UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 2, 2000 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26841 1-800-FLOWERS.COM, Inc. (Exact name of registrant as specified in its charter) DELAWARE 11-3117311 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 Stewart Avenue, Westbury, New York 11590 (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (516) 237-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A common stock, $0.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of voting common stock held by non-affiliates of the Registrant, based on the closing price of the Class A common stock on September 25, 2000 as reported on the Nasdaq National Market, was approximately $62,828,000. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The Registrant does not have any non-voting common equity outstanding. 26,327,298 (Number of shares of class A common stock outstanding as of September 25, 2000) 37,858,615 (Number of shares of class B common stock outstanding as of September 25, 2000) DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders (the Definitive Proxy Statement), to be filed with the SEC within 120 days of July 2, 2000, are incorporated by reference into Part III of this Report.
1-800-FLOWERS.COM, INC. FORM 10-K For the fiscal year ended July 2, 2000 INDEX <TABLE> <CAPTION> <S> <C> <C> <C> PART I ITEM 1. Business 1 ITEM 2. Properties 20 ITEM 3. Legal Proceedings 20 ITEM 4. Submission of Matters to a Vote of Security Holders 20 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 ITEM 6. Selected Financial Data 24 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 34 ITEM 8. Financial Statements and Supplementary Data 35 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III ITEM 10. Directors and Executive Officers of the Registrant 35 ITEM 11. Executive Compensation 35 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 35 ITEM 13. Certain Relationships and Related Transactions 35 Part IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36 SIGNATURES 38 </TABLE>
PART I THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE COMPANY'S CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM, INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED ELSEWHERE IN THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. ITEM 1. BUSINESS THE COMPANY 1-800-FLOWERS.COM, Inc. is a leading multi-channel source of thoughtful gift products, offering an extensive array of fresh-cut flowers, plants, gift baskets, gourmet foods, home decor and garden merchandise and other unique products. With one of the most recognized brands in retailing and a history of successfully integrating technologies and business innovations, 1-800-FLOWERS.COM has evolved into a "next age" retailer providing convenient, multi-channel access for customers via the Internet, telephone, catalogs and retail stores. The Company's web site (www.1800flowers.com) has been rated the #1 online gift site by Gomez Advisors, ClicksGuide.com and other online e-commerce rating agencies. As of July 2, 2000, the Company had sold its products to approximately 9.3 million customers, of which 2.7 million were added in the previous twelve months. We offer more than 4,000 varieties of fresh-cut and seasonal flowers, plants and floral arrangements and more than 7,000 stock keeping units ("SKUs") of gifts, gourmet foods and home and garden products, including garden accessories and casual lifestyle furnishings. We are committed to providing our customers the best possible shopping experience through superior service and a 100% satisfaction guarantee. In 1992, Teleway, Inc. was formed under the laws of the State of Delaware and acquired a majority of the outstanding shares of the common stock of 800-FLOWERS, Inc., a Texas corporation, under which entity the telemarketing business was operated. In 1995, Teleway, Inc. changed its name to 1-800-FLOWERS, Inc. and in 1996, 800-FLOWERS, Inc. was merged into 1-800-FLOWERS, Inc. Subsequently, in 1999, 1-800-FLOWERS, Inc. changed its name to 1-800-FLOWERS.COM, Inc. In August 1999, in order to provide the capital required to further the Company's strategy of becoming the leading multi-channel retailer of thoughtful gifts for all occasions, the Company completed its initial public offering ("IPO"), raising net proceeds of $114.8 million through the issuance of 6 million shares of its Class A common stock. The Company had previously raised net proceeds of approximately $101.6 million through a private placement of the Company's preferred stock in May 1999 to Benchmark Capital Partners, SOFTBANK America, Inc. and Waelinvest S.A. References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" and the "Company" refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's principal offices are located at 1600 Stewart Avenue, Westbury, New York, 11590 and its telephone number at that location is (516) 237-6000. THE ORIGINS OF 1-800-FLOWERS.COM The Company began when James F. McCann, its Chairman and Chief Executive Officer, acquired a single retail florist in New York City, which he subsequently expanded to a 14-store chain. Thereafter, the Company modified its business strategy to take advantage of the rapid emergence of toll-free calling. The Company acquired the right to use the toll-free 1
telephone number 1-800-FLOWERS, adopted it as its corporate identity and began to aggressively build a national brand around it. The Company believes it was one of the first companies to embrace this new way of conducting business. To support the growth of its toll-free business and to provide superior customer service, the Company began developing an operating infrastructure that incorporated the best available technologies. Over time, the Company 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 the Company to deliver products reliably nationwide on a same-day or next-day basis and to market pre-selected, high-quality floral products, the Company created BloomNet, a nationwide network of independent local florists selected for their high-quality products, superior customer service and order fulfillment and delivery capabilities. In the early 1990s, the Company recognized the emergence of the Internet as a significant strategic opportunity and moved aggressively to embrace this new medium. By taking advantage of its previous investments in its infrastructure, the Company was able to quickly develop and implement an online presence. As a result, 1-800-FLOWERS.COM was one of the first companies to market products online through CompuServe beginning in 1992 and America Online, Inc. ("AOL") beginning in 1994 (keyword: flowers). In April 1995, the Company opened its fully functional, e-commerce Web site (www.1800flowers.com) and subsequently entered into strategic relationships with AOL, Yahoo! and Microsoft Network, among others, to build its online brand and customer base. The Company's online presence has enabled it to expand the number and types of products it can effectively offer. Since 1995, the Company has broadened its product offerings of flowers, gourmet foods and gifts and added complementary home and garden merchandise through its April 1998 acquisition of The Plow & Hearth, Inc. ("Plow & Hearth"). The Company further expanded its gourmet food line through its November 1999 acquisition of GreatFood.com, Inc. ("GreatFood.com"), the #1 online destination (Time magazine 12/99) for gourmet food and gift products. As a result, the Company has developed relationships with customers who purchase products not only for gifting occasions but also for everyday consumption. 1-800-FLOWERS.COM TODAY The Company believes its success in selling floral, gift, gourmet food and home and garden products is attributable to the following key elements of its business: BRAND. The Company believes that 1-800-FLOWERS is one of the most recognized brands in the floral industry. The strength of its brand has enabled the Company to extend its product offerings to complementary products, including specialty gifts, gourmet foods, and home and garden merchandise, which has attracted a significant number of new customers. The Company is establishing its brand as a source for thoughtful gifting and will continue to introduce products and services consistent with this mission. The Company continues to invest heavily in building its brand through strategic online relationships and extensive marketing, advertising and public relations programs. The Company believes its brand is characterized by: o Convenience. Customers may purchase floral, gift, gourmet food and home and garden products online or by calling the Company's toll-free telephone number from their home or office 24 hours a day, seven days a week. The Company offers a variety of delivery options, including same-day or next-day service throughout the world. o Quality. High-quality products are critical to the Company's continued brand strength. The Company offers its customers a 100% satisfaction guarantee on all of its products. o Selection. Over the course of a year, the Company offers more than 4,000 varieties of fresh-cut and seasonal flowers, plants and floral arrangements, and more than 7,000 SKUs of gifts, gourmet foods and home and garden products, including garden accessories and casual lifestyle furnishings. 2
o Customer Service. The Company ensures a high level of customer service by training its agents to assist its customers over the telephone and online to select the appropriate flowers or gifts and to monitor order fulfillment. PRODUCT SELECTION. The Company continuously expands its product offerings to provide a better shopping experience for its customers. The Company's merchandising team works closely with manufacturers and suppliers to select and design its principal floral, gift, gourmet food and home and garden merchandise as well as other products that meet the seasonal and other socially expressive needs of its customers. Because the Company offers a wide selection of products, it creates the opportunity to have a relationship with customers who purchase products not only for gifting occasions but also for everyday consumption. CUSTOMER RELATIONSHIPS. Through direct contact with its customers, the Company can, where appropriate and allowed by law and its privacy policy, collect information and maintain a database about its 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. The Company uses this information to improve its customers' experience 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. As of July 2, 2000, the Company's total database of customers numbered approximately 9.3 million, 2.2 million of which have transacted business with the Company online. The Company also gathers information about the recipients of its products, including their name, address, telephone number and the products received. The Company markets its products to businesses for gifting, incentive and reward programs. The Company currently provides many of its large corporate customers with an account manager, a team of floral and gifting coordinators and a customized, password-protected area of its Web site. TECHNOLOGY INFRASTRUCTURE. The Company believes it has been and continues to be a leader in implementing new technologies and systems to give its customers the best possible purchasing experience, whether online or over the telephone. The Company's Web site has been designed to be secure, fast and easy to use. To serve its telephone customers, the Company has implemented a centrally managed telecommunications network. The Company processes 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, the Company's customer service representatives are electronically linked to this system, enabling them to facilitate placement of an order and subsequently track customer and order information. FULFILLMENT CAPABILITIES. Fresh-cut and seasonal flowers and floral arrangements are perishable and often sent as gifts. A majority of the Company's customers' purchases of floral and floral-related gift products are fulfilled through one of 1,500 fulfillment centers including the BloomNet network of independent florists and the Company's owned or franchised retail stores. This allows the Company to deliver its floral products on a same-day or next-day basis to ensure freshness and to meet its customers' need for prompt delivery. In addition, the Company is better able to ensure consistent product quality and presentation and offer a greater variety of arrangements, which creates a better experience for its customers and gift recipients. The Company selects 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 its BloomNet members, the Company created BloomLink, a proprietary Internet-based communications system. At July 2, 2000, approximately 70% of the BloomNet members had adopted BloomLink since its introduction in January 1998. The Company also has the ability to arrange for delivery of floral products internationally through independent wire services. 3
