..... -- -- -- 4,407
------- --------- ----------- -------
Balance at June 29, 1997........... -- 5,191,400 (2,975) (2,670)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,608)
Purchase of treasury stock......... -- 141,400 (133) (133)
Comprehensive income:
Net income....................... -- -- -- 5,074
Unrealized gain on marketable
securities..................... -- -- -- 9
-------
Total comprehensive income..... -- -- -- 5,083
------- --------- ----------- -------
Balance at June 28, 1998........... -- 5,332,800 (3,108) 672
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,328)
Employee stock options............. (1,680) -- -- --
Amortization of deferred
compensation..................... 105 -- -- 105
Comprehensive loss:
Net loss......................... -- -- -- (7,354)
Unrealized loss on marketable
securities..................... -- -- -- (14)
-------
Total comprehensive loss....... -- -- -- (7,368)
------- --------- ----------- -------
Balance at March 28, 1999.......... $ (1,575) 5,332,800 $ (3,108) $ (7,919)
------- --------- ----------- -------
------- --------- ----------- -------
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SEE ACCOMPANYING NOTES.
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 interests.................................. (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 of investments.............................. (741) (4,382) (4,050) (3,447) --
Sales and maturities of available-for-sale
investments......................................... -- 3,077 3,754 2,647 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
----------- ----------- --------- ------------ -----------
----------- ----------- --------- ------------ -----------
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SEE ACCOMPANYING NOTES.
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. is a leading e-commerce provider of floral products
and gifts. Customers can purchase products through any of three sales channels:
online, by calling toll-free and by visiting one of 123 retail stores (owned or
franchised) located across the United States. 1-800-FLOWERS.COM has broadened
its product lines to include home and garden merchandise through its acquisition
of The Plow & Hearth, Inc. in April 1998 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM and its wholly-owned and majority-owned subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended March 29, 1998, have been prepared by 1-800-FLOWERS.COM 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 1-800-FLOWERS.COM'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
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
card companies. The timing of the related cash realization and fees accrued are
determined based upon agreements with these companies. Credit is also extended
to customers based upon an evaluation of the customer's financial condition and
collateral is generally not required. Allowances relating to accounts receivable
(June 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
1-800-FLOWERS.COM capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion with actual sales from the corresponding catalog over a period not to exceed twenty-six weeks. 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
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COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
1-800-FLOWERS.COM follows the provisions of Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which requires the capitalization of costs incurred in connection with developing or obtaining software for internal use. These costs are amortized over a period of three years, the estimated useful life of the software. The useful life of Internet and Web site development costs is less than one year and, accordingly, are expensed as incurred. No costs for computer software developed for internal use were capitalized during the year ended June 30, 1996. Capitalized computer software developed for
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.
INVESTMENTS
1-800-FLOWERS.COM's investments, consisting primarily of debt and equity securities, are classified as available-for-sale and are stated at fair value, with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income. The cost of investments sold is determined using the specific identification method. Estimated fair values of investments are based on quoted market prices at the end of each accounting period. Interest, dividends and other distributions of earnings are included in other income.
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 past due franchise receivables into three-year promissory notes bearing interest of up to 10% per annum; (iii) the sale of 1-800-FLOWERS.COM-owned stores to new franchisees; (iv) the resale of franchises and (v) license fees associated with termination agreements designed to compensate 1-800-FLOWERS.COM for the loss of future license fees. 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 AND GOODWILL
Licenses represent the fair value of franchise agreements acquired in 1-800-FLOWERS.COM's acquisition of Amalgamated Consolidated Enterprises, Inc. and are amortized on a straight-line basis over a 16-year period.
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 1-800-FLOWERS.COM's cash and equivalents, notes and accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of the significant items. The fair value of 1-800-FLOWERS.COM's long-term obligations are estimated based on the current rates offered to 1-800-FLOWERS.COM for
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) obligations of similar terms and maturities. Under this method, 1-800-FLOWERS.COM's fair value of long-term obligations was not significantly different than the stated values at June 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 floral products and upon shipment of non-floral products. 1-800-FLOWERS.COM provides an allowance for sales returns in the period of sale, based upon historical experience.
COST OF REVENUES
Cost of revenues consists primarily of florist fulfillment costs (fees paid to wire services that serve as clearinghouses for floral orders, net of rebates), the cost of floral and non-floral merchandise sold from inventory or through third parties, and the associated costs of inbound freight and outbound shipping. Additionally, cost of revenues includes labor and facility costs related to wholesale operations.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising and promotional expenditures, catalog costs, fees paid to strategic online partners, fulfillment (other than costs included in cost of revenues) and customer service center expenses as well as payroll and non-payroll related expenses for those areas engaged in marketing, selling, merchandising, customer service and fulfillment activities. All such marketing and sales costs are expensed when incurred.
In accordance with Statement of Position 93-7, REPORTING OF ADVERTISING COSTS, 1-800-FLOWERS.COM expenses all advertising costs at the time the advertisement is first shown. Advertising expense (including the amortization of deferred catalog costs of approximately $2,604,000, $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.
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS
When impairment indicators are present, 1-800-FLOWERS.COM reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flow analysis expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the future discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
1-800-FLOWERS.COM evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or reduced number of remaining periods in the revised useful life.
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 determined under enacted tax laws and rates that will be in effect when the differences are expected to reverse.
STOCK-BASED COMPENSATION
1-800-FLOWERS.COM accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
SEGMENT DISCLOSURES
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. Statement 131 superseded Statement of Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. 1-800-FLOWERS.COM operates in one business segment through any of its three access channels. The adoption of Statement 131 did not affect 1-800-FLOWERS.COM's consolidated results of operations or financial position.
For the years ended June 29, 1997 and June 28, 1998 and for the nine months ended March 28, 1999, the flowers and plants products category represented 92.1%, 86.9% and 72.2% of total net revenues, respectively. Additionally, for the nine months ended March 28, 1999, the home category represented 10.0% of total net revenues.
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on 1-800-FLOWERS.COM's net income (loss) or stockholders' equity (deficit). Statement 130 requires unrealized gains or losses on 1-800-FLOWERS.COM's available-for-sale securities, which prior to adoption was reported separately in stockholders' equity, to be included in comprehensive income. The related tax effect on comprehensive income is not material for the periods presented. Prior year consolidated financial statements have been restated to conform to the requirements of Statement 130.
3. ACQUISITIONS
During the three years ended June 28, 1998, 1-800-FLOWERS.COM made the acquisitions described below, each of which has been accounted for as a purchase. Accordingly, the consolidated financial statements include the operating results of each business from the respective date of acquisition. No acquisitions were consummated during the nine-month period ended March 28, 1999.
THE PLOW & HEARTH, INC.
In April 1998, 1-800-FLOWERS.COM acquired 88% of the issued and outstanding shares of common stock of Plow & Hearth (70% of the fully diluted equity of Plow & Hearth due to the existence of 28,334 outstanding management stock options). Plow & Hearth is a catalog company located in Virginia. The acquisition price was $16,100,000, exclusive of the management put liability described below, of which $14,700,000 was financed through 1-800-FLOWERS.COM's credit agreement (see Note 5). The purchase price has been allocated to the assets acquired and the liabilities assumed based on fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired of $19,600,000 has been recorded as goodwill and is being amortized over 20 years.
1-800-FLOWERS.COM, Plow & Hearth and Plow & Hearth management shareholders and option holders entered into a stockholders' agreement effective with the acquisition. In accordance with the agreement, as amended, each management shareholder and option holder has the right to cause Plow & Hearth to purchase 12,668 shares of its outstanding stock and 28,344 stock options at a price contingent upon the operating profits of Plow & Hearth, with a minimum obligation upon either the death, disability or termination of employment of a management shareholder or option holder or the 60-day period commencing on April 3, 2002 and terminating on June 3, 2002. Accordingly, 1-800-FLOWERS.COM recorded a liability of $6,300,000 at the acquisition date. The liability at June 28, 1998 was adjusted to approximately $8,700,000 and, subsequently at 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, reflecting the minority interest holders' percentage of the increase (decrease).
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)
1-800-FLOWERS.COM's minimum obligation under the put liability increases to $8,400,000 upon the completion of an initial public offering of 1-800-FLOWERS.COM's common stock. Accordingly, the increase in the liability from $6,300,000 at March 28, 1999 to $8,400,000 will be recorded as $1,500,000 of general and administrative expense and $600,000 as additional goodwill.
Additionally, under Plow & Hearth's amended and restated stock option plan, 35,342 shares of unissued Plow & Hearth common stock are reserved for issuance. The aforementioned 28,334 management stock options are immediately exercisable and expire in February 2008. In April 1998, Plow & Hearth issued 3,504 stock options to management at an exercise price equal to the per share acquisition price of $153.65. These options do not contain the management stockholder put option as defined in the preceding paragraph. These options will expire ten years from the issuance date and vest ratably over five years.
Concurrently with the acquisition of Plow & Hearth, 1-800-FLOWERS.COM also acquired an 85% interest in Plow & Hearth LP. Plow & Hearth owns the remaining 15%. Plow & Hearth LP owns the land and distribution center/office facility of Plow & Hearth and leases the facility to Plow & Hearth. The $800,000 purchase price has been allocated to the assets acquired and the liabilities assumed based on fair values at the date of acquisition. The purchase price approximates the estimated fair values of the net assets acquired, including the assumption of a $2,400,000 construction loan payable.
The following table reflects unaudited pro forma results of operations of 1-800-FLOWERS.COM and Plow & Hearth on the basis that the acquisition had taken place at the beginning of the earliest period presented:
YEARS ENDED
------------------------------
JUNE 29, 1997 JUNE 28, 1998
-------------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net revenues...................................................................... $ 222,324 $ 257,747
-------------- --------------
-------------- --------------
Net income........................................................................ $ 4,468 $ 3,464
-------------- --------------
-------------- --------------
Net income applicable to common stockholders...................................... $ 3,006 $ 1,856
-------------- --------------
-------------- --------------
Net income per common share applicable to common stockholders:
Basic........................................................................... $ 0.07 $ 0.04
-------------- --------------
-------------- --------------
Diluted......................................................................... $ 0.06 $ 0.04
-------------- --------------
-------------- --------------
Shares used in the calculation of net income per common share:....................
Basic........................................................................... 44,140 44,120
-------------- --------------
-------------- --------------
Diluted......................................................................... 46,740 46,610
-------------- --------------
-------------- --------------
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The unaudited pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on July 1, 1996 or of future operations of the combined companies.
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) GREAT PLAINS WHOLESALE FLORISTS, INC.
In July 1997, 1-800-FLOWERS.COM's subsidiary, Floral Works, Inc., acquired the business and assets of Great Plains Wholesale Florists, Inc., a supplier of fresh cut flowers and arrangements to the supermarket industry, for $900,000 in cash and the issuance of a $900,000 four-year seller financed note bearing interest at 6.5% per annum. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their fair values at the date of acquisition.