The Company fulfills most of its 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. The Company selects its third-party vendors based upon the quality of their products, their reliability and their ability to meet volume requirements. The Company primarily packages and ships its home and garden products from its advanced 300,000 square foot fulfillment center located in Madison, Virginia by next-day or other delivery method chosen by the customer. THE COMPANY'S STRATEGY The Company is establishing its brand as a source for thoughtful gift products and will continue to introduce new products and services consistent with this mission. As such, the Company's objective is to be the leading provider of flowers, specialty or other socially expressive gifts, gourmet foods and products for the home and garden. The key elements of its strategy to achieve this objective are: AGGRESSIVELY EXTEND THE COMPANY'S BRAND. The Company's goal is to make the 1-800-FLOWERS.COM brand synonymous with flowers, gifts, gourmet foods and home and garden products. To do this, the Company intends to invest in building its brand, while placing an equally important focus on customer retention and capitalizing on the Company's already significant, loyal customer base. The Company will continue to invest in its customer acquisition and marketing programs to: o maintain and develop cost-effective strategic relationships with Internet companies; o broaden its television, radio, print and e-mail advertising campaigns; and o increase its public relations programs, such as community events, radio and television demonstrations and trade conferences. As part of the Company's continuing effort to broaden its product offerings and serve the thoughtful gifting needs of its customers, the Company intends to market other high-quality brands in addition to 1-800-FLOWERS. The Company intends to accomplish this through internal development, co-branding arrangements, strategic partnerships or acquisitions of complementary businesses. In fiscal year 2000 the Company acquired GreatFood.com, Inc. and TheGift.com, Inc. ("TheGift"), online retailers of specialty and gourmet foods and specialty gift products, respectively, and developed its Merchant Partner Program. As part of this program, the Company has recently formed strategic relationships with Finlay Enterprises ("Finlay") who will become the Company's fine jewelry provider on the Internet, and Lenox to market its gift and collectible products. EXPAND ITS OFFERINGS OF GIFTS AND HOME AND GARDEN PRODUCTS. To broaden relationships with its existing customers, the Company intends to offer more products designed for everyday occasions and sentiments, as well as products for the home and garden. To do this, the Company intends to increase the number as well as expand its relationships with product manufacturers or, where appropriate, acquire businesses with complementary product lines. ENHANCE ITS CUSTOMER RELATIONSHIPS. The Company intends to enhance its relationships with its customers, encouraging more frequent and more extensive use of its Web site, by continuing to introduce enhanced product-related content and interactive features. The Company will also continue to personalize the features of its Web site and increase its use of both customer and recipient information to target product promotions, remind customers of upcoming occasions and convey other marketing messages. In addition, the Company is committed to continuing to make shopping and visiting www.1800flowers.com an easy, secure and pleasurable experience. The Company also believes it has a significant opportunity to expand its corporate accounts and intends to focus greater resources on developing customized programs for its corporate customers to meet their gifting needs and those of their employees. INCREASE THE NUMBER OF ONLINE CUSTOMERS. One of the Company's goals is to increase the number of customer orders 4
placed through its cost-effective Web site. To achieve this goal, the Company intends to continue to: o actively promote its Web site through Web portals and online networks; o aggressively expand its online affiliate program, in which independent Web sites link directly to the Company's Web site; o aggressively market the Company's Web site in its advertising campaigns; o promote the Company's Web site to its existing telephonic customers; and o facilitate access to the Company's Web site for its corporate customers by developing direct links from their internal corporate networks. Continue to Upgrade the Company's Technology Infrastructure. The Company will continue to make significant investments and use the best available technologies in order to improve its operations. In particular, the Company intends to: o continue to improve functionality, speed and ease of use of its Web site, and do so in a cost effective manner by performing more of these disciplines internally; o improve its transaction processing system to facilitate order tracking; o enhance its ability to analyze its database of customer and recipient information and conduct personalized one-to-one marketing; and o further expand the functionality and features of BloomLink. CONTINUE TO IMPROVE THE COMPANY'S FULFILLMENT CAPABILITIES. The Company intends to improve its fulfillment capabilities to make its operations more efficient by: o strengthening relationships with BloomNet member florists and increasing the number of BloomLink installations in their stores; o implementing alternative means of fulfillment, including centralized production and logistics partnering; and o continuing to improve its operations that support its gift, gourmet food and home and garden product lines. THE COMPANY'S PRODUCTS The Company offers 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 its core products, the Company's merchandising team works closely with manufacturers and suppliers to select and design products that meet the seasonal and other special needs of its customers. For the years ended July 2, 2000, June 27, 1999 and June 28, 1998, the flowers category represented 67.3%, 74.6% and 86.9% of total net revenues, respectively. Over the course of a year, the Company's product selection consists of: GREETINGS. Through its partnership with Gizmoz, Inc., the Company provides electronic greeting cards with hundreds of fun and creative ways to express emotions, offer congratulations, or just keep in touch. FLOWERS. The Company offers more than 3,000 varieties of fresh-cut and seasonal flowers and floral arrangements for all occasions and holidays, available for same-day delivery. PLANTS. The Company also offers approximately 1,000 varieties of popular plants to brighten homes, gardens and landscapes. GIFTS BASKETS. The Company offers more than 200 beautiful and innovative gift assortments. 5
GOURMET TREATS. Through the acquisition of GreatFood.com, the number one online destination (Time magazine 12/99) for gourmet foods, the Company currently offers more than 400 carefully selected gourmet products from around the world, including candies, chocolates, nuts, cookies, and fruit to caviar, imported cheeses and giftable surf-and-turf dinners. UNIQUE GIFTS. The Company offers 1,000 specially selected gift items, including plush toys, balloons, bath and spa items, candles, wreaths, ornaments, and home accessories. GARDENWORKS. The Company provides approximately 2,000 SKUs for the gardener including tools and accessories, pottery, nature-related products, books and related items. HOME AND GARDEN. Through its Plow & Hearth (www.plowhearth.com) subsidiary, the Company offers more than 3,000 SKUs for home, hearth and outdoor living, including casual lifestyle furniture and home accessories, clothing, footwear, candles and lighting, vases, kitchen items and accents. THE COMPANY'S WEB SITES The Company offers floral, gift, gourmet food and home and garden products through its 1-800-FLOWERS.COM Web site (www.1800flowers.com). Customers may come to the Web site directly or may be referred to the Company by one of the Company's portal partners. The Company's online partners include AOL (keyword:flowers), Yahoo! and Microsoft Network and more than 30,000 members of its online affiliate program, which the Company initiated in February 1999. The Company also offers home and garden products through the Plow & Hearth Web site (www.plowhearth.com). As of July 2, 2000, approximately 2.2 million customers had made a purchase through the Company's online sales channel. The Company's Web site allows customers to easily browse and purchase its products, promotes brand loyalty and encourages repeat purchases by providing an inviting customer experience. The Company's 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. The Company has designed its Web site to be fast, secure and easy to use and to enable customers to order products with minimal effort. The Company's main Web site includes the following key features in addition to the variety of delivery and shipping options (same day/next day) and 24 hour 7 day customer service that are available to all our customers: SEARCHING. The Company has incorporated sophisticated search capabilities, which enable customers to search for products by category, occasion, price, flower type or keyword. The Company also has a "Gift Center" section that provides popular gift ideas for each occasion, and a "Gift Finder" which provides advanced search capabilities. PERSONALIZATION. The Company utilizes its Web site to enhance the direct relationship with its customers, including personalized welcome screens to repeat customers. The "My Assistant" area of the Company's 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 the Company's local retail stores. The Company's customers can also register for its "Gift Reminder Program," in which the Company sends 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. The Company uses secure server software to encrypt the customer's credit card number prior to transmitting it over the Internet. PRIVACY. The Company recognizes the importance of maintaining the privacy of its customers. The Company uses the information gathered from its customers and others who have registered on its Web site from time to time to send promotional materials. The Company periodically makes information available to selected third parties for direct 6
marketing purposes. However, customers may elect not to receive promotional information or instruct the Company not to make their information available to third parties. The Company also gathers information concerning how visitors use and navigate its Web site. The Company uses this information only internally to better allow the Company to serve its customers. The Company's current online privacy policy, which is updated to continuously reflect current industry guidelines, is set forth on its Web site. MARKETING AND PROMOTION The Company's marketing and promotion strategy is designed to strengthen the 1-800-FLOWERS brand, build customer loyalty, increase the number of customers, encourage repeat purchases and develop additional product revenue opportunities. The Company also intends to develop and market other high-quality brands in addition to its current 1-800-FLOWERS.COM, GreatFood.com, Plow&Hearth.com and TheGift.com brands through internal development, co-branding arrangements, strategic partnerships or acquisitions of complementary businesses. The Company markets and promotes its brand and products as follows: THE COMPANY'S STRATEGIC ONLINE RELATIONSHIPS. The Company promotes its products through strategic relationships with leading Web portals and online networks. The Company's relationships include, among others: o America Online. The Company has worked with AOL since 1994. On September 1, 2000, the Company entered into a new five-year, $22.1 million interactive marketing agreement with AOL that effectively extends and enhances the term of its previous agreement for an additional two years, through August 2005. Under the terms of the new agreement, the Company will continue as the exclusive marketer of fresh-cut flowers across six AOL properties including AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City, and ICQ and receive increased promotions across several of the AOL properties. o Yahoo! The Company's products, advertisements and links to its Web site are prominently featured on Yahoo's online shopping channel. The Company's agreement with Yahoo! extends through May 2001. o Microsoft Network. The Company's products, advertisements and links to its Web site are prominently featured on Microsoft Network's online shopping channel. o NBCi. The Company's products and links to its Web site are also prominently featured on NBCi's shopping channel. The Company's agreement with NBCi extends through September 2001. o StarMedia Network. Through the Company's relationship with StarMedia Network, the Company has developed Spanish and Portuguese language versions of its Web site. THE COMPANY'S ONLINE AFFILIATE PROGRAM. In addition to securing alliances with frequently visited Web sites, in February 1999 the Company established an affiliate network that has grown to more than 30,000 Web sites operated by third parties. Affiliates may join this program through the Company's Web site and their participation may be terminated by them or by the Company at any time. These Web sites earn commissions by referring customers from their sites to the Company's Web site. Affiliates include Barnes&Noble.com, iWon.com, BizRate.com, GreaterGood.com and Juno.com. TRADITIONAL MEDIA. The Company utilizes traditional media, including television, radio, print and outdoor advertising, to market its brand and products. Traditional media allows the Company to reach a large number of customers and to target particular market segments. DIRECT MAIL AND CATALOGS. The Company uses its direct mail promotions and catalogs to increase the number of new customers and to introduce additional products to its existing customers. Through the use of the Plow & Hearth brand 7
catalogs, the Company has cross-promoted its floral and gift products to its home and garden customers as well as home and garden products to its floral and gift customers. For the year ended July 2, 2000, the Company mailed a total of approximately 50 million catalogs, primarily Plow & Hearth, American Country Home and the 1-800-Flowers brands. In addition to providing a direct sale mechanism, the Company believes that these catalogs will attract additional customers to the www.1800flowers.com and www.plowhearth.com Web sites. CO-MARKETING AND PROMOTIONS. The Company has established a number of co-marketing relationships and promotions to advertise its products. For example, the Company has established co-marketing arrangements with United, American and Delta airlines as well as American Express, VISA and MasterCard, among others. The Company established the American and Delta airlines relationships in the third quarter of fiscal 1999. FULFILLMENT OPERATIONS The Company's customers primarily place their orders either online or over the telephone. Fulfillment of products is as follows: FLOWERS. A majority of the Company's floral orders are fulfilled through one of 1,500 fulfillment centers including the BloomNet network of independent florists and the Company's owned or franchised retail stores. The Company selects 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 and be approved by the Company's internal selection committee. By fulfilling floral orders through BloomNet or one of its owned or franchised stores, the Company is able to deliver floral products on a same-day or next-day basis to ensure freshness and to meet the customers' need for prompt delivery. Because the Company selects these florists and receives customer feedback on their performance in fulfilling orders, it is able to ensure consistent product quality and presentation and offer a greater variety of arrangements, which the Company believes creates a better experience for its customers and gift recipients. The Company's relationships with its BloomNet members are non-exclusive. Many florists, including many BloomNet florists, also are members of other floral fulfillment organizations. The BloomNet agreements generally are cancelable by either party with ten days notification and do not guarantee any orders, dollar amounts or exclusive territories from the Company to the florist. Of the BloomNet member florists and Company owned or franchised stores, approximately 70% are connected to the Company electronically via BloomLink, an Internet-based electronic communications system. Where the Company is not connected to the BloomNet partners or its owned and franchised stores via BloomLink, the Company utilizes the communication system of an independent wire service to transmit an order to the fulfilling florist. In addition, the Company also ships overnight to its customers directly from growers and through its fulfillment centers. The Company owns and operates 39 retail stores, located primarily in the New York and Los Angeles metropolitan areas. In addition, the Company has 83 franchised stores, located primarily in California. Company owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs. The Company does not expect to materially increase the number of owned or franchised retail stores, although it plans to expand the non-floral fulfillment capabilities of these stores in the foreseeable future. PLANTS, GIFT BASKETS, GOURMET TREATS AND UNIQUE GIFTS. The Company's plants, gift baskets, gourmet treats and unique gifts are shipped directly to the customer by members of BloomNet, third-party product suppliers or through its Madison, Virginia fulfillment center using next-day or other delivery method selected by the customer. The Company's business is not dependent on any one of these third-party suppliers. 8
HOME AND GARDEN. The Company fulfills purchases of home and garden merchandise from its Madison, Virginia fulfillment center or by third-party product suppliers using next-day or other delivery method selected by the customer. In fiscal 2000, the Company shipped approximately 1.2 million packages from this facility which employs advanced technology for receiving, packaging, shipping and inventory control. In September 2000, the Company completed the installation of a new warehouse management system to increase its capacity and reduce operating costs. TECHNOLOGY INFRASTRUCTURE The Company believes it has an advanced technology platform. Its technology infrastructure, primarily consisting of the Company's Web site, transaction processing, customer databases and telecommunications systems, is built and maintained for reliability, security and flexibility. In addition, the Company continues to invest in the scalability of its infrastructure, allowing it to grow with the Company's business. To minimize the risk of service interruptions from unexpected component or telecommunications failure, maintenance and upgrades, the Company has built full back-up into those components of its systems that have been identified as critical. In recent years the Company installed an Oracle-based order processing and database management system, developed BloomLink, and upgraded its telecommunications network, including its call management system. The Company plans to continue to invest in technologies that will improve and expand its e-commerce and telecommunication capabilities. The Company's 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 the Company under an agreement that extends through June 2001, which automatically renews for successive two-year periods unless the agreement is terminated. In addition to Fry Multimedia's two hosting facilities, the Company is in the process of co-locating the hosting of its Web site and BloomLink with a third-party vendor to provide additional back-up and system redundancy. The Company's 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, the Company is able to retrieve, sort and analyze customer information to enable it to better serve its customers and target its product offerings. The Company has acquired technology applications that have significantly expanded its ability to analyze and use this information. The Company's five customer service centers and many of its third party product suppliers are connected electronically to its transaction processing system to permit the rapid transmission of, and access to, critical order and customer information. In addition, BloomLink electronically connects the Company to approximately 70% of the retail stores in its floral retail fulfillment network. The Company's operation center is located in its headquarters in Westbury, New York. The Company provides comprehensive facility management services, including human and technical monitoring of all production servers, 24 hours per day, seven days per week. COMPETITION Although the capital markets have had an impact on many startups in the e-commerce arena, the growing popularity and convenience of e-commerce has continued to give rise to new 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. Additionally, several of these merchants offer an expanding variety of products and some 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: 9
o undertake more extensive marketing campaigns for their brands and services; o adopt more aggressive pricing policies; and o make more attractive offers to potential employees, distribution partners and retailers. In addition, the Company faces intense competition in each of its individual product categories. In the floral industry, there are many other providers of floral products, none of which is dominant. The Company's competitors include: o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o supermarkets and mass merchants with floral departments. Similarly, the plant, gift basket, gourmet treats, unique gifts 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, 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. The Company believes its brand strength, product selection, customer relationships, technology infrastructure and fulfillment capabilities position it to compete effectively against its current and potential competitors in each of its product categories. However, increased competition could result in: o price reductions, decreased revenues and lower profit margins; o loss of market share; and o increased marketing expenditures. These and other competitive factors may adversely impact the Company's business and results of operations. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES The Internet is rapidly evolving and there are few laws or regulations directly applicable to e-commerce. Legislatures are considering an increasing number of laws and regulations pertaining to the Internet, including laws and regulations addressing: o user privacy; o pricing; o content; o connectivity; o intellectual property; o distribution; o taxation; o liabilities; o antitrust; and o characteristics and quality of products and services. Further, the growth and development of the market for online services may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services. This could decrease the demand for the Company's services and increase its cost of doing business. Moreover, the applicability to the Internet of 10