The excess of the purchase price over the net assets acquired, of approximately $1,744,000, has been recorded as goodwill and is being amortized over 15 years. Had this acquisition been consummated as of July 1, 1996, the unaudited pro forma consolidated net revenues and results of operations would not have been considered material for the year ended June 29, 1997.
FLORAL WORKS, INC.
In September 1996, 1-800-FLOWERS.COM invested $1,100,000 in cash for an 80% interest in Floral Works, Inc. which was formed in order to acquire specific assets and liabilities of FLS Floral Wholesalers Ltd. The purchase price has been allocated to the assets acquired and the liabilities assumed based on fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired of approximately $826,000 has been recorded as goodwill and is being amortized over 15 years.
Upon the sale or an initial public offering of 1-800-FLOWERS.COM, 1-800-FLOWERS.COM 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 with an exercise price of $2,800 per right. The stock appreciation rights vest ratably over 5 years and the exercise price increases 10% annually. At March 28, 1999, 40% of the stock appreciation rights are exercisable. Since issuance, 1-800-FLOWERS.COM has not recorded any provision related to such stock appreciation rights.
Had this acquisition been consummated as of July 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, 1-800-FLOWERS.COM completed an investment transaction with American Floral Services, Inc., a floral wire service. The investment consisted of 1-800-FLOWERS.COM purchasing a minority interest in American Floral Services Class A common stock and 15% preferred stock and a long-term note receivable. During the year ended June 30, 1996, the long-term note receivable was converted into additional preferred stock of American Floral Services. On June 30, 1997, American Floral Services repurchased, on a pro-rata basis, 59% of its then outstanding shares of Class A common stock in the amount of $387.16 per share. This transaction resulted in a gain on 1-800-FLOWERS.COM's investment in American Floral Services of approximately $1,545,000 which was received and recorded as other income during the year ended June 28, 1998. In addition, during the years ended June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998 and March 28, 1999, 1-800-FLOWERS.COM recorded $318,000,
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) $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, 1-800-FLOWERS.COM, its principal shareholder and a venture capital firm entered into an investment agreement, as amended, whereby each existing share of common stock was converted into one share of Class A common stock (which shares contain all voting rights of 1-800-FLOWERS.COM) and 100 shares of Class B common stock (which contain no voting rights). Additionally, Class C common stock (which contain no voting rights) and a preferred stock class were established.
Pursuant to the investment agreement, 1-800-FLOWERS.COM, upon obtaining financial and operational targets, has the right to draw up to $25,000,000 in funds. As of March 28, 1999, 1-800-FLOWERS.COM 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, 1-800-FLOWERS.COM provides the venture capital firm a predetermined number of shares of Class C common stock and warrants to acquire shares of Class B common stock at a nominal price per share. Upon the takedown of $10,000,000 by 1-800-FLOWERS.COM in January 1995, the venture capital firm received 263,452 shares of Class C common stock and warrants to acquire 2,371,040 shares of Class A common stock expiring in 2005. The fair value of the warrants was estimated by 1-800-FLOWERS.COM at approximately $1,375,000. As of March 28, 1999, all of 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. 1-800-FLOWERS.COM may, at its option, repurchase and/or retire the shares of Class B and/or C common stock held by the venture capital firm 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 $97 per share. The investment agreement contains financial covenants with which 1-800-FLOWERS.COM is in compliance as of March 28, 1999.
On June 28, 1996, 1-800-FLOWERS.COM 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, 84,768 shares of Class C common stock and 762,930 Class B warrants were issued. The fair value of the warrants was estimated by 1-800-FLOWERS.COM at approximately $492,000 and was charged to operations during the year ended June 30, 1996. The Class B warrants were immediately exercised into 762,930 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 $92 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, 1-800-FLOWERS.COM entered into a stock purchase agreement with a stockholder whereby 1-800-FLOWERS.COM purchased 1,400 shares of its Class A common stock and 140,000 shares of its Class B common stock for $133,000.
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
1-800-FLOWERS.COM'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, 1-800-FLOWERS.COM entered into an agreement with a bank that provided for an $18,000,000 term loan and a $12,000,000 revolving credit line, bearing interest at LIBOR Index plus 2.25% per annum (7.31% at March 28, 1999) payable monthly. 1-800-FLOWERS.COM 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, 1-800-FLOWERS.COM borrowed $3,000,000 under the $12,000,000 revolving credit line.
As of March 28, 1999, 1-800-FLOWERS.COM 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 1-800-FLOWERS.COM'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, 1-800-FLOWERS.COM entered into a credit agreement with a
bank that provided for a $15,500,000 standby credit note and a $5,000,000
revolving credit facility. 1-800-FLOWERS.COM borrowed the full amount under
the standby credit note in connection with the acquisitions of Plow & Hearth
and Plow & Hearth LP (see Note 3). The credit agreement requires interest to
be paid monthly. On March 19, 1999, 1-800-FLOWERS.COM repaid amounts then
outstanding and entered into a new credit agreement with the same bank (see
(1) above).
Other components of long-term debt, relating to obligations of Plow & Hearth, are as follows:
(3) $2,400,000 commercial note dated June 13, 1997 ($2,278,000 outstanding at March 28, 1999) assumed in the Plow & Hearth and Plow & Hearth LP acquisitions, bearing interest at 8.19% per annum. The note is payable in 203 equal monthly installments of principal and interest commencing June 13, 1997.
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)
(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 (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 1-800-FLOWERS.COM:
(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.
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 compensation expense.................... 6.5 -- -- -- --
(Decrease) increase in valuation allowance............ (5.8) -- -- -- 4.2
--- --- --- --- -----
50.3% 41.7% 39.4% 39.1% (28.7)%
--- --- --- --- -----
--- --- --- --- -----
|
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED) Significant components of 1-800-FLOWERS.COM'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
------ ------- ------
------ ------- ------
|
1-800-FLOWERS.COM 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
-------------- -------------- ---------------
-------------- -------------- ---------------
|
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
------------------------ ------------------------
AMORTIZED AMORTIZED MARCH 28,
COST FAIR VALUE COST FAIR VALUE 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Investments available-for-sale:
Federal and municipal government bonds............ $ 4,576 $ 4,581 $ 5,173 $ 5,178
Equity securities................................. 5 6 266 275
Corporate notes................................... 560 559 -- --
----------- ----------- ----------- -----------
$ 5,141 5,146 $ 5,439 5,453
----------- ----------- ----------- -----------
----------- -----------
Other investments:
Equity investment in American Floral Services, at
cost............................................ 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
----------- --------- ----------- ---------
----------- --------- ----------- ---------
|
There were no gross unrealized holding losses at June 29, 1997 or June 28, 1998. Additionally, gross realized gains or losses on the sales of available-for-sale securities were immaterial for all periods presented.
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) OTHER ASSETS
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- -------------- ---------------
(IN THOUSANDS)
Exclusive online marketing contract............................. $ -- $ -- $ 3,125
Deferred catalog costs.......................................... -- 669 1,772
Other assets.................................................... 999 1,429 1,451
----- ------- -------
999 2,098 6,348
Accumulated amortization........................................ 200 303 425
----- ------- -------
$ 799 $ 1,795 $ 5,923
----- ------- -------
----- ------- -------
|
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, including goodwill and licenses......... $ (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.
Cash receipts on notes receivable amounted to $413,000, $600,000, $723,000, $542,000 and $492,000 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.
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
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
------- ------- -------
------- ------- -------
|
8. PROFIT SHARING PLAN
1-800-FLOWERS.COM established a 401(k) Profit Sharing Plan which covers substantially all eligible employees of 1-800-FLOWERS.COM. All full-time employees of 1-800-FLOWERS.COM 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) plan in amounts not exceeding federal guidelines. On an annual basis 1-800-FLOWERS.COM, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in 1-800-FLOWERS.COM's contribution based upon years of service. 1-800-FLOWERS.COM made contributions of $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, 1-800-FLOWERS.COM's board of directors approved 1-800-FLOWERS.COM's 1997 Stock Option Plan. The stock option plan authorizes the granting to key employees, officers, directors and consultants of 1-800-FLOWERS.COM options to purchase an aggregate of 5,985,440 shares of 1-800-FLOWERS.COM's Class B common stock, $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 1-800-FLOWERS.COM's board of directors or compensation committee of the board at the time of grant, provided, however, that in the case of an incentive stock option the exercise price may not be less than 100% of the fair market value of such stock at the time of the grant, or less than 110% of such fair market value in the case of options granted to a 10% owner of 1-800-FLOWERS.COM's stock. The vesting and expiration periods of options issued under the stock option plan are determined by 1-800-FLOWERS.COM's board of directors or compensation committee as set forth in the applicable option agreement, provided that the expiration date shall not be later than ten years from the date of grant.
During January 1999, 1-800-FLOWERS.COM issued stock options to employees to purchase 200,000 shares of common stock at $2.00 per share, which was considered to be the fair value of the common stock at that time and vest at the rate of 25% per year on the anniversary of the grant
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) date. Soon thereafter, 1-800-FLOWERS.COM entered into discussions with an investor to purchase shares of common stock at $10.43 per share; accordingly, for accounting purposes, 1-800-FLOWERS.COM used such per share value to record a deferred compensation charge of $1,680,000, of which $105,000 was amortized during the nine months ended March 28, 1999, associated with the option grants in January 1999.
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..................... -- $ -- 427,750 $ 1.30 525,500 $ 1.36
Grants......................................... 427,750 1.30 102,500 1.61 712,000 2.00
Forfeitures.................................... -- -- (4,750) 1.18 -- --
--------- ------------ -----------
Balance, end of year........................... 427,750 1.30 525,500 1.36 1,237,500 1.73
--------- ------------ -----------
--------- ------------ -----------
Weighted-average fair value of options issued
during the period............................ $ 0.22 $ 0.73 $ 0.90
|
The following table summarizes information about stock options outstanding at March 28, 1999:
WEIGHTED-
AVERAGE
REMAINING
OPTIONS OPTIONS CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE
---------------------------------------------------- ------------ ------------ ------------
$1.30............................................... 423,000 253,800 2.8 years
1.61............................................... 102,500 25,630 8.8
2.00............................................... 712,000 393,000 9.4
------------ ------------
1,237,500 672,430 7.1
------------ ------------
------------ ------------
|
At March 31, 1999, 1-800-FLOWERS.COM has reserved approximately 8,710,000 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 of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,which also requires that the information be determined as if 1-800-FLOWERS.COM had accounted for its stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the minimum value option pricing model with the following assumptions: risk free interest rate of 6%; no dividend yield and a weighted-average expected life of the options of 5 years at date of grant. Because the determination of fair value of all options granted after such
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) time as 1-800-FLOWERS.COM 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.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. 1-800-FLOWERS.COM pro forma financial information is as follows:
YEARS ENDED 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................................. $0.07 $0.08 $0.03 $(0.20 )
Pro forma................................... 0.07 0.08 0.03 (0.21 )
Diluted earnings (loss) per share applicable
to common stockholders:
As reported................................. $0.06 $0.07 $0.03 $(0.20 )
Pro forma................................... 0.06 0.07 0.03 (0.21 )
|
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........ 47,050 44,140 44,120 44,140 44,000
Effect of dilutive securities:
Employee stock options...... -- 230 120 240 --
Warrants.................... 2,370 2,370 2,370 2,370 --
--------------- --------------- --------------- --------------- ---------------
Dilutive potential common
shares.................... 2,370 2,600 2,490 2,610 --
--------------- --------------- --------------- --------------- ---------------
Denominator for diluted
earnings (loss) per share-
weighted average common
shares outstanding and
assumed conversions....... 49,420 46,740 46,610 46,750 44,000
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
|
During the nine months ended March 28, 1999, options and warrants to purchase 3,420,000 shares of common stock (using the treasury stock method) were excluded from the diluted loss per share computation as their effect would be antidilutive. For all periods presented, 350,000 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. Additionally, subsequent to March 28, 1999, 1-800-FLOWERS.COM issued options to purchase 200,000 shares of Class A common stock with an exercise price equal to the price of the shares sold in an initial public offering.