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 the Company's business, financial condition and results of operations. States or foreign countries might attempt to regulate the Company's business or levy additional sales or other taxes relating to its activities. Because the Company's products and services are available over the Internet anywhere in the world, multiple jurisdictions may claim that the Company is required to do business as a foreign corporation in one or more of those jurisdictions. Failure to qualify as a foreign corporation in a jurisdiction where the Company is required to do so could subject it to taxes and penalties. States or foreign governments may charge the Company with violations of local laws. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company regards its service marks, trademarks, trade secrets, domain names and similar intellectual property as critical to its success. The Company has applied for or received trademark and/or service mark registration for, among others, the marks "1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com", and "TheGift.com". The Company also has rights to numerous domain names, including www.1800flowers.com, www.800flowers.com, www.flowers.com, www.plowhearth.com, www.greatfood.com and www.TheGift.com. In addition, the Company has developed a transaction processing system and operating systems as well as marketing data, including customer information databases. The Company relies on trademark, unfair competition and copyright law, trade secret protection and contracts such as confidentiality and license agreements with its employees, customers, partners and others to protect its proprietary rights. Despite the Company's precautions, it may be possible for competitors to obtain and/or use the Company's proprietary information without authorization or to develop technologies similar to the Company's 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. The Company's means of protecting its proprietary rights in the United States or abroad may not be adequate. The Company intends to continue to license technology from third parties, including Oracle, Microsoft, MCI and AT&T, for its communications technology and the software that underlies its business systems. The market is evolving and the Company may need to license additional technologies to remain competitive. The Company may not be able to license these technologies on commercially reasonable terms or at all. In addition, the Company may fail to successfully integrate licensed technology into its operations. Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes infringements and misappropriations will continue to occur in the future. The Company intends to police against infringement or misappropriation. However, the Company cannot guarantee it will be able to enforce its 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 the Company. The Company cannot be certain that its technologies or marks do not infringe valid patents, trademarks, copyrights or other proprietary rights held by third parties. The Company may be subject to legal proceedings and claims from time to time relating to its intellectual property and to the intellectual property of others in the ordinary course of its business. Intellectual property litigation is expensive and time-consuming and could divert management resources away from running the Company's business. 11
EMPLOYEES As of July 2, 2000, the Company had a total of approximately 2,200 full and part-time employees. During peak periods, the Company substantially increases the number of customer service and retail and fulfillment personnel. The Company's personnel are not represented under collective bargaining agreements and the Company considers its relations with its employees to be good. ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES THE COMPANY FACES. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO THE COMPANY OR THAT ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR ITS BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE COMPANY'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. THE COMPANY EXPECTS TO INCUR LOSSES FOR THE FORESEEABLE FUTURE, WHICH MAY REDUCE THE TRADING PRICE OF ITS CLASS A COMMON STOCK. The Company expects to incur significant operating and capital expenditures in order to: o expand the 1-800-FLOWERS.COM brand through marketing and other promotional activities; o maintain certain of its strategic relationships with Internet companies; o increase the number of products offered; and o enhance the Company's technological infrastructure and order fulfillment capabilities. Although the Company has been profitable in the past, management expects that the Company will incur losses for the foreseeable future as a result of these expenditures. However, the Company expects to achieve positive Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the fourth quarter of fiscal 2001 and full year of fiscal 2002. No assurances can be made that positive EBITDA will be achieved on this schedule or at all. In order to achieve and maintain profitability, the Company will need to generate revenues significantly above historical levels and/or reduce operating expenses. Management cannot assure you that the Company may achieve sufficient revenues for profitability. Even if the Company does achieve profitability, it may not sustain or increase profitability on a quarterly or annual basis in the future. THE COMPANY'S QUARTERLY OPERATING RESULTS MAY SIGNIFICANTLY FLUCTUATE AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF ITS FUTURE RESULTS. The Company's future revenues and results of operations may fluctuate significantly due to a combination of factors, many of which are outside of management's control. The most important of these factors include: o seasonality; o the timing and effectiveness of marketing programs; o the timing of the introduction of new products and services; o the timing and effectiveness of capital expenditures; o the Company's ability to enter into or renew marketing agreements with Internet companies; and o competition. The Company may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue in relation to its expenses, operating results may suffer. The Company's operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company's future performance. It is possible that, in future periods, results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of the Company's Class A common stock to fall. Consumer spending on flowers, gifts and other products sold by the Company may vary with general economic conditions. If general economic conditions deteriorate and the Company's customers have less disposable income, consumers may likely spend less on its products and its quarterly operating results may suffer. 12
THE COMPANY'S OPERATING RESULTS MAY SUFFER IF REVENUES DURING THE COMPANY'S PEAK SEASONS DO NOT MEET ITS EXPECTATIONS. Sales of the Company's products are seasonal, concentrated in the second calendar quarter, due to Mother's Day, Secretaries' Week and Easter, and the fourth calendar quarter, due to the Thanksgiving and Christmas holidays. In anticipation of increased sales activity during these periods, the Company hires a significant number of temporary employees to supplement its permanent staff and the Company increases its inventory levels. If revenues during these periods do not meet the Company's expectations, it may not generate sufficient revenue to offset these increased costs and its operating results may suffer. IF THE COMPANY'S CUSTOMERS DO NOT FIND ITS EXPANDED PRODUCT LINES APPEALING, REVENUES MAY NOT GROW AND NET INCOME MAY DECREASE. The Company's business historically has focused on offering floral and floral related gift products. The Company has expanded its product lines in the plant, gift baskets, gourmet treats, unique or specialty gifts and home and garden categories, and expects to continue to incur significant costs in marketing these new products. If the Company's customers do not find its expanded product lines appealing, the Company may not generate sufficient revenue to offset its related costs and its results of operations may be negatively impacted. IF THE COMPANY FAILS TO DEVELOP AND MAINTAIN ITS BRAND, IT MAY NOT INCREASE OR MAINTAIN ITS CUSTOMER BASE OR ITS REVENUES. The Company must develop and maintain the 1-800-FLOWERS.COM brand to expand its customer base and its revenues. In addition, the Company has introduced and acquired other brands in the past, and may continue to do so in the future. The Company believes that the importance of brand recognition will increase as it expands its product offerings. Many of the Company's customers may not be aware of the Company's non-floral products. The Company intends to maintain its expenditures for creating and maintaining brand loyalty and raising awareness of its additional product offerings. However, if the Company fails to advertise and market its products effectively, it may not succeed in establishing its brands, it may lose customers and revenues may decline. The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brand will also depend on its success in providing its customers high-quality products and a high level of customer service. If the Company's customers do not perceive its products and services to be of high quality, the value of the 1-800-FLOWERS.COM brand would be diminished, the Company may lose customers and its revenues may decline. A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC ONLINE RELATIONSHIPS THAT GENERATE A SIGNIFICANT AMOUNT OF TRAFFIC COULD LIMIT THE GROWTH OF THE COMPANY'S BUSINESS. The Company expects that while a greater percentage of its online customers will come to its Web site directly, it will also rely on third party Web sites with which the Company has strategic relationships, including AOL, Yahoo!, Snap.com, and the Microsoft Network for traffic. If these third-parties do not attract a significant number of visitors, the Company may not receive a significant number of online customers from these relationships and its revenues from these relationships may decrease or not grow. There continues to be strong competition to establish relationships with leading Internet companies, and the Company may not successfully enter into additional relationships, or renew existing ones beyond their current terms. The Company may also be required to pay significant fees to maintain and expand existing relationships. The Company's online revenues may suffer if it fails to enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs. IF LOCAL FLORISTS AND OTHER THIRD-PARTY VENDORS DO NOT FULFILL ORDERS TO THE COMPANY'S CUSTOMERS' SATISFACTION, ITS CUSTOMERS MAY NOT SHOP WITH THE COMPANY AGAIN. Floral orders placed by the Company's customers are fulfilled by local florists, a majority of which are either part of the Company's "BloomNet" network of independent florists or the Company's owned or franchised stores. Except for the 39 Company-owned stores as of July 2, 2000, the Company does not directly control any of these florists. In addition, many of the non-floral products sold by the Company are manufactured and delivered to its 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 the Company's services when placing future orders and its revenues may decrease. 13
IF A FLORIST DISCONTINUES ITS RELATIONSHIP WITH THE COMPANY, THE COMPANY'S CUSTOMERS MAY EXPERIENCE DELAYS IN SERVICE OR DECLINES IN QUALITY AND MAY NOT SHOP WITH THE COMPANY AGAIN. Many of the Company's 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 the Company, the Company 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, THE COMPANY WILL BE REQUIRED TO INCUR SUBSTANTIAL COSTS TO ISSUE REFUNDS, CREDITS OR REPLACEMENT PRODUCTS. The Company offers its customers a 100% satisfaction guarantee on its products. If customers are not satisfied with the products they receive, the Company will either send the customer another product or issue the customer a refund or a credit. The Company's 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 THE COMPANY'S NON-FLORAL PRODUCTS. Non-floral products are delivered to customers either directly from the manufacturer or from the Company's warehouse in Virginia. The Company has 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 the Company's goods, its customers might choose to buy comparable products locally to avoid shipping charges. In addition, these carriers may experience labor stoppages, which could impact the Company's ability to deliver products on a timely basis to its customers and adversely affect its customer relationships. IF THE COMPANY FAILS TO CONTINUOUSLY IMPROVE ITS WEB SITE, IT MAY NOT ATTRACT OR RETAIN CUSTOMERS. If potential or existing customers do not find the Company's Web site a convenient place to shop, the Company may not attract or retain customers and its sales may suffer. To encourage the use of the Company's Web site, it must continuously improve its accessibility, content and ease of use. Customer traffic and the Company's business would be adversely affected if competitors' Web sites are perceived as easier to use or better able to satisfy customer needs. COMPETITION IN THE FLORAL, PLANT, GIFT BASKET, GOURMET TREAT, UNIQUE GIFT 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 these categories. In the floral category, the Company's competitors include: o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o supermarkets and mass merchants with floral departments. Similarly, the plant gift basket, gourmet treat, unique gift 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 the Company expects it to increase. Increased competition could result in: o price reductions, decreased revenue and lower profit margins; o loss of market share; and o increased marketing expenditures. These and other competitive factors could materially and adversely affect the Company's results of operations. 14
IF THE COMPANY DOES NOT ACCURATELY PREDICT CUSTOMER DEMAND FOR ITS PRODUCTS, IT MAY LOSE CUSTOMERS OR EXPERIENCE INCREASED COSTS. In the past, the Company did not need to maintain a significant inventory of products. However, as the Company expands the volume of non-floral products offered to its customers, the Company may be required to increase inventory levels and the number of products maintained in its warehouses. Because the Company has limited experience offering many of its non-floral products through its Web site, the Company may not predict inventory levels accurately. If the Company overestimates customer demand for its 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 the Company underestimates customer demand, it may disappoint customers who may turn to its 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 THE COMPANY'S REVENUES AND GROSS MARGINS COULD DECLINE. A variety of factors affect the supply of flowers in the United States and the price of the Company's 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 the Company's floral products may be reduced, causing revenues and gross margins to decline. Alternatively, the Company 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 the Company. Most of the flowers sold in the United States are grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that this will continue in the future. The availability and price of flowers could be affected by a number of factors affecting these regions, including: o import duties and quotas; o agricultural limitations and restrictions to manage pests and disease; o changes in trading status; o economic uncertainties and currency fluctuations; o severe weather; o work stoppages; o foreign government regulations and political unrest; and o trade restrictions, including United States retaliation against foreign trade practices. A FAILURE TO MANAGE ITS INTERNAL OPERATING AND FINANCIAL FUNCTIONS COULD LEAD TO INEFFICIENCIES IN CONDUCTING THE COMPANY'S BUSINESS AND SUBJECT IT TO INCREASED EXPENSES. The Company's expansion efforts have significantly strained its operational and financial systems. To accommodate the Company's growth, it 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 its business. In addition, the Company's systems, procedures and controls may prove to be inadequate to support its future operations. THE COMPANY'S FRANCHISEES MAY DAMAGE ITS BRAND OR INCREASE ITS COSTS BY FAILING TO COMPLY WITH ITS FRANCHISE AGREEMENTS OR ITS OPERATING STANDARDS. The Company's franchise business is governed by its Uniform Franchise Offering Circular, franchise agreements and applicable franchise law. If the Company's franchisees do not comply with its established operating standards or the terms of the franchise agreements, the 1-800-FLOWERS.COM brand may be damaged. The Company may incur significant additional costs, including time-consuming and expensive litigation, to enforce its rights under the franchise agreements. Additionally, the Company is the primary tenant on certain leases, which the franchisees sublease from the Company. If a franchisee fails to meet its obligations as subtenant, the Company could incur significant costs to avoid default under the primary lease. Furthermore, as a franchiser, the Company has obligations to its franchisees. Franchisees may challenge the performance of the Company's obligations under the franchise agreements and subject it to costs in defending these claims and, if the claims are successful, costs in connection with their compliance. 15
IF THIRD PARTIES ACQUIRE RIGHTS TO USE SIMILAR DOMAIN NAMES OR PHONE NUMBERS OR IF THE COMPANY LOSES THE RIGHT TO USE ITS PHONE NUMBERS, ITS BRAND MAY BE DAMAGED AND IT MAY LOSE SALES. The Company's Internet domain names are an important aspect of its brand recognition. The Company 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 the Company's customers and cause its customers to inadvertently place orders with these third parties, which could result in lost sales and could damage its brand. Likewise, the phone number that spells 1-800-FLOWERS is important to the Company's brand and its business. While the Company has obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common "FLOWERS" misdials, it 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 the Company's customers and cause lost sales and potential damage to its brand. In addition, under applicable FCC rules, ownership rights to telephone numbers cannot be acquired. Accordingly, the FCC may rescind the Company's right to use any of its phone numbers, including 1-800-FLOWERS. IF THE COMPANY DOES NOT CONTINUE TO RECEIVE REBATES FROM WIRE SERVICES, ITS RESULTS OF OPERATIONS COULD SUFFER. The Company has entered into arrangements with independent wire service companies that provide it with rebates when it settles its customers' floral orders utilizing their service. If the Company cannot renew these arrangements or enter similar arrangements on commercially reasonable terms, its results of operations could suffer. In addition, these companies may eliminate or modify the rebate structure they have in place with the Company. Any adverse modification to these rebate structures could also cause the Company's results of operations to suffer. THE COMPANY'S NET SALES AND GROSS MARGINS WOULD DECREASE IF IT EXPERIENCES SIGNIFICANT CREDIT CARD FRAUD. A failure to adequately control fraudulent credit card transactions would reduce its net sales and gross margins because it does not carry insurance against this risk. The Company has developed technology to help detect the fraudulent use of credit card information. Nonetheless, to date, the Company has 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, the Company is liable for fraudulent credit card transactions because it does not obtain a cardholder's signature. A FAILURE TO INTEGRATE THE SYSTEMS AND OPERATIONS OF ANY ACQUIRED BUSINESS WITH THE COMPANY'S OPERATIONS MAY DISRUPT ITS BUSINESS. The Company has acquired complementary businesses and may continue to do so in the future. If the Company is unable to fully integrate these acquisitions or any future acquisition into its operations, its business and operations could suffer, management may be distracted and its expenses may increase. Moreover, the expected benefits from any acquisition may not be realized, resulting in lost opportunities and loss of capital. THE COMPANY'S REVENUES MAY NOT GROW IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR COMMERCE. The Company expects to derive an increasing amount of its revenue from electronic commerce, and intends to extensively market its non-floral products online. If the Internet is not accepted as a medium for commerce, its revenues may not grow as the Company expects and its business may suffer. A number of factors may inhibit Internet usage, including: o inadequate network infrastructure; o consumer concerns for Internet privacy and security; o inconsistent quality of service; and o lack of availability of cost-effective, high speed service. If Internet usage grows, the infrastructure may not be able to support the demands placed on it by that growth and its 16
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 THE COMPANY 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. Additionally, computer "viruses" may cause the Company's systems to incur delays or experience other service interruptions. Such interruptions may materially impact the Company's ability to operate its business. If a computer virus affecting the Internet in general is highly publicized or particularly damaging, the Company's customers may not use the Internet or may be prevented from using the Internet, which would have an adverse effect on its revenues. As a result, the Company 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 THE COMPANY'S REPUTATION. In the past, particularly during peak holiday periods, the Company has experienced significant increases in traffic on its Web site and in its toll-free customer service centers. The Company's operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. The Company's systems have in the past, and may in the future, experience: o system interruptions; o long response times; and o degradation in service. The Company cannot assure you that it will adequately implement systems to improve the speed, security and availability of its Internet and telecommunications systems. Because the Company's business depends on customers making purchases on its systems, its revenues may decrease and its reputation could be harmed if it experiences frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season. IF FRY MULTIMEDIA, AT&T AND MCI DO NOT ADEQUATELY MAINTAIN THE COMPANY'S WEB SITE AND TELEPHONE SERVICE, THE COMPANY MAY EXPERIENCE SYSTEM FAILURES AND ITS REVENUES MAY DECREASE. The Company is dependent on Fry Multimedia to host its Web site and on AT&T and MCI to provide telephone services to its customer service centers. If Fry Multimedia or AT&T and MCI experience system failures or fail to adequately maintain the Company's systems, the Company would experience interruptions and its customers might not continue to utilize its services. If the Company does not host its Web site or maintain its telephone service, it will be unable to generate revenue. The Company's future success depends upon these third-party relationships because it does not have the resources to maintain its Web site or its telephone service without these or other third parties. The Company may not be able to maintain these relationships or replace them on financially attractive terms. Failure to do so may disrupt the Company's operations or require it to incur significant unanticipated costs. INTERRUPTIONS IN FTD'S MERCURY SYSTEM OR A REDUCTION IN THE COMPANY'S ACCESS TO THIS SYSTEM MAY DISRUPT ORDER FULFILLMENT AND CREATE CUSTOMER DISSATISFACTION. A significant portion of the Company's customers' orders are 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, the Company would experience difficulties in fulfilling its customers' orders and many of its customers might not continue to shop with the Company. In addition, the Company has been engaged in discussions with FTD, whereby FTD has stated that it is considering reducing the Company's level of access to the Mercury system. FTD is one of the Company's competitors, and any 17