11. COMMITMENTS AND CONTINGENCIES
LEASES
1-800-FLOWERS.COM currently leases office, store facilities, and equipment under various operating leases through fiscal 2009. As leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require 1-800-FLOWERS.COM to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. 1-800-FLOWERS.COM has also entered into leases that are on a month-to-month basis.
1-800-FLOWERS.COM, 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) 1-800-FLOWERS.COM also leases certain computer, telecommunication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $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, 1-800-FLOWERS.COM is required to maintain an irrevocable standby letter of credit in the amount of approximately $785,000 which is renewable annually.
As of 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
-----------
-----------
|
1-800-FLOWERS.COM, through the Amalgamated Consolidated Enterprises acquisition, subleases land and buildings (which are leased from third parties) to 1-800-FLOWERS.COM's franchisees. Certain of the leases, other than land leases which have been classified as operating leases, are classified as capital leases and have initial lease terms of approximately 20 years (including option periods in some cases).
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) 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:
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
------------- -------
------------- -------
|
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, 1-800-FLOWERS.COM 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 1-800-FLOWERS.COM 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.
1-800-FLOWERS.COM has commitments under exclusive online marketing agreements with AOL and AOL.com whereby 1-800-FLOWERS.COM will pay a minimum of $11,500,000 over a four-year period commencing July 1, 1997. Such online marketing costs are capitalized and amortized over the greater of the ratio of the number of impressions delivered over the total number of contracted impressions, or a straight-line basis over the term of the agreement. Through
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) March 28, 1999, 1-800-FLOWERS.COM has paid $7,500,000 pursuant to such online marketing agreements. The remaining $4,000,000 is payable $3,000,000 in July 1999, and $500,000 during each of the fiscal years ending June 2000 and 2001. 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. Additionally, 1-800-FLOWERS.COM is required to share a portion of revenue derived from such online marketing agreements. Such amount is expensed as the related revenue is recognized.
LITIGATION
There are various claims, lawsuits, and pending actions against 1-800-FLOWERS.COM and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on 1-800-FLOWERS.COM's consolidated financial position, results of operations or liquidity.
12. CAPITAL TRANSACTIONS
On May 20, 1999, 1-800-FLOWERS.COM completed a private placement of 984,493 shares of non-voting Series B preferred stock, yielding net proceeds of $101,600,000. In connection with this private placement, all shares of Redeemable Class C common stock were redeemed and a portion reinvested in 143,053 shares of such preferred stock. The non-voting Series B preferred stock was subsequently converted into voting Series A preferred stock. The Series A preferred stock has a preference in liquidation and each share of preferred stock is convertible into ten shares (assuming the stock split described below) of Class A common stock upon the completion of an initial public offering.
On May 20, 1999, the board of directors and stockholders approved an increase in the number of authorized shares of common stock to 400,000,000 and preferred stock to 1,200,000. On July 7, 1999, 1-800-FLOWERS.COM amended and restated its certificate of incorporation to provide that all previously outstanding shares of Class A common stock, which the holders of were entitled to one vote per share, and Class B common stock, which contained no voting rights, convert into a new series of Class B common stock and are entitled to 10 votes per share. Each share of Class B common stock shall automatically convert into one share of Class A common stock upon transfer, with limited exception. Additionally, a new series of Class A common stock was established that entitles the holders to one vote per share. Also on July 7, 1999, the board of directors and stockholders approved an amendment to the certificate of incorporation to be effective on , 1999 that provides for a ten-for-one split of the outstanding shares of common stock and an increase in the number of authorized shares of preferred stock to 10,000,000. Retroactive effect has been given to the stock split. All common stock, option and warrant data has been restated to reflect the stock split.
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
Roanoke, Virginia
March 9, 1998
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.
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
------------------------------ THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, ------------------------------
1996 1997 MARCH 31, MARCH 31,
-------------- -------------- 1997 1998
-------------- --------------
(UNAUDITED) (UNAUDITED)
Operating revenues:
Merchandise sales, net........................ $ 29,045,513 $ 38,996,352 $ 3,616,611 $ 4,901,994
Mailing list rental income.................... 290,569 188,495 59,087 52,994
Membership fee income......................... 231,711 13,056 11,870 --
Shipping income, net of shipping costs........ 418,896 433,947 (23,462) (38,278)
-------------- -------------- -------------- --------------
29,986,689 39,631,850 3,664,106 4,916,710
-------------- -------------- -------------- --------------
Operating costs and expenses:
Cost of goods sold............................ 16,101,851 21,653,476 2,131,043 2,913,920
Catalog production and marketing costs........ 7,864,827 9,539,107 794,933 1,134,658
Selling, general and administrative
expenses.................................... 3,759,736 4,619,167 855,724 5,017,158
-------------- -------------- -------------- --------------
27,726,414 35,811,750 3,781,700 9,065,736
-------------- -------------- -------------- --------------
Income (loss) from operations................... 2,260,275 3,820,100 (117,594) (4,149,026)
Other income (expense):
Interest expense.............................. (325,108) (248,449) (69,476) (38,967)
Interest income............................... 24,490 101,041 38,428 43,261
Other, net.................................... 90,940 (37,265) 24,132 (77,311)
Minority interest............................. (25,462) (25,471) (7,515) (19,713)
-------------- -------------- -------------- --------------
(235,140) (210,144) (14,431) (92,730)
-------------- -------------- -------------- --------------
Income (loss) before income taxes............... 2,025,135 3,609,956 (132,025) (4,241,756)
Income tax expense (benefit) (note 6)........... 767,941 1,437,004 (46,438) (1,689,886)
-------------- -------------- -------------- --------------
Net income (loss)............................... $ 1,257,194 $ 2,172,952 $ (85,587) $ (2,551,870)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
|
See accompanying notes to consolidated financial statements.
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.
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED THREE MONTHS ENDED
------------------------------ ----------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
-------------- -------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................................... $ 1,257,194 $ 2,172,952 $ (85,587) $ (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 85,416 90,340
Minority interest........................................... 25,462 25,471 7,515 19,713
Provision for deferred income taxes......................... (53,161) (90,202) 3,214 106,075
Provision for inventory obsolescence........................ (5,000) 47,000 16,500 36,000
(Increase) decrease in:
Accounts receivable....................................... 245,342 (303,844) 209,602 375,872
Inventories............................................... 119,881 (1,478,268) (53,530) (145,412)
Deferred catalog costs.................................... (418,457) 134,853 (240,071) (190,414)
Income taxes refundable................................... 93,477 -- 175,049 (1,589,137)
Prepaid expenses and other current assets................. (586) (37,862) (66,244) (35,884)
Other assets.............................................. (7,702) 9,555 (43) --
Increase (decrease) in:
Accounts payable.......................................... 335,387 (1,047,147) (2,046,005) (156,517)
Accrued expenses.......................................... 297,258 362,146 (817,321) (925,276)
Customer deposits......................................... 46,269 (738) (704,729) (33,830)
Income taxes payable...................................... 820,396 490,103 (59,647) (1,307,424)
-------------- -------------- ------------- -------------
Net cash provided by (used in) operating activities............... 3,148,240 650,041 (3,575,881) (2,361,938)
-------------- -------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (62,694) (242,238) (44,080) (21,916)
Purchases of software........................................... (49,312) (82,368) (5,610) (692)
Purchase of intangible assets................................... -- (21,058) -- (9,699)
-------------- -------------- ------------- -------------
Net cash used in investing activities............................. (112,006) (345,664) (49,690) (32,307)
-------------- -------------- ------------- -------------
Cash flows from financing activities:
Borrowings under line of credit agreement....................... 6,848,000 2,588,000 296,000 --
Payments under line of credit agreement......................... (6,848,000) (2,588,000) (280,000) --
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) (42,475) (20,773)
Financing costs for long-term debt.............................. -- (14,222) -- --
Common stock options exercised.................................. 18,225 -- -- --
Purchase of common stock........................................ (18,200) (61,750) (61,750) --
Return of capital to limited partners........................... (70,000) (70,000) (17,500) (17,500)
-------------- -------------- ------------- -------------
Net cash used in financing activities............................. (202,913) (936,526) (105,725) (38,273)
-------------- -------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.............. 2,833,321 (632,149) (3,731,296) (2,432,518)
Cash and cash equivalents, beginning of period.................... 1,485,288 4,318,609 4,318,609 3,686,460
-------------- -------------- ------------- -------------
Cash and cash equivalents, end of period.......................... $ 4,318,609 $ 3,686,460 $ 587,313 $ 1,253,942
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Supplemental cash flow information:
Income taxes paid (refunded) during the period.................. $ (92,771) $ 1,037,103 $ 821,200 $ 1,100,600
Interest paid during the period................................. 324,949 242,166 73,502 924
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.
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Plow & Hearth, Inc. 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 Plow & Hearth LP, (collectively "Plow & Hearth"). Plow & Hearth LP was organized to finance the acquisition of 39.549 acres of land and the construction of a 108,000-square foot distribution center/office facility. The distribution center/office facility is leased to The Plow & Hearth, Inc. for a 20-year term. Plow & Hearth LP is owned by The Plow & Hearth, Inc. (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 The Plow & Hearth, Inc., its stockholders and Plow & Hearth LP, the accounts of Plow & Hearth LP have been consolidated with those of The Plow & Hearth, Inc. and all significant intercompany transactions have been eliminated.
The Plow & Hearth LP 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 The Plow & Hearth, Inc., as general partner, received $5,000.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31, 1997 and 1998 have been prepared by Plow & Hearth 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, 1997 and 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
Plow & Hearth 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.
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE--OTHER
Accounts receivable--other consist of amounts due for rental of Plow & Hearth's mailing list and miscellaneous receivables.
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
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PURCHASED SOFTWARE COSTS
Plow & Hearth 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
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $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
------------ ------------
------------ ------------
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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
---------- -----------
---------- -----------
|
Customer mailing lists are being amortized over a period of five years. Amortization expense for the years ended December 31, 1996 and 1997 was $8,466 and $1,053, respectively.