material decrease or elimination of access to the Mercury system by FTD would adversely impact the Company's ability to fulfill orders in a timely fashion during peak periods and may result in lost revenues and customers. IF THE COMPANY IS UNABLE TO HIRE AND RETAIN KEY PERSONNEL, ITS BUSINESS AND GROWTH MAY SUFFER. The Company's success is dependent on its ability to hire, retain and motivate highly qualified personnel. In particular, the Company's success depends on the continued efforts of its Chairman and Chief Executive Officer, James F. McCann, and its President, Christopher G. McCann. In addition, the Company has recently hired or promoted several new members to its senior management team to help manage its growth and it may need to recruit, train and retain a significant number of additional employees, particularly employees with technical backgrounds. These individuals are in high demand and the Company is not certain it will be able to attract the personnel it needs. The loss of the services of any of the Company's executive management or key personnel, its failure to integrate any of its new senior management into its operations or its inability to attract qualified additional personnel could cause its growth to suffer and force it to expend time and resources in locating and training additional personnel. MANY GOVERNMENTAL REGULATIONS MAY IMPACT THE INTERNET, WHICH COULD AFFECT THE COMPANY'S 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 the Company's Web site. The Company expects 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 the Company's products, increase its costs or otherwise adversely affect its business. REGULATIONS IMPOSED BY THE FEDERAL TRADE COMMISSION MAY ADVERSELY AFFECT THE GROWTH OF THE COMPANY'S INTERNET BUSINESS OR ITS 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 the Company 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 the Company. 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. The Company may become a party to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts may adversely affect its ability to collect demographic and personal information from users, which could adversely affect its marketing efforts. UNAUTHORIZED USE OF THE COMPANY'S INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE ITS BRAND. Unauthorized use of the Company's intellectual property by third parties may damage its brand and its reputation and may likely result in a loss of customers. It may be possible for third parties to obtain and use the Company's intellectual property without authorization. Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes 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 THE COMPANY IS NOT SUCCESSFUL, COULD DISRUPT ITS ABILITY TO CONDUCT BUSINESS. The Company cannot be certain that its products do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. The Company may be a party to legal proceedings and claims relating to the intellectual property of others from time to time in the ordinary 18
course of its business. The Company may incur substantial expense in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against the Company may result in substantial monetary liability or may materially disrupt its ability to conduct business. IF STATES BEGIN IMPOSING STATE SALES AND USE TAXES, THE COMPANY MAY LOSE SALES OR INCUR SIGNIFICANT EXPENSES IN SATISFACTION OF THESE OBLIGATIONS. At present, except for the Company's retail operations, the Company does not collect sales or other similar taxes in respect of sales and shipments of its products in states other than Arizona, Connecticut, Florida, Georgia, New York, Texas and Virginia. However, various states have sought to impose state sales tax collection obligations on out-of-state direct marketing companies such as 1-800-FLOWERS.COM. A successful assertion by one or more of these states that the Company should have collected or be collecting sales tax on the sale of its products could result in additional costs and corresponding price increases to its customers. Any imposition of state sales and use taxes on the Company's products sold over the Internet may decrease customers' demand for its products and 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 THE COMPANY TO INCREASED COSTS. Several of the products the Company sells, including perishable food products, may expose it to product liability claims in the event that the use or consumption of these products results in personal injury. Although the Company has not experienced any material losses due to product liability claims to date, it 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 the Company's reputation and its brand. Although the Company maintains insurance against product liability claims, its coverage may be inadequate to cover any liabilities it may incur. THE COMPANY'S STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY, PARTICULARLY BECAUSE IT HAS INTERNET OPERATIONS. The price at which the Company's 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 the Company's Class A common stock, regardless of the Company's 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. The Company may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management's attention and resources. 19
Item 2. PROPERTIES The Company's headquarters and one of its customer service centers are located in approximately 71,000 square feet of office space in Westbury, New York, under a lease that expires in May 2005. In addition, the Company owns an approximately 300,000 square foot fulfillment center in Madison, Virginia. The Company leases a total of approximately 53,000 square feet for its customer service centers in San Antonio, Texas; Phoenix, Arizona; Marietta, Georgia and Bethpage, New York. The Company is currently in the process of site selection for a new service center to replace the Company's service center in Marietta, Georgia. As of July 2, 2000, the Company leased approximately 250,000 square feet for owned or franchised retail stores with lease terms typically ranging from 5 to 20 years. Some of its leases provide for a minimum rent plus a percentage rent based upon sales after certain minimum thresholds are achieved. The leases generally require the Company to pay insurance, utilities, real estate taxes and repair and maintenance expenses. In order to accommodate increasing call volume requirements, while improving operating efficiencies, in June 2000, the Company announced a redeployment plan which includes the closure of certain retail stores in conjunction with its strategic redeployment of its retail network of direct fulfillment centers and the relocation of certain customer service centers. The redeployment will be completed in phases during fiscal year 2001. Item 3. LEGAL PROCEEDINGS There are various claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 20
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION 1-800-FLOWERS.COM's Class A common stock trades on The Nasdaq National Stock Market under the symbol "FLWS." There is no established public trading market for the Company's Class B common stock. The following table sets forth the reported high and low sales prices for the Company's Class A common stock for each of the fiscal quarters during the period from August 3, 1999, the date of the Company's IPO, through July 2, 2000. <TABLE> <CAPTION> High Low -------------- -------------- <S> <C> <C> Year ended July 2, 2000 August 3, 1999 - September 26, 1999 $ 23.19 $ 13.50 September 27, 1999 - December 26, 1999 $ 17.06 $ 11.75 December 27, 1999 - March 26, 2000 $ 13.00 $ 6.28 March 27, 2000 - July 2, 2000 $ 8.00 $ 4.25 </TABLE> RIGHTS OF COMMON STOCK Holders of Class A common stock generally have the same right as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one basis and each share of Class B common stock will automatically convert into one share of Class A common stock upon its transfer, with limited exceptions. HOLDERS As of September 25, 2000, there were approximately 93 shareholders of record of the Company's Class A common stock, although the Company believes that there is a significantly larger number of beneficial owners. As of September 25, 2000, there were approximately 24 shareholders of record of the Company's Class B common stock. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Class A or Class B common stock, and intends to retain future earnings, if any, to provide funds to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future. USE OF PROCEEDS OF INITIAL PUBLIC OFFERING The effective date of the Company's registration statement (File 333-78985) filed on Form S-1 under the Securities Act of 1933, as amended, relating to the Company's initial public offering of Class A common stock was August 2, 1999. In its initial public offering, the Company sold 6,000,000 shares of its Class A common stock to an underwriting syndicate led by Goldman, Sachs & Co., Credit Suisse First Boston Corporation and Wit Capital Corporation. The offering commenced on August 3, 1999 and closed on August 6, 1999, resulting in aggregate proceeds of $126 million. 21
The Company's net proceeds from the offering were $114.8 million. Approximately $8.8 million of offering expenses were attributable to underwriting discounts. Since the closing of the Company's IPO, the Company has utilized the proceeds as follows: o Repayment of amounts previously outstanding under a bank term loan ($18.0 million), revolving line of credit ($3.0 million), seller financed acquisition obligation ($2.5 million) and commercial notes and capital leases ($1.8 million); o Redemption of all common stock of the Company's Plow & Hearth subsidiary held by minority shareholders ($7.9 million, net of option exercises by Plow & Hearth option holders); o Acquisition of GreatFood.com and other investments ($18.6 million, net of cash acquired); o Capital expenditures ($21.2 million); o Funding of operating activities ($35.5 million), including marketing and other activities associated with the Company's expansion into non-floral product lines. Unused proceeds of the offering are currently invested in money market funds with portfolios of investment grade corporate and U.S. government securities. As of July 2, 2000, the Company had not made any specific expenditure plans with respect to the remaining proceeds of this offering. While the Company cannot specify with certainty the particular uses for such proceeds, the Company currently intends to use the remaining proceeds over time: o to fund its marketing activities, including brand enhancement; o to enhance its infrastructure; o to enter into strategic relationships with Internet companies; o to expand its product offerings; o to expand its current business through strategic acquisitions, and o for other general corporate purposes. RECENT SALE OF UNREGISTERED SECURITIES During the previous three years ended July 2, 2000, the Company issued the following unregistered securities: o May 20, 1999, the Company issued 1,127,546 shares of preferred stock to 11 investors for an aggregate amount of $117.6 million. The preferred stock automatically converted to Class A common stock upon the consummation of the initial public offering. o Options to purchase an aggregate of 983,000 shares of Class B Common stock. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Company, to information about the Company. 22