REVENUE RECOGNITION
Merchandise sales, cost of goods sold and shipping income, net of shipping costs, are recognized upon shipment of products. Mailing list rental income is recognized upon notification that another company has used a Plow & Hearth customer name.
Plow & Hearth 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, Plow & Hearth 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
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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
Plow & Hearth 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. Plow & Hearth'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 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
Plow & Hearth 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 Plow & Hearth 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
The Plow & Hearth, Inc. currently has a line of credit with Central Fidelity Bank. Under this agreement, The Plow & Hearth, Inc. 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 The Plow & Hearth, Inc.'s accounts
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED) 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, The Plow & Hearth, Inc. 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. The Plow & Hearth, Inc. was in compliance with these covenants at December 31, 1997.
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 The Plow & Hearth, Inc. 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 Plow & Hearth LP 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 distribution center/office facility including the lease with The Plow & Hearth, Inc. The loan is also unconditionally and fully guaranteed by The Plow & Hearth, Inc. The loan's financial covenants require Plow & Hearth LP to meet a debt coverage ratio of at least 1.10 to 1.00. Plow & Hearth LP was in compliance with this covenant at December 31, 1997.
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED) 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
-------------
-------------
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(3) LEASES
Plow & Hearth 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
---------- ---------
---------- ---------
|
Plow & Hearth 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.
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(3) LEASES (CONTINUED) 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
---------
---------
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(4) COMMON STOCK AND COMMON STOCK OPTIONS
COMMON STOCK
The Plow & Hearth, Inc. and its stockholders are parties to a buy-sell agreement which imposes certain restrictions on the transferability of The Plow & Hearth, Inc.'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 Plow & Hearth, Inc. Any stock offered for resale must first be offered, at the selling price, to The Plow & Hearth, Inc. and the existing stockholders (see note 8).
COMMON STOCK OPTIONS
The Plow & Hearth, Inc.'s stock option 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 PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED) 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 stock option plan included a vesting schedule based on years of service. Effective October 21, 1997, The Plow & Hearth, Inc.'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 Plow & Hearth, Inc. adopted The Plow & Hearth, Inc. amended and restated stock option plan to replace the existing November 13, 1990 stock option plan. The Plow & Hearth, Inc. 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 Plow & Hearth, Inc. 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 Plow & Hearth, Inc. accounts for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense would be recorded on the date of 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, was issued in October 1995 and if fully adopted, changes the methods of recognition of cost on plans similar to those of Plow & Hearth. Adoption of SFAS 123 is optional; however, pro forma disclosures as if
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED) Plow & Hearth 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 Plow & Hearth 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, Plow & Hearth's net income would have been reduced to the pro forma amounts indicated below:
1996 1997
------------- -------------
Net income:
As reported................................................... $ 1,257,194 $ 2,172,952
Pro forma..................................................... 1,248,550 2,166,913
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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 Plow & Hearth matching, at their discretion, 25 percent of the employees' contribution up to 3 percent of the employees' annual compensation. Plow & Hearth incurred $11,910 of expense related to the 401(k) retirement plan for the year ended December 31, 1997. No Plow & Hearth contributions were made in 1996.
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 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
----------- -------------
----------- -------------
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THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 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
----------- ------------
----------- ------------
|
Plow & Hearth 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 Plow & Hearth to concentration of credit risk consist of cash equivalents and accounts receivable. Plow & Hearth's cash equivalents consisted of commercial paper and an overnight repurchase agreement at December 31, 1996 and 1997. Plow & Hearth'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 Plow & Hearth'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 Plow & Hearth's mailing list. Concentrations of credit risk with respect to accounts receivable are limited due to Plow & Hearth's large number of customers and their dispersion throughout geographic regions.
(8) SUBSEQUENT EVENT
On March 9, 1998, certain stockholders of The Plow & Hearth, Inc. 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 The Plow & Hearth, Inc. The transaction is expected to close during April 1998.
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 $ 33,572 $ 3,583(a) $ 257,747
Cost of revenues......................................... 136,966 18,383 1,735(b) 157,084
----------------- ------------ ------------ -----------
Gross profit......................................... 83,626 15,189 1,848 100,663
Operating expenses:
Marketing and sales.................................... 55,417 -- 12,402(c) 67,819
Catalog production and marketing....................... -- 7,916 (7,916)(d) --
Technology and development............................. 1,794 -- 332(e) 2,126
General and administrative............................. 15,832 -- 4,537(f) 20,369
Selling, general and administrative.................... -- 7,766 (7,766)(g) --
Depreciation and amortization.......................... 4,168 -- 1,020(h) 5,188
----------------- ------------ ------------ -----------
Total operating expenses........................... 77,211 15,682 2,609 95,502
----------------- ------------ ------------ -----------
Operating income (loss).................................. 6,415 (493) (761) 5,161
Other income (expense):
Interest income........................................ 1,290 87 -- 1,377
Interest expense....................................... (1,177) (157) (900)(i) (2,234)
Other, net............................................. 1,541 (163) -- 1,378
----------------- ------------ ------------ -----------
1,654 (233) (900) 521
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority
interests.............................................. 8,069 (726) (1,661) 5,682
Provision for income taxes............................... 3,181 (291) (342)(j) 2,548
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................. 4,888 (435) (1,319) 3,134
Minority interests in operations of consolidated
subsidiaries........................................... 186 (26) 170(k) 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.................................................. $ 0.08 $ 0.04
----------------- -----------
----------------- -----------
Diluted................................................ $ 0.07 $ 0.04
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per
common share:
Basic.................................................. 44,120 44,120
----------------- -----------
----------------- -----------
Diluted................................................ 46,610 46,610
----------------- -----------
----------------- -----------
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SEE ACCOMPANYING NOTES.
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 29, 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 $ 33,572 $ 3,583(a) $ 183,372
Cost of revenues......................................... 91,773 18,383 1,735(b) 111,891
----------------- ------------ ------------ -----------
Gross profit........................................... 54,444 15,189 1,848 71,481
Operating expenses:
Marketing and sales.................................... 38,089 -- 12,402(c) 50,491
Catalog production and marketing....................... -- 7,916 (7,916)(d) --
Technology and development............................. 1,128 -- 332(e) 1,460
General and administrative............................. 10,315 -- 4,537(f) 14,852
Selling, general and administrative.................... -- 7,766 (7,766)(g) --
Depreciation and amortization.......................... 2,768 -- 1,020(h) 3,788
----------------- ------------ ------------ -----------
Total operating expenses........................... 52,300 15,682 2,609 70,591
----------------- ------------ ------------ -----------
Operating income (loss).................................. 2,144 (493) (761) 890
Other income (expense):
Interest income........................................ 812 87 -- 899
Interest expense....................................... (720) (157) (900)(i) (1,777)
Other, net............................................. 1,637 (163) -- 1,474
----------------- ------------ ------------ -----------
1,729 (233) (900) 596
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority
interests.............................................. 3,873 (726) (1,661) 1,486
Provision (benefit) for income taxes..................... 1,515 (291) (342)(j) 882
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................. 2,358 (435) (1,319) 604
Minority interests in operations of consolidated
subsidiaries........................................... 38 (26) 170(k) 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.................................................. $ 0.03 $ (0.01)
----------------- -----------
----------------- -----------
Diluted................................................ $ 0.03 $ (0.01)
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per
common share:
Basic.................................................. 44,140 44,140
----------------- -----------
----------------- -----------
Diluted................................................ 46,750 44,140
----------------- -----------
----------------- -----------
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SEE ACCOMPANYING NOTES.
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. of The Plow & Hearth, Inc. as if it occurred on June 30, 1997. Such unaudited pro forma consolidated statements of operations set forth the historical results of operations of 1-800-FLOWERS.COM for the year ended June 28, 1998 and the nine months ended March 29, 1998 and Plow & Hearth for the nine months ended March 29, 1998. The operations of Plow & Hearth for the three months ended June 28, 1998 are included in the operations of 1-800-FLOWERS.COM.
The unaudited pro forma statements of operations have been prepared by management and should be read in conjunction with the historical financial statements of 1-800-FLOWERS.COM and Plow & Hearth. The statements do not purport to be indicative of the results of operations that might have occurred if the Plow & Hearth 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 following pro forma adjustments give effect to the acquisition of Plow & Hearth as if it occurred on June 30, 1997 and include adjustments that reclassify the financial statement presentation of Plow & Hearth to be consistent with the accounting policies of 1-800-FLOWERS.COM, Inc.:
(a) Shipping expense of $3,375,000 and promotional discounts of $208,000 originally recorded as a reduction to revenues reclassified to cost of revenues and marketing and sales.
(b) Shipping expense of $3,375,000 described in (a) and $1,640,000 of fulfillment costs reclassified to marketing and sales.
(c) Catalog production and marketing costs of $7,916,000 reclassified to marketing and sales, $1,640,000 of fulfillment costs described in (b) and $658,000 of credit card clearing fees, $300,000 of fulfillment payroll and $1,680,000 of labor and advertising reclassified from selling, general and administrative expenses and $208,000 of promotional discounts described in (a).
(d) Catalog production and marketing costs of $7,916,000 described in (c).
(e) $332,000 of technology and development costs reclassified from selling, general and administrative expenses.
(f) $4,511,000 of general and administrative expenses reclassified from selling, general and administrative expenses and $26,000 from minority interests.
(g) $3,946,000 charge related to a stock option revaluation reclassified to general and administrative expenses, $565,000 of selling, general and administrative expenses
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED JUNE 28, 1998 AND
THE NINE MONTHS ENDED MARCH 29, 1998
2. PRO FORMA ADJUSTMENTS (CONTINUED) reclassified to general and administrative expenses and $658,000 of credit card clearing fees, $300,000 of fulfillment payroll and $1,680,000 of labor and advertising, described in (c), reclassified from selling, general and administrative expenses, and $285,000 of reclassified depreciation and amortization expense and $332,000 of technology and development costs described in (e).
(h) $285,000 of depreciation and amortization described in (g) and an adjustment of $735,000 to provide for a full-year amortization of $19,600,000 of intangibles acquired which are being amortized over 20 years.
(i) Adjustment of $900,000 to provide additional interest expense incurred on $15,500,000 of borrowings to fund the acquisition at an annual rate of 7.7%. A 1/8% fluctuation in the variable interest rate would result in a change of interest expense of approximately $20,000.
(j) Adjustment of $342,000 to provide the tax benefit for the additional interest expense described in (i).
(k) Adjustment of $144,000 to provide for additional minority interests on the amortization expense described in (h), the interest expense and related tax benefit decribed in (i) and (j), and the reclassification described in (f).
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 the terms of the underwriting agreement, 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.................................................................... 6,000,000
-----------
-----------
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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 850,000 shares from 1-800-FLOWERS.COM and up to an additional 50,000 shares from Christopher G. McCann 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.......... $ $
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The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Mr. Christopher G. McCann assuming full exercise of the underwriters' option to purchase additional shares from Mr. McCann:
Paid by Mr. McCann
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 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, key employees and substantially all 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 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 Mr. O'Connor, a director of 1-800-FLOWERS.COM, full-time and regular part-time employees, friends and persons having business relationships with 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 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.
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.
Each underwriter has also agreed that (a) it has not offered or sold and prior to the date
six months after the date of issue of the shares of class A common stock will not offer or sell any shares of class A common stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (b) it has complied, and will comply, with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the shares of class A common stock in, from or otherwise involving the United Kingdom, and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the shares of class A common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on.
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 $1,500,000.
1-800-FLOWERS.COM has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
[pictures of florists tending to floral arrangements, flowers being delivered to customer and warehouses. The words "We Deliver," with bullet points beneath reading "- 33 owned and 87 franchised retail stores; - BloomNet network of approximately 1,500 independent local florists; - Direct Shipment by third party suppliers; - Advanced fulfillment center for packaging, shipping and inventory control of home and garden merchandise; - Flexible delivery options, including same-day and next-day service.]
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.................. 17
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 35
Management............................ 47
Related Party Transactions............ 55
Principal Stockholders................ 57
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 62
Legal Matters......................... 63
Experts............................... 64
Where You Can Find More Information... 64
Trademarks............................ 64
Index to Consolidated 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.
6,000,000 Shares
1-800-FLOWERS.COM, INC.
Class A Common Stock
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........................................... $ 34,528
NASD filing fee................................................ 15,500
NASDAQ listing fee............................................. 95,000
Legal fees and expenses........................................ 500,000
Accountants' fees and expenses................................. 300,000
Printing expenses.............................................. 350,000
Blue sky fees and expenses..................................... 5,000
Transfer agent and registrar fees and expenses................. 15,000
Miscellaneous.................................................. 184,972
----------
Total.................................................... $1,500,000
----------
----------
|
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 10 shares of the same class. The Registrant has issued the following securities since May 1996:
1. On June 28, 1996, the Registrant issued 8,476.77 shares of class C common stock to James F. McCann as partial repayment for a debt owed by the Registrant to Mr. McCann.
2. 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.
3. On June 28, 1998, the Registrant issued 76,293 shares of class B common stock to James F. McCann as partial repayment for a debt owed by the Registrant to Mr. McCann.
4. On May 20, 1999, the Registrant issued 1,127,546 shares of preferred stock for an aggregate amount of $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(++) 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, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and James F.
McCann.
10.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS, Inc. and
The Chase Manhattan Bank.
|
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(+) Development and Hosting Agreement, dated as of June 18, 1999, between Fry
Multimedia, Inc. and 800-Gifthouse, Inc.
10.10(++) 1997 Stock Option Plan, as amended.
10.11(++) Stockholders' Agreement, dated as of April 3, 1998, among The Plow & Hearth,
Inc., 1-800-FLOWERS, Inc. and the Persons Set Forth on Schedule A thereto.
10.12(++) Amendments to Stockholders' Agreement, dated as of May 17, 1999, among The
Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc. and the Persons Set Forth on
Schedule A thereto.
10.13(++) Employment Agreement, effective as of January 4, 1999, between John W. Smolak
and 1-800-FLOWERS, Inc.
10.14(++) Employment Agreement, effective as of April 3, 1998, between Peter G. Rice
and 1-800-FLOWERS, Inc.
10.15(++) Employment Agreement, effective as of January 18, 1999, between Kerry W. Coin
and 1-800-FLOWERS, Inc.
10.16(++) Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the
persons designated as Investors on the signature pages thereto.
10.17(++) Stock Purchase Agreement, dated as of May 20, 1999, among 1-800-FLOWERS.COM,
Inc., James F. McCann, Christopher G. McCann and the Investors listed on
Schedule A thereto.
10.18(*) 1999 Stock Incentive Plan.
10.19(++) Employment Agreement, effective as of July 1, 1999, between James F. McCann
and 1-800-FLOWERS.COM, Inc.
10.20(++) Employment Agreement, effective as of July 1, 1999, between Christopher G.
McCann and 1-800-FLOWERS.COM, Inc.
10.21 First Amendment to Credit Agreement Waiver and Consent, entered into as of
May 20, 1999, between 1-800-FLOWERS.COM, Inc. and The Chase Manhattan Bank.
10.22 Letter Agreements between 1-800-FLOWERS.COM, Inc. (formerly known as Teleway,
Inc.) and Bayberry Advisors, Inc., dated September 30, 1993, March 8, 1995,
May 8, 1996, May 8, 1997, May 8, 1998 and May 8, 1999.
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.
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(*) To be filed by amendment.
(+) Confidential treatment 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. 3 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 22nd day of July, 1999.
Dated: July 22, 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. 3 to the registration statement has been signed by the following persons in the capacities indicated below:
Dated: July 22, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: July 22, 1999 /s/ JOHN W. SMOLAK
--------------------------------------------
John W. Smolak
Senior Vice President--Finance and
Administration (Principal Financial and
Accounting Officer)
Dated: July 22, 1999 *
--------------------------------------------
Christopher G. McCann
Director, Senior Vice President
Dated: July 22, 1999 *
--------------------------------------------
T. Guy Minetti
Director
Dated: July 22, 1999 *
--------------------------------------------
Jeffrey C. Walker
Director
Dated: July 22, 1999 *
--------------------------------------------
David Beirne
Director
|
II-5
Dated: July 22, 1999 *
--------------------------------------------
Charles R. Lax
Director
Dated: July 22, 1999 *
--------------------------------------------
Kevin J. O'Connor
Director
|
*By: /s/ JOHN W. SMOLAK
--------------------------------
John W. Smolak
Attorney-in-fact
|
II-6
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") as of 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, and have issued our report thereon dated May 20, 1999, except for the second paragraph of Note 12--Capital Transactions as to which the date is , 1999 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is 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.
Ernst & Young LLP
Melville, New York
The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in the second paragraph of Note 12--Capital Transactions to the consolidated financial statements.
/s/ Ernst & Young LLP
Melville, New York
July 22, 1999
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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
Reserve for credits and chargebacks.... 400,000 -- 5,336,000(d) (5,311,000)(e) 425,000
----------- -------------- ---------------- ------------ -----------
$1,332,000 $ 383,000 $ 5,398,000 $(5,311,000) $1,802,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
Year ended June 29,1997:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 359,000 $ 269,000 $ -- $ (119,000)(a) $ 509,000
Reserve for estimated doubtful
accounts--notes receivable......... 185,000 284,000 -- (46,000)(a) 423,000
Reserve for credits and chargebacks.... 400,000 -- 5,016,000(d) (5,016,000)(e) 400,000
----------- -------------- ---------------- ------------ -----------
$ 944,000 $ 553,000 $ 5,016,000 $(5,181,000) $1,332,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
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) --
Reserve for credits and chargebacks.... 310,000 -- 3,908,000(d) (3,818,000)(e) 400,000
----------- -------------- ---------------- ------------ -----------
$ 877,000 $ 319,000 $ 3,908,000 $(4,160,000) $ 944,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
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(a) Reduction in allowance due to write-off of accounts receivable balances.
(b) Reduction in valuation allowance for deferred tax assets.
(c) Increase in reserve due to acquisition of Plow & Hearth.
(d) Recorded as a reduction to revenues.
(e) Reduction in reserve upon authorization of credits and chargebacks.
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, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and
James F. McCann.
10.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS,
Inc. and The Chase Manhattan Bank.
10.5(+) 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.
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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.
10.21 First Amendment to Credit Agreement Waiver and Consent, entered into
as of May 20, 1999, between 1-800-FLOWERS.COM, Inc. and The Chase
Manhattan Bank.
10.22 Letter Agreements between 1-800-FLOWERS.COM, Inc. (formerly known as
Teleway, Inc.) and Bayberry Advisors, Inc., dated September 30, 1993,
March 8, 1995, May 8, 1996, May 8, 1997, May 8, 1998 and May 8, 1999.
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.
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(*) To be filed by amendment.
(+) Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(++) Previously filed.
Exhibit 3.2
AMENDMENT NO. 1 TO
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
1-800-FLOWERS.COM, INC.
(Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware)
1-800-FLOWERS.COM, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated in Delaware, and the date of its filing of its original Certificate of Incorporation with the Secretary of State of Delaware was June 30, 1992. The Certificate of Incorporation was amended and restated on January 12, 1995, and was filed with the Secretary of State of the State of Delaware on January 13, 1995. A Certificate of Amendment to the Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 16, 1995. A Certificate of Amendment to the Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on April 14, 1999. A Second Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 20, 1999. A Third Amended and Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 7, 1999
SECOND: That the Board of Directors duly adopted resolutions proposing to amend the Third Amended and Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and in the best interests of the Corporation and its stockholders, and authorizing the appropriate officers of the Corporation to solicit the written consent of the requisite stockholders, all in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Third Amended and Restated Certificate of Incorporation of the Corporation be amended as follows:
1. Article IV.A is hereby amended and restated in its entirety as follows:
"A. CLASSES OF STOCK.
The total number of shares of stock which the Corporation shall have authority to issue is four hundred and ten million (410,000,000), consisting of ten million shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), and four hundred million (400,000,000) shares of Common Stock, par value $0.01 per share (the "Common Stock"). All of the Preferred Stock shall initially be undesignated. Of the Common Stock, two hundred million (200,000,000) shares shall be classified as Class A Common Stock (the "Class A Common Stock"), and two hundred million (200,000,000) shares shall be classified as Class B Common Stock (the "Class B Common Stock"). As shares of Class B Common Stock are converted into shares of Class A Common Stock as described herein, the number of shares classified as Class B Common Stock shall be reduced and the number of shares classified as Class A Common Stock shall be increased on a one-for-one basis."
2. Article IV.B.2 is hereby deleted in its entirety.
3. Article IV.B.3 is hereby deleted in its entirety.
4. Article IV.C.1 is hereby amended and restated in its entirety as follows:
"C. COMMON STOCK.
STOCK SUBDIVISION, RECLASSIFICATION. Effective at the filing with the Secretary of State of the State of Delaware of this Amendment No. 1 to the Third Amended and Restated Certificate of Incorporation, and without further action on the part of the holders of the Series A Preferred Stock, par value $0.01 per share (the Series A Preferred Stock"), outstanding immediately prior thereto, each share of Series A Preferred Stock shall be automatically converted into one share of Class A Common Stock, subject to the subdivision described herein. Effective at the filing with the Secretary of State of the State of Delaware of this Amendment No. 1 to the Third Amended and Restated Certificate of Incorporation, and without further action on the part of the holders of the outstanding Class A Common Stock, each share of Class A Common Stock outstanding immediately prior thereto (including shares of Class A Common Stock issued upon the automatic conversion of the Series A Preferred Stock as described above) shall thereafter be automatically converted into ten (10) shares of Class A Common Stock, and without further action on the part of the holders of the Class B Common Stock, each share of Class B Common Stock outstanding immediately prior thereto shall thereafter be automatically converted into ten (10) shares of Class B Common Stock."
5. Article VI is hereby amended and restated in its entirety as follows.
"Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the bylaws of the Corporation. The stockholders of the Corporation may not take any action by written consent in lieu of a meeting."