ADDITIONAL ISSUANCES OF SECURITIES Additional securities of the Company may be issued as follows: o 983,000 shares of Class B common stock upon the exercise of options outstanding as of September 25, 2000, at a weighted average exercise price of $1.74 per share; o 3,815,000 shares of Class A common stock upon the exercise of options outstanding as of September 25, 2000, at a weighted average exercise price of $14.27, and up to 8,127,000 additional shares of Class A common stock that could be issued under its 1999 stock incentive plan; and RESALES OF SECURITIES 55,295,813 shares of Class A and Class B common stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market from time to time only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act. As of September 25, 2000, all of such shares of the Company's common stock could be sold in the public market pursuant to and subject to the limits set forth in Rule 144. Sales of a large number of these shares could have an adverse effect on the market price of the Company's Class A common stock by increasing the number of shares available on the public market. The Company has entered into an investors' rights agreement with certain of its stockholders, including Waelinvest, SOFTBANK, Benchmark, Chase, James F. McCann and Christopher G. McCann. Under this agreement, these parties will have the right to require us to register shares of Class A common stock they own on various occasions. An aggregate of 52,949,757 shares of Class A common stock can be registered under the agreement. A majority in interest of the parties to the agreement other than Messrs. McCann and the Company will have the right to require the Company on one occasion to register their stock. In addition, these investors, as well as Messrs. McCann, have the right to require the Company to register their shares of stock at any time the Company proposes to register any of its common stock for offerings to the public. The investors and Messrs. McCann can also require the Company to register their shares on a registration statement on Form S-3 up to two times per year. These registration rights expire on the earlier of the third anniversary of the IPO or the date on which all shares held by these parties can be sold under Rule 144 under the Securities Act of 1933, as amended, and have customary limitations. The Company has agreed to pay the offering expenses in connection with the registration of these shares, other than underwriters' commission. 23
Item 6. SELECTED FINANCIAL DATA The selected consolidated statement of operations data for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, and the consolidated balance sheet data as of July 2, 2000 and June 27, 1999, have been derived from the Company's audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended June 29, 1997 and June 30, 1996, and the selected consolidated balance sheet data as of June 28, 1998, June 29, 1997 and June 30, 1996, are derived from the Company's audited consolidated financial statements which are not included in this Annual Report on Form 10-K. The following tables summarize the Company's consolidated statement of operations and balance sheet data. The Company disposed of Floral Works, Inc. in January 2000, acquired GreatFood.com, Inc. and TheGift.com, Inc. in November 1999 and acquired Plow & Hearth in April 1998. The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition and up through the date of disposition. You should read this information together with the discussion in "Management's Discussion and Analysis of Financial Condition and Result of Operations" and the Company's consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K. <TABLE> <CAPTION> YEARS ENDED ------------------------------------------------------------------------- JULY 2, JUNE 27, JUNE 28, JUNE 29, JUNE 30, 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues: Telephonic $ 230,221 $203,885 $161,874 $145,295 $127,920 Online 119,019 52,886 26,748 16,092 9,936 Retail/fulfillment 36,010 39,102 31,970 25,043 15,272 ------------- ------------- ------------- ------------- ------------- Total net revenues 385,250 295,873 220,592 186,430 153,128 Cost of revenues 237,493 179,697 136,966 115,078 92,820 ------------- ------------- ------------- ------------- ------------- Gross profit 147,757 116,176 83,626 71,352 60,308 Operating expenses: Marketing and sales 161,075 92,147 55,417 47,464 42,952 Technology and development 16,809 8,067 1,794 1,411 851 General and administrative 28,975 15,748 15,832 12,338 11,556 Depreciation and amortization 16,479 8,385 4,168 3,287 2,247 ------------- ------------- ------------- ------------- ------------- Total operating expenses 223,338 124,347 77,211 64,500 57,606 ------------- ------------- ------------- ------------- ------------- Operating (loss) income (75,581) (8,171) 6,415 6,852 2,702 Other income (expense), net 7,422 (1,183) 1,654 674 (209) ------------- ------------- ------------- ------------- ------------- (Loss) income before income taxes and minority interests (68,159) (9,354) 8,069 7,526 2,493 Benefit (provision) for income 1,286 2,715 (3,181) (3,135) (1,255) taxes ------------- ------------- ------------- ------------- ------------- (Loss) income before minority (66,873) (6,639) 4,888 4,391 1,238 interests Minority interests 43 (207) 186 (4) 59 ------------- ------------- ------------- ------------- ------------- Net (loss) income (66,830) (6,846) 5,074 4,387 1,297 Redeemable Class C common stock - (5,215) (1,608) (1,462) (1,029) dividends ------------- ------------- ------------- ------------- ------------- Net (loss) income applicable to common stockholders $ (66,830) $(12,061) $ 3,466 $ 2,925 $ 268 ============= ============= ============= ============= ============= Net (loss) income per common share applicable to common stockholders: Basic $(1.10) $(0.27) $0.08 $0.07 $0.01 ============= ============= ============= ============= ============ Diluted $(1.10) $(0.27) $0.07 $0.06 $0.01 ============= ============= ============= ============= ============ Shares used in the calculation of net (loss) income per common share: Basic 60,889 44,035 44,120 44,140 47,050 ============= ============= ============= ============= ============= Diluted 60,889 44,035 46,610 46,740 49,420 ============= ============= ============= ============= ============= </TABLE> 24
<TABLE> <CAPTION> AS OF ------------------------------------------------------------------------- JULY 2, JUNE 27, JUNE 28, JUNE 29, JUNE 30, 2000 1999 1998 1997 1996 ------------- ------------- ------------ -------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and equivalents $111,624 $99,183 $ 8,873 $11,443 $ 6,639 Working capital (deficit) 82,129 85,619 1,950 1,975 (2,452) Total assets 224,641 182,355 81,746 44,130 36,884 Long-term liabilities 12,947 37,766 35,359 9,456 17,804 Redeemable class C common stock - - 17,692 16,084 14,622 Total stockholders' equity (deficit) 158,918 109,003 672 (2,670) (5,615) </TABLE> The following selected unaudited pro forma combined financial data gives effect to the Company's acquisitions of GreatFood.com, TheGift.com, Plow & Hearth and the sale of Floral Works as if such transactions had been completed on June 29, 1997. The selected unaudited pro forma combined financial data do not purport to be indicative of what actual results of operations would have been had such transactions been completed at the assumed times do not purport to be indicative of future operations and should not be construed as representative of future operations. <TABLE> <CAPTION> YEARS ENDED --------------------------------------------- JULY 2, 2000 JUNE 27, 1999 JUNE 28, 1998 -------------- ------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Net revenues (*) $ 378,565 $ 284,854 $244,854 Loss from operations $ (86,478) $ (19,116) $(1,632) Net loss applicable to common stockholders $ (77,418) $ (22,720) $(4,808) Net loss per common share $ (1.27) $ (0.52) $ (0.11) </TABLE> (*) Pre-acquisition net revenues for GreatFood.com and TheGift.com were not material to the Company's results of operations. 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters and subject areas discussed in this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company's current expectations, assumptions, estimates and projections about its business and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, as more fully described under the caption "Risk Factors that May Affect Future Results" and elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW 1-800-FLOWERS.COM, Inc. is a leading multi-channel source of thoughtful gift products, offering an extensive array of fresh-cut flowers, plants, gift baskets, gourmet foods, home decor and garden merchandise and other unique products. With one of the most recognized brands in retailing and a history of successfully integrating technologies and business innovations, the Company has evolved into a "next age" retailer providing convenient, multi-channel access for customers via the Internet, telephone, catalogs and retail stores. 1-800-FLOWERS.COM offers thousands of stock keeping units ("SKUs") including flowers, plants, specialty gifts, gourmet foods, gift baskets, garden accessories, and home decor items. The Company's product offering reflects a carefully selected assortment of high quality merchandise chosen for its unique "thoughtful gifting" qualities which accommodate customer needs in celebrating a special occasion or conveying a personal sentiment. Many products are available for same-day or overnight delivery and all come with the Company's 100% satisfaction guarantee. In addition to the Company's selection of thoughtful gifts, the Company's product line is further complemented by its subsidiaries which include Plow & Hearth, a direct marketer (catalog and web: www.plowhearth.com) of home decor and garden products, and GreatFood.com (www.greatfood.com) the #1 online destination (Time magazine 12/99) for gourmet food products. A majority of the Company's floral and floral-related gift products are fulfilled through one of 1,500 fulfillment centers, including the BloomNet network of independent florists and the Company's owned or franchised stores. The Company transmits its orders either through BloomLink, its proprietary Internet-based electronic communication system, or the communication system of a third-party. Remittance to the fulfilling florist is processed either through a third-party wire service that reconciles and effects payments between sending and fulfilling florists, called a clearinghouse, or is directly paid by the Company. Consistent with industry practice, the Company remits 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%-9% fee for its services. Additionally, when settling directly with the fulfilling florist, the Company remits 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. The Company's home and garden merchandise and non-floral related gift products and gourmet foods are shipped by the Company, 26
members of BloomNet or third parties directly to the customer. The Company ships non-floral gift items by Federal Express, United Parcel Service, United States Postal Service or other common carriers. Most of the Company's home and garden products are fulfilled from the Company's Madison, Virginia fulfillment center. The Company's retail fulfillment operations primarily consist of 39 owned and 83 franchised stores. Retail fulfillment revenues also include revenues attributable to the Company's Floral Works wholesale floral subsidiary (through the date of its disposition in January 2000), fees paid to the Company by members of its BloomNet network and royalties, fees and sublease rent paid to the Company by its franchised stores. Company owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs. As such, a majority of the revenues derived from Company owned stores represent fulfillment of its floral orders and are eliminated as intercompany revenues. The Company expects to incur losses for the foreseeable future as a result of the significant operating and capital expenditures required to achieve its objectives. However, the Company expects to achieve positive EBITDA for the fourth quarter of fiscal 2001 and full year of fiscal 2002. No assurances can be made that positive EBITDA can be achieved on this schedule or at all. In order to achieve and maintain profitability, the Company will need to generate revenues significantly above historical levels. The Company's prospects for achieving profitability must be considered in light of the risks, uncertainties, expenses, and difficulties encountered by companies in the rapidly evolving market of online commerce. RESULTS OF OPERATIONS The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal year 2000, which ended July 2, 2000 consisted of 53 weeks, while fiscal years 1999 and 1998, which ended on June 27, 1999 and June 28, 1998, respectively, consisted of 52 weeks. As such, a portion of the increase in the Company's fiscal year 2000 revenues, and associated variable expenses, was attributable to the additional week of activity during the period. NET REVENUES <TABLE> <CAPTION> Years Ended ---------------------------------------------------------------------- July 2, June 27, June 28, 2000 % Change 1999 % Change 1998 ------------ --------------- ------------- ------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Net revenues: Telephonic $230,221 12.9% $203,885 26.0% $161,874 Online 119,019 125.0% 52,886 97.7% 26,748 Retail/fulfillment 36,010 (7.9%) 39,102 22.3% 31,970 ------ ------ ------ $385,250 30.2% $295,873 34.1% $220,592 </TABLE> Net revenues consist primarily of the selling price of merchandise and service and shipping charges, net of returns and credits. Growth in both telephonic and online revenues during the years ended July 2, 2000 and June 27, 1999 was due to an increase in order volume and average net revenue per order as a result of increased marketing spending, an increase in repeat purchases from existing customers, and the Company's continued expansion into non-floral products, including a broad range of items such as online greeting cards, candies and gourmet items, as well as unique gifts for the home and garden. Non-floral gift products accounted for 29.6%, 21.4% and 5.3% of total merchandise sold during the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. During the fiscal years ended July 2, 2000 and June 27, 1999, the Company added approximately 2.7 million and 2.2 million new customers, respectively, bringing its cumulative customer accounts, at July 2, 2000, to over 9.3 million, 2.2 million of which have transacted business either through the 1-800-flowers.com Web site or one of its affiliated portal partners. In addition, online revenue growth continues to be driven by increased traffic coming directly to the Companys' URL's ("Universal Resource Locators"), which accounted for 69.0%, 45.9% and 37.1% of total online orders during the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. The continued growth of telephonic revenues demonstrates the benefits of providing customers with multiple channel access to products and services. Additionally, a large component of the growth in the 27
telephonic revenues during the year ended June 27, 1999 was attributable to the Company's April 1998 acquisition of Plow & Hearth. Revenue derived from the Company's GreatFood.com subsidiary, which is included in the Company's results of operations since it was acquired on November 24, 1999, was not material in relation to consolidated revenue for the year ended July 2, 2000. The decrease in retail/fulfillment revenues during the year ended July 2, 2000 in comparison to the year ended June 27, 1999 was due to a $5.1 million reduction in floral wholesale net revenue as a result of the Company's divestiture of Floral Works in January 2000, offset by an increase in retail net revenue due to growth in the number of owned retail stores from 36 at June 27, 1999 to 39 at July 2, 2000, and an increase in same store sales. The increase in retail/fulfillment revenues during the year ended June 27, 1999, in comparison to the year ended June 28, 1998, was primarily due to the growth in the number of owned retail stores from 23 to 36. In accordance with the Company's redeployment plan discussed below, the Company does not expect to materially increase the number of owned retail stores in the foreseeable future. GROSS PROFIT <TABLE> <CAPTION> Years Ended ----------------------------------------------------------------------- July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Gross profit $147,757 27.2% $116,176 38.9% $83,626 Gross margin % 38.4% 39.3% 37.9% </TABLE> Gross profit consists primarily of net revenues less cost of revenues which consist 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 direct-to-consumer operations and to properties that are sublet to the Company's franchisees. During the years ended July 2, 2000 and June 27, 1999, gross profit increased as a result of increased sales volume and average net revenue per order. Gross margin percentage during the year ended July 2, 2000 declined 0.9 percentage points in comparison to the prior year due to certain introductory product pricing, including promotions related to the successful launch of the Company's exclusive line of "Fleur de Chocolate" branded Belgian candies, a higher credit and replacement rate on floral orders during the Valentine's and Mother's day holidays to increase customer satisfaction and loyalty, and an increase in the average merchandise sales price on florist fulfilled orders which, while generating higher absolute gross profit dollars, results in a lower gross margin percentage since the Company's fixed service charge is spread over a higher sales price. The gross margin percentage increase during June 27, 1999 was primarily attributable to the April 1998 acquisition of Plow & Hearth, whose product line carries a higher margin than floral products. 28
MARKETING AND SALES EXPENSE <TABLE> <CAPTION> Years Ended ---------------------------------------------------------------------- July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Marketing and sales $161,075 74.8% $92,147 66.3% $55,417 Percentage of sales 41.8% 31.1% 25.1% </TABLE> Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, fees paid to establish and maintain strategic relationships with Internet portal companies, costs associated with retail stores, customer service center and fulfillment center operations and the operating expenses of the Company's departments engaged in marketing, selling and merchandising activities. The increases in marketing and sales expense during the years ended July 2, 2000 and June 27, 1999 were primarily attributable to higher discretionary spending in traditional media advertising, relationship and direct marketing, additions to the Company's marketing and merchandising staff, as well as additional sales personnel in support of order fulfillment and customer service activities, and additional online portal expenses as a result of the Company's expanded agreement with America Online, contract renewal with Excite and Microsoft Network and new agreements with Snap.com and Yahoo! In addition, in June 2000, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a redeployment charge of approximately $2.1 million. The principal actions of the charge include the closure of certain retail stores in connection with the Company's strategic redeployment of its retail network of direct fulfillment centers and the relocation of certain customer service centers, enabling the Company to meet increasing call volume requirements, while reducing costs per call. The redeployment will be completed in phases during fiscal year 2001. The major components of the redeployment charge include the estimated provision for the present value of future lease obligations and related facility shut down costs in the amount of approximately $1.0 million (charged to marketing and sales expense), and the estimated unrecoverable book value of abandoned fixtures, equipment and leasehold improvements in the amount of approximately $1.1 million (charged to depreciation and amortization-see below). In addition to the above, a significant portion of the increase during the year ended June 27, 1999 was due to incremental catalog printing and circulation expenditures resulting from the April 1998 Plow & Hearth acquisition. In order to continue to execute its business plan, in future periods, the Company expects to continue to invest significantly in its marketing and sales efforts to continue to acquire new customers, while also leveraging its already significant customer base through cost effective, customer retention initiatives. Such spending will be within the context of the Company's overall marketing plan which is continually evaluated and revised to reflect the results of the Company's market research, which seek to determine the most cost efficient use of the Company's marketing dollars. Such evaluation includes the ongoing review of the Company's strategic relationships with its internet portal partners to ensure that such relationships continue to generate cost-effective incremental volume. 29
TECHNOLOGY AND DEVELOPMENT EXPENSE <TABLE> <CAPTION> Years Ended ---------------------------------------------------------------------- July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Technology and development $16,809 108.4% $8,067 349.7% $1,794 Percentage of sales 4.4% 2.7% 0.8% </TABLE> Technology and development expense consists primarily of expenditures incurred by the Company to maintain, monitor and manage the Company's Web site, including design, content development and third-party hosting, as well as maintenance, support, and licensing costs pertaining to its associated order entry, customer service, fulfillment and database systems. The increase in technology and development expense during the years ended July 2, 2000 and June 27, 1999 was primarily attributable to development costs incurred to enhance the content and functionality of the Company's Web site and transaction processing systems, and additional payroll, recruiting and related expenses associated with the staffing of the technology department to accommodate the Company's growth. During the years ended July 2, 2000 and June 27, 1999, the Company expended $35.3 million and $16.2 million on technology and development, of which $18.5 million and $8.1 million have been capitalized, respectively. The Company believes that continued investment in technology and development is critical to attaining its strategic objectives and, as a result, technology and development costs are expected to continue to increase in comparison to prior years, particularly in the areas of Web site development and database management. GENERAL AND ADMINISTRATIVE EXPENSES <TABLE> <CAPTION> Years Ended ---------------------------------------------------------------------- July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> General and administrative $28,975 84.0% $15,748 (0.5%) $15,832 Percentage of sales 7.5% 5.3% 7.2% </TABLE> General and administrative expense consists of payroll and other expenses in support of the Company's executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses. The increase in general and administrative expenses during the year ended July 2, 2000 was the result of costs associated with additions to the management team and administrative increases associated with operating as a public company. In addition, $3.1 million of the increase during the year ended July 2, 2000 was attributable to the effect of the management put liability associated with the Plow & Hearth acquisition. During the year ended July 2, 2000, the Company recorded a charge of $1.5 million to increase the liability in accordance with the acquisition valuation formula contained in the Plow & Hearth stockholders' agreement between the Company, Plow & Hearth and Plow & Hearth management shareholders. Conversely, in accordance with the agreement, during the year ended June 27, 1999, the Company recorded a benefit of $1.6 million to reduce the related liability. The Company believes that its current general and administrative infrastructure is sufficient to support existing requirements and, as such, while increasing in absolute dollars, general and administrative expenses should, on a seasonally adjusted basis, begin to decline as a percentage of net revenues in fiscal year 2001. 30
DEPRECIATION AND AMORTIZATION <TABLE> <CAPTION> Years Ended ---------------------------------------------------------------------- July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Depreciation and amortization $16,479 96.5% $8,385 101.2% $4,168 Percentage of sales 4.3% 2.8% 1.9% </TABLE> Increases in depreciation and amortization expense during the years ended July 2, 2000 and June 27, 1999 resulted from additional capital expenditures in short-lived information systems hardware and software, as well as amortization of goodwill resulting from the Company's acquisitions of GreatFood.com and TheGift.com in November 2000 and Plow