6. The phrase "Subject to Section B.3 of Article IV," beginning Article X is hereby deleted in its entirety.
7. Except as provided in this Amendment No.1, all provisions of the Third Amended and Restated Certificate of Incorporation shall remain unaffected by the filing of this Amendment No. 1 and shall remain in full force and effect.
* * *
FOURTH: That said amendments were duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law.
IN WITNESS WHEREOF, this Amendment No. 1 to the Third Amended and Restated Certificate of Incorporation has been signed by the Chief Executive Officer of the Corporation this ___ day of _____, 1999.
James F. McCann, Chief Executive Officer
Exhibit 10.21
FIRST AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT
This FIRST AMENDMENT TO CREDIT AGREEMENT, WAIVER AND CONSENT (this "FIRST AMENDMENT") is entered into as of May 20, 1999 among 1-800-FLOWERS.COM, INC., formerly known as 1-800-Flowers, Inc., a Delaware corporation (the "COMPANY"), and THE CHASE MANHATTAN BANK, a New York banking corporation (the "LENDER").
WHEREAS, the Company and the Lender entered into a Credit Agreement dated as of March 19, 1999 (the "CREDIT AGREEMENT"), pursuant to which the Lender agreed to make available to the Company a term loan and revolving credit facility;
WHEREAS, the Company anticipates the consummation of a private placement of equity securities and an initial public offering of the Company's common stock pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (collectively, the "Transactions");
WHEREAS, in contemplation of the consummation of such Transactions and in connection with certain changes in the Company's accounting policies that have been implemented in preparation for such Transactions, the Company has requested that the Lender agree to certain amendments to the Credit Agreement, and provide certain waivers and consents in connection therewith, and the Lender has agreed to such request, subject to the terms and conditions of this First Amendment.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS; REFERENCES; INTERPRETATION.
(a) Unless otherwise specifically defined herein, each term used herein (including in the Recitals hereof and in the Consent and Agreement of Guarantors attached hereto) which is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement.
(b) Each reference to "this First Amendment," "hereof," "hereunder," "herein" and "hereby" and each other similar reference contained in the Credit Agreement, and each reference to "the Credit Agreement" and each other similar reference in the other Loan Documents, shall from and after the First Amendment Effective Date refer to the Credit Agreement as amended hereby.
(c) The rules of interpretation set forth in Section 1.02 of the Credit Agreement shall be applicable to this First Amendment.
2. AMENDMENTS AND ADDITIONS TO THE CREDIT AGREEMENT. Subject to the terms and conditions hereof, the Credit Agreement is amended as
follows, effective as of the First Amendment Effective Date (as defined in
Section 6):
(a) AMENDMENTS TO SECTION 1.01 OF THE CREDIT AGREEMENT. The definitions set forth in Section 1.01 of the Credit Agreement are amended as follows:
(i) The second sentence of the definition of "Consolidated EBITDA" is amended so as to read in full as follows:
All of the foregoing categories shall be calculated with respect to the Company and its Subsidiaries and shall be calculated (without duplication) over the four fiscal quarters next preceding the date of calculation thereof other than the calculation of Consolidated EBITDA pursuant to Section 7.13 which shall be calculated for the fiscal quarter of the Company ending most recently prior to the date of determination thereof.
(ii) The definition of "P&H Acquisition Agreement" is amended so as to read in full as follows:
"`P&H Acquisition Agreement' shall mean, collectively, the Stock Purchase Agreement dated March 9, 1998, by and among the Company, P&H and the shareholders of P&H identified therein, and the Purchase Agreement dated March 9, 1998, by and among the limited partners of the P&H Partnership, the Company, P&H Partnership, 1-800-Flowers Acquisition Corp. and Peter G. Rice, in each case as amended by the P&H Amendment Agreements."
(iii) The definition of "Revolving Credit Commitment" is amended such that the reference therein to the figure $12,000,000 is replaced with a reference to the figure $5,000,000.
(iv) The definition of "Revolving Credit Commitment Termination Date" is amended so as to read in full as follows.
"`Revolving Credit Commitment Termination Date' shall mean the earlier of (i) the date of the closing of the Initial Public Offering or (ii) July 3, 2000."
(v) The definition of "Stock Option Plan" is amended so as to read in full as follows:
"`Stock Option Plan' shall mean the P&H Non-Qualified Stock Option Agreement dated as of February 28, 1998 between P&H and the option holders named therein, as amended by the P&H Amendment Agreements."
(vi) The definition of "Stockholders Agreement" is amended so as to read in full as follows:
"`Stockholders Agreement' shall mean the Stockholders Agreement dated April 3, 1998 by and among P&H, the Company, Peter G. Rice and other individuals set forth on Schedule A thereto, as amended by the P&H Amendment Agreements."
(vii) The definition of "Term Loan Maturity Date" is amended so as to read in full as follows:
"`Term Loan Maturity Date' shall mean the earlier of (i) the date of the closing of the Initial Public Offering or (ii) July 3, 2000."
(viii) The definition of "Interest Rate Margin" is hereby amended to delete the text "the fifth Business Day following the day of delivery of the financial statements to the Lender for the third fiscal quarter ending March 28, 1999" and to substitute the date "August 31, 1999" in place thereof.
(ix) The definition of "LC Margin" is hereby amended to delete the text "the fifth Business Day following the date of delivery of the financial statements for the third fiscal quarter ending March 28, 1999" and to insert the date "August 31, 1999" in place thereof.
(x) The definition of "Unused Fee Rate" is hereby amended to delete the text "the fifth Business Day following the date of the delivery of the financial statements for the third fiscal quarter ending March 28, 1999" and to insert the date "August 31, 1999" in place thereof.
(b) ADDITIONS TO SECTION 1.01 OF THE CREDIT AGREEMENT. Section 1.01 of the Credit Agreement is amended by the addition of the following terms:
(i) "First Amendment" shall mean the First Amendment to Credit Agreement dated as of May 20, 1999 by and between the Company and the Lender.
(ii) "First Amendment Effective Date" has the meaning set forth in Section 6 of the First Amendment.
(iii) "Initial Public Offering" shall mean the Company's initial sale of its common stock in a firm commitment underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended, in which the aggregate gross proceeds to the Company (prior to deduction of offering expenses but after deductions of underwriting discounts and commissions) are at least $25,000,000.
(iv) "Liquidity Account" shall mean one or more accounts maintained by the Company with the Lender or an Affiliate of the Lender the contents of which are comprised of cash deposits or Eligible Investments.
(v) "P&H Amendment Agreements" shall mean (a) the First
Amendment to Stockholders' Agreement dated as of March 27, 1999 by and among
P&H, the Company and the Persons listed on the signature pages thereto; (b) the
Second Amendment to Stockholders' Agreement dated as of May 17, 1999 by and
among P&H, the Company and the Persons listed on the signature pages thereto,
(c) the First Master Amendment to the Plow & Hearth, Inc. Nonqualified Stock
Option Agreements dated as of March 27, 1999 by and among P&H and the Persons
listed on the signature pages thereto; (d) the Second Master Amendment to the Plow & Hearth, Inc. Nonqualified Stock Option Agreements dated May 17, 1999 by and among P&H and the Persons listed on the signature pages thereto; and (e) the Master Amendment to the Plow & Hearth, Inc. Incentive Stock Option Agreements dated as of May 17, 1999 by and among P&H and the Persons listed on the signature pages thereto.
(vi) "Recapitalization" shall mean the consummation of the transactions contemplated in the Recapitalization Consent.
(vii) "Recapitalization Consent" shall mean the Consent and Amendment No. 1 to Investment Agreement dated as of May 20, 1999 among Chase Venture Capital Associates, the Company and Mr. James F. McCann.
(viii) "Restated Financial Statements" has the meaning set forth in Section 6 of the First Amendment.
(ix) "Second Restated Certificate" shall mean the Second Amended and Restated Certificate of Incorporation of the Company.
(x) The definition of "Total Commitment" is amended so as to read as follows:
"`Total Commitment' shall mean, at any time after the First Amendment Effective Date, the aggregate of the Commitments in effect at such time, which, as of the First Amendment Effective Date, shall be $23,000,000."
(c) AMENDMENT TO SECTION 2.02 OF THE CREDIT AGREEMENT. The first sentence of Section 2.02 of the Credit Agreement is amended such that the reference therein to EXHIBIT A is replaced with a reference to EXHIBIT A to the First Amendment.
(d) AMENDMENT TO SECTION 2.04 OF THE CREDIT AGREEMENT. Section 2.04 of the Credit Agreement is amended as follows:
(i) The first sentence of Section 2.04 of the Credit Agreement is amended such that the reference therein to EXHIBIT B is replaced with a reference to EXHIBIT B to the First Amendment.
(ii) The fourth sentence of Section 2.04 of the Credit Agreement is amended so as to read in full as follows:
"The Term Note shall (a) be dated the Closing Date, (b) be stated to mature on the Term Loan Maturity Date and (c) be payable as to principal in full on the Term Loan Maturity Date."
(e) AMENDMENT TO SECTION 2.05 OF THE CREDIT AGREEMENT. Section 2.05 of the Credit Agreement is amended by the addition of a new subsection (e) thereto, to read in full as follows:
"(e) LETTERS OF CREDIT OUTSTANDING ON REVOLVING CREDIT COMMITMENT TERMINATION DATE. If Letter of Credit shall remain outstanding on the Revolving Credit Commitment Termination Date, then on the Revolving Credit Commitment Termination Date the Company shall provide Cash Collateral to the Lender, pursuant to a cash collateral agreement having
terms that are reasonably satisfactory to the Lender and the Company, in the face amount remaining undrawn on the Revolving Credit Commitment Termination Date of such outstanding Letter of Credit.
(f) AMENDMENT TO SECTION 7.10 OF THE CREDIT AGREEMENT. Section 7.10 of the Credit Agreement is amended by the addition of the following sentence at the end thereof:
Notwithstanding the foregoing provisions of this Section 7.10, the Company or any of its Subsidiaries may make such changes in its accounting policies and procedures which underlie or are reflected in the Restated Financial Statements, provided such changes are permitted by and in accordance with GAAP.
(g) AMENDMENT TO SECTION 7.13 OF THE CREDIT AGREEMENT. Section 7.13 of the Credit Agreement is amended so as to read in full as follows:
"SECTION 7.13. FINANCIAL CONDITION COVENANT.
(a) CONSOLIDATED EBITDA. Permit, on any date of determination, the aggregate balance in the Liquidity Account to be less than $40,000,000, unless the Consolidated EBITDA for the fiscal quarter of the Company ending most recently prior to such date of determination shall have exceeded the amount set forth below in reference to such fiscal quarter (in which case it shall not be required that any minimum Liquidity Account balance be maintained) (bracketed amount ([ ]) is negative):
FISCAL QUARTER MINIMUM CONSOLIDATED
EBITDA
-------------- --------------------
June 27, 1999 $4,000,000
September 26, 1999 [$2,800,000]
December 26, 1999 $4,000,000
March 26, 2000 $950,000
July 2, 2000 $8,100,000
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(b) MAXIMUM UNFUNDED CONSOLIDATED CAPITAL EXPENDITURES. Permit
Unfunded Consolidated Capital Expenditures of the Company and its
Subsidiaries to exceed $5,000,000 in the aggregate during the period
commencing March 28, 1999 through July 2, 2000; provided, however, the
Company shall not be subject to the foregoing limitation so long as the
aggregate balance in the Liquidity Account is $40,000,000 or greater.
(h) AMENDMENT TO SECTION 7.15 OF THE CREDIT AGREEMENT. Section 7.15 of the Credit Agreement is amended by the addition of the following sentence at the end thereof:
Notwithstanding the foregoing provisions of this Section 7.15, this Section
7.15 shall not (x) restrict the Company or any Subsidiary of the Company from consummating any redemption, repurchase of, or payment or other distribution in respect of, any capital stock of the Company or any such Subsidiary (or any warrant or option for the purchase thereof) provided for in Section 2.1 of the Recapitalization Consent as in effect on the date hereof or (y) restrict the Company from declaring or paying any dividend or distribution or otherwise making any payment or distribution on account of any capital stock of the Company to the extent provided in Article IV of the Second Restated Certificate as in effect on the date hereof.
(i) AMENDMENT TO SECTION 7.16 OF THE CREDIT AGREEMENT. Section 7.16 is amended by the addition of the following sentence at the end thereof:
Notwithstanding the foregoing provisions of this Section 7.16,
nothing contained in this Section shall restrict the Company from
(x) entering into that certain Investors' Rights Agreement dated as
of May 20, 1999 with Mr. James F. McCann and Mr. Christopher G.
McCann and the persons designated as Investors on the signature
pages thereto or (y) consummating the transactions contemplated in
Section 2.1 of the Recapitalization Consent or the First Amendment.
3. WAIVERS UNDER LOAN DOCUMENTS. Subject to the terms and conditions set forth herein, the Lender hereby irrevocably grants the following waivers in respect of the Loan Documents:
(a) The Lender hereby irrevocably waives any noncompliance prior to
the First Amendment Effective Date with the covenants set forth in Section 7.13
of the Credit Agreement and any Default or Event of Default arising as a result
of any such noncompliance; provided, however that (i) Consolidated Net Income
for the nine month period ended March 28, 1999 was not less than [$7,600,000]
(excluding the Company's redeemable Class C Common Stock dividends) and (ii)
Consolidated Net Worth (calculated inclusive of the Company's Class C Common
Stock) at March 28, 1999 was not less than $10,900,000 (bracketed amount ([ ])
is negative).
(b) The Lender hereby irrevocably waives any breach of or noncompliance with any representation, warranty, covenant or other provision of any Loan Document and any Default or Event of Default in each case otherwise arising at any time prior to or on or after the First Amendment Effective Date as a result of the restatement of the financial statements of the Company and its Subsidiaries reflected in the Restated Financial Statements or as a result of the implementation of the changes in accounting policies and procedures underlying or reflected in such restatement.
4. CONSENTS. Notwithstanding the terms and any provisions in the Loan Documents to the contrary, the Lender hereby consents to the consummation of the transactions contemplated in Section 2.1 of the Recapitalization Consent.
5. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Lender as follows:
(a) No Default or Event of Default has occurred and is continuing after giving effect to Sections 2, 3 and 4 of the First Amendment.
(b) The execution, delivery and performance by the Company of this First Amendment and the Credit Agreement, as amended by this First Amendment, have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, or notice to or action by, any Person (including any Governmental Authority) in order to be effective and enforceable.
(c) This First Amendment and the Credit Agreement, as amended by this First Amendment, constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with their respective terms.
(d) The Restated Financial Statements were prepared in conformity with Generally Accepted Accounting Principles, applied on a consistent basis (after giving effect to the changes in accounting policies and procedures underlying or reflected in the Restated Financial Statements), and present fairly the consolidated financial condition and consolidated results of operations of the Company and its Subsidiaries as of the dates of such financial statements and for the periods to which they relate.
6. CONDITIONS OF EFFECTIVENESS.
(a) The effectiveness of Sections 2, 3 and 4 of this First Amendment shall be subject to the satisfaction or waiver of each of the following conditions precedent on or prior to May 20, 1999, the date on which all such conditions shall have been satisfied or waived being the "First Amendment Effective Date":
(i) The Company shall have executed and delivered to the Lender an Amended and Restated Revolving Credit Note, substantially in the form of EXHIBIT A hereto, in exchange for the existing Revolving Credit Note, endorsed to reflect cancellation thereof, which Lender shall promptly deliver to the Company after the First Amendment Effective Date.
(ii) The Company shall have executed and delivered to the Lender an Amended and Restated Term Note, substantially in the form of EXHIBIT B hereto, in exchange for the existing Term Note, endorsed to reflect cancellation thereof, which Lender shall promptly deliver to the Company after the First Amendment Effective Date.
(iii) The Lender shall have received from each Guarantor an executed counterpart of the attached Consent and Agreement of Guarantor.
(iv) The Lender shall have received the following (collectively the "Restated Financial Statements"): (i) the audited restated consolidated balance sheet of the Company and its Subsidiaries and the related restated consolidated statement of income, retained earnings and cash flow of the Company and its Subsidiaries for the fiscal year ended June 28, 1998, which shall have been
audited by Ernst & Young, independent certified public accountants, as reflected in an audit report dated on or about the First Amendment Effective Date and (ii) the audited restated consolidated balance sheet of the Company and its Subsidiaries and the related restated consolidated statement of income, retained earnings and cash flow of the Company and its Subsidiaries for the nine-month fiscal period ended March 28, 1999, which shall have been audited by Ernst & Young, independent certified public accountants, as reflected in an audit report dated on or about the First Amendment Effective Date and which nine month statements shall indicate that (i) Consolidated Net Income for the nine month period ended March 28, 1999, was not less than [$7,600,000] (excluding the Company's redeemable Class C Common Stock dividends) and (ii) Consolidated Net Worth (calculated inclusive of the Company's Class C Common Stock) at March 28, 1999, was not less than $10,900,000 (bracketed amount ([ ]) is negative).
(v) The Lender shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of the Company dated the First
Amendment Effective Date certifying that the representations and warranties in
Section 5 hereto are true and correct as of the First Amendment Effective Date.
(vi) The representations and warranties by the Company and each of its Subsidiaries pursuant to the Credit Agreement and the other Loan Documents to which each is a party shall be true and correct in all material respects on and as of the First Amendment Effective Date, after giving effect to Sections 2, 3 and 4 of the First Amendment, with the same effect as though such representations and warranties had been made on and as of such date unless such representation is as of a specific date, in which case, as of such date.
(b) From and after the First Amendment Effective Date, each of the outstanding Term Note and the outstanding Revolving Credit Note shall be superseded and replaced by each of the Amended and Restated Term Note and the Amended and Restated Revolving Credit Note, respectively, both being delivered pursuant to Section 6(a) of this First Amendment. Both the previously outstanding Term Note and previously outstanding Revolving Credit Note will be deemed cancelled upon the occurrence of the First Amendment Effective Date. Except as expressly amended or otherwise modified pursuant hereto, the Credit Agreement and each other Loan Document shall remain unchanged and in full force and effect and is hereby ratified and confirmed in all respects.
(c) The Lender will notify the Company of the occurrence of the First Amendment Effective Date.
7. MISCELLANEOUS.
(a) The Company acknowledges and agrees that the execution and delivery by the Lender of this First Amendment shall not be deemed to create a course of dealing or an obligation to execute similar waivers or amendments under the same or similar circumstances in the future.
(b) This First Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights and obligations under this First Amendment without the prior written consent of the Lender.
(c) This First Amendment shall be governed by and construed in accordance with the law of the State of New York without regard to principles of conflicts or choice of law.
(d) This First Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Lender or the Company of a facsimile transmitted document purportedly bearing the signature of the Lender or the Company shall bind the Lender or the Company, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Lender to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Lender.
(e) This First Amendment contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein. This First Amendment supersedes all prior drafts and communications with respect hereto or thereto. This First Amendment may not be amended except in accordance with the Credit Agreement.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.
1-800-FLOWERS.COM, INC.
THE CHASE MANHATTAN BANK
CONSENT AND AGREEMENT OF GUARANTORS
Each of the undersigned, in its capacity as a Guarantor, acknowledges that its consent to the foregoing First Amendment to Credit Agreement (the "FIRST AMENDMENT") is not required, but each of the undersigned nevertheless does hereby consent to the foregoing First Amendment and to the documents and agreements referred to therein. Nothing herein shall in any way limit any of the terms or provisions of the Guaranty of the undersigned or the each of the Pledge Agreements executed by the undersigned in the Lender's favor, or any other Loan Document executed by the undersigned (as the same may be amended from time to time), all of which are hereby ratified and affirmed in all respects.
GUARANTORS:
800-FLOWERS, INC.
1-800-FLOWERS RETAIL INC.
FRESH INTELLECTUAL PROPERTIES, INC.
800-GIFTHOUSE, INC.
1-800-FLOWERS TEAM SERVICES, INC.
TELEWAY, INC.
BLOOMLINK SYSTEMS, INC.
1-800-FLOWERS ACQUISITION CORP.
ST. CLAIRE FLORAL CO., INC.
FLORAL WORKS, INC.
AMALGAMATED CONSOLIDATED ENTERPRISES, INC.
THE PLOW & HEARTH, INC.
C.M. CONROY COMPANY, INC.
CONROY'S ACQUISITION CORPORATION
CONROY'S, INC.
Title: Treasurer and Vice President-Finance
FLORISTS' CAPITAL CORPORATION
Title: Treasurer and Vice President-Finance
Exhibit 10.22
BAYBERRY ADVISORS, INC.
10 PLATEAU CIRCLE WEST
BRONXVILLE, NEW YORK 10708
(914) 793-7570
September 30, 1993
Mr. James McCann
President
Teleway, Inc.
1600 Stewart Avenue
Westbury, New York 11590
Dear Mr. McCann:
This will confirm the agreement between Bayberry Advisors, Inc. ("Bayberry") and Teleway, Inc. (the "Company") as follows:
1. The Company has engaged Bayberry, effective as of September 15, 1993, to provide financial advisory services to the Company, on a non-exclusive basis, including:
(a) analysis and evaluation of the Company's business and advice to management of the Company of the results of these analyses;
(b) assistance to the Company in its analysis, evaluation and negotiation of any proposed financing or restructuring of the Company, including any proposed joint venture, merger, acquisition of assets or business by the Company;
(c) with respect to any such joint venture, merger, or any purchase of assets or business, Bayberry will assist in the analysis and presentation of all financing bids or proposals with respect to any acquisition transaction by the Company, the negotiation of financial aspects of such transaction, and, if, and to the extent requested by the Company, the closing and consummation of any proposed transaction(s); and
(d) to otherwise assist the Company in the further development of its business plan and/or specific projects, as from time to time agreed to by the parties.
2. Bayberry has accepted, effective as of September 15, 1993, the engagement described in Paragraph 1 and in that connection, agrees to keep and maintain all material, non-public information concerning the Company confidential, and disclose such information only as contemplated by this Agreement or as required by law;
3. The Company acknowledges and agrees that Bayberry intends to make proposals and introduce potential financial transactions and investors to the Company which it believes suitable for the Company and in the Company's best interests under the specified circumstances. However, the Company acknowledges that Bayberry makes no direct or implied representation, warranty, or promise with respect to the ultimate success of any financial or other proposal or the consummation of any particular financing or other transaction, or any other result, financial or otherwise, which might be obtained by the Company by implementing such any proposals, or considering any such proposed transaction, or by accepting any such investor. The evaluation and actual implementation of any such proposals or acceptance of any such investor shall be the sole decision and responsibility of the Company's management and shareholders.
4. The Company may make available to Bayberry all information concerning the business, assets, operations and financial condition of the Company which Bayberry reasonably requests in connection with the services performed by Bayberry hereunder. Bayberry may rely upon the accuracy and completeness of all such information without independent verification.
5. The Company may refuse to discuss or participate in any transaction with any party for any reason whatsoever and may terminate negotiations with any party at any time.
6. As compensation for its services hereunder, the Company shall pay Bayberry as follows:
(a) An annual retainer of $120,000 payable semi-annually on September 15 and March 15 of each year during the term of this Agreement; Bayberry acknowledges that it has received the first payment of $60,000.
(b) In addition, the Company will also pay to Bayberry a mutually agreed upon transaction fee upon the consummation of any transaction out of the ordinary course of the Company's business which results from the services provided by Bayberry [and such services were necessary for the success of the transaction], if such transaction is consummated during the term of Bayberry's engagement hereunder or within 18 months after the effective date of termination of this Agreement; the foregoing shall not apply, however, to any transaction involving Conroy's Flowers-to-Go, or Chemical Venture Partners, which the parties agree are to be covered by the annual retainer provided for in Section 6(a) above.
7. The Company shall promptly reimburse Bayberry, upon receipt of an invoice therefor, for Bayberry's out-of-pocket expenses incurred during the period of its engagement hereunder; provided that professional fees and disbursements shall not be reimbursable if paid to a professional retained without the Company's approval.
8. The Company shall indemnify Bayberry and hold it harmless as provided in Appendix A hereto, which is incorporated herein by reference.
9. For a period of two (2) years after the expiration or termination of this Agreement (or any extension or renewal thereof) Bayberry shall not provide financial advisory services to any person or entity which is engaged in the floral or gift giving industry.
10. Any advice provided by Bayberry under this Agreement shall not be disclosed publicly or made available to third parties without Bayberry's prior approval.
11. The term of Bayberry's engagement hereunder shall be a period of two
(2) years from September 15, 1993. The provisions of Paragraphs 6
through 9, shall survive any expiration or termination of this
Agreement (or any extension or renewal thereof).
12. This Agreement may not be amended or modified except in writing. This Agreement shall be governed and construed in accordance with the laws of the State of New York.
If the foregoing correctly sets forth the understanding and agreement between Bayberry and the Company, please so indicate in the space provided for that purpose below, whereupon this letter shall constitute a binding agreement as of the date first above written.
BAYBERRY ADVISORS, INC.
By: /s/ T. GUY MINETTI
------------------------------------
T. Guy Minetti
|
AGREED AND ACCEPTED:
TELEWAY, INC.
By: /s/ JAMES McCANN ---------------------------------- James McCann, President |
APPENDIX A
A. The Company shall:
(1) Indemnify Bayberry and hold it harmless against any losses,
claims, damages or liabilities to which Bayberry may become
subject: (a) arising in any manner out of or in connection
with (i) actions taken or omitted to be taken (including any
untrue statements made or statements omitted to be made) by
the Company, or (ii) actions taken or omitted to be taken by
Bayberry in conformity with either (x) instructions of the
Company or (y) actions taken or omitted to be taken by the
Company; or (b) otherwise arising in any manner out of or in
connection with Bayberry's rendering of services hereunder,
unless (in the case of indemnification pursuant to this clause
(b) it is finally judicially determined that such losses,
claims, damages or liabilities arose out of the gross
negligence or bad faith of Bayberry; and
(2) Reimburse Bayberry for any legal or other expenses as reasonably incurred by it in connection with investigating, preparing to defend or defending any lawsuits, claims or other proceedings arising in any manner out of or in connection with Bayberry's rendering of services hereunder.
The Company shall not be liable under this paragraph A with respect to any claim made against Bayberry, unless Bayberry shall have given the Company reasonable written notice of, and an opportunity to defend, any such claim. If any action, suit or proceeding shall be commenced against, or any claim or demand be asserted against Bayberry, as a condition precedent to demanding identification under this paragraph A, Bayberry shall promptly notify the Company in writing. The Company shall have the right to assume the entire control of, including the selection of counsel, subject to the right of Bayberry to participate (at its expense and with counsel of its choice) in, the defense, compromise or settlement thereof, and in connection therewith, Bayberry shall cooperate fully in all respects with the Company in any such defense, compromise or settlement thereof, including, without limitation, the selection of counsel. The Company will not compromise or settle any such action, suit, proceeding, claim or demand without the prior written consent of Bayberry, which consent will not be unreasonably withheld or delayed. So long as the Company is defending in good faith any such claim or demand asserted by a third party against Bayberry, Bayberry shall not settle or compromise such claim or demand without the prior written consent of the Company, which consent will not be unreasonably withheld or delayed. Bayberry shall make available to the Company or its agents all records and other materials in Bayberry's possession reasonably required by it for its use in contesting any third party claim or demand, then Bayberry may defend, through counsel of its own choosing, such action, suit, proceeding, claim or demand and (so long as Bayberry gives the Company at least 15 days' notice of the terms of the proposed settlement thereof and permits the Company to then undertake the defense thereof if the Company objects to the proposed settlement) to settle such action, suit, proceeding, claim or demand and to recover from the Company under this Paragraph A.
The Company agrees that the indemnification and reimbursement commitments set forth in this Paragraph A shall apply whether or not Bayberry is a formal party to any such lawsuits, claims or other proceedings, that Bayberry is entitled to retain separate counsel of its choice in connection with any of the matters to which such commitments relate and that such commitments shall extend upon the terms set forth in this paragraph to any controlling person, director, officer, employee or agent of Bayberry.
B. The Company and Bayberry agree that if any indemnification or reimbursement sought pursuant to the preceding Paragraph A is finally judicially determined to be unavailable (except with respect to indemnification pursuant to Paragraph A(1) above for the reasons specified in Paragraph A(1) above), then (whether or not Bayberry is the person entitled to indemnification or reimbursement) the Company and Bayberry shall contribute to the loses, claims, liabilities, damages and expenses for which such indemnification or reimbursement is held unavailable in such proportion as is appropriate to reflect the relative benefits to the Company, on the one had, and Bayberry, on the other, in connection with the transaction contemplated herein, subject to the limitation that in any event Bayberry's aggregate contribution to all losses, claims, liabilities, damages and expenses with respect to which contribution is available hereunder shall not exceed the amount f fees actually received by Bayberry hereunder. It is hereby agreed that the relative benefits to the Company, on the one hand, and Bayberry, on the other, with respect to any transaction or proposed transaction contemplated herein shall be deemed to be in the same proportion as (i) the total value of the transaction contemplated herein bears to (ii) the fee paid to Bayberry with respect to such transaction.
BAYBERRY ADVISORS, INC.
10 PLATEAU CIRCLE WEST
BRONXVILLE, NEW YORK 10708
(914) 793-7570
March 8, 1995
Mr. James McCann
President Teleway, Inc.
1600 Stewart Avenue
West bury, New York 11590
Dear Mr. McCann:
This letter shall serve an addendum to the September 30, 1993 Letter Agreement (the "Agreement") between Bayberry Advisors, Inc. ("Bayberry") and Teleway, Inc. (the "Company") covering certain financial services provided to Teleway by Bayberry. The parties hereby agree to the following changes to the Agreement:
(1) Section 1. - add as section (e); to assist Teleway in effecting its retail expansion plan through (1) the acquisition of retail florists (2) the franchising or licensing of the 1-800 Flowers name to retail florists or (3) any other such venture under which 1-800 Flowers expands its retail distribution.
(2) Section 6. - add as section (e): with respect to the services provided under Section 1. (3) above, Teleway will pay Bayberry an additional fee of $120,000 payable monthly.
All other terms and conditions of the Agreement shall remain in force and will continue for one year from the date of his addendum.
If the foregoing correctly sets forth the understanding and agreement between Bayberry and the Company, please so indicate by signing below, whereby this addendum shall constitute a binding agreement as of the date first written above.
BAYBERRY ADVISORS, INC.
By: /s/ T. Guy Minetti
AGREED AND ACCEPTED;
|
TELEWAY, INC.
By:
President
BAYBERRY ADVISORS, INC.
10 PLATEAU CIRCLE WEST
BRONXVILLE, NEW YORK 10708
(914) 793-7570
May 8, 1996
Mr. James McCann
President Teleway, Inc.
1600 Stewart Avenue
West bury, New York 11590
Dear Mr. McCann:
This letter shall serve as an addendum to the September 30, 1993 Letter Agreement and the March 8, 1995 addendum thereto (collectively, the "Agreement") between Bayberry Advisors, Inc. ("Bayberry") and Teleway, Inc. (the "Company") covering certain financial services provided to the Company by Bayberry. It is understood herein that 1-800 Flowers, Inc. is the successor to Teleway and that all references to the "Company" are references to 1-800 Flowers, Inc.
It is hereby agreed that both parties wish to extend the financial services covered in the Agreement for a period f one year from the date hereof. It is further agreed that the compensation for such services will be an annual retainer of $100,000 payable semi-annually on May 15, 1996 and November 15, 1996.
All other terms and conditions of the agreement shall remain in force and will continue for one year form the date of this letter.
If the foregoing correctly sets forth the understanding and agreement between Bayberry and the company, please so indicate by signing below.
BAYBERRY ADVISORS, INC.
By: /s/ T. Guy Minetti
President
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AGREED AND ACCEPTED;
1-800 FLOWERS, INC.
By:
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated May 20, 1999, except for the second paragraph of Note 12--Capital Transactions as to which the date is , 1999, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-78985) and related Prospectus of 1-800-FLOWERS.COM, Inc. dated July 22, 1999.
Ernst & Young LLP
Melville, New York
The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 12--Capital Transactions to the consolidated financial statements.
/s/ Ernst & Young LLP
Melville, New York
July 22, 1999
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EXHIBIT 23.3
ACCOUNTANTS' CONSENT
The Board of Directors
1-800-FLOWERS.COM, Inc.
We consent to the use of our report on the consolidated financial statements of The Plow & Hearth, Inc., included herein and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP Roanoke, Virginia July 22, 1999 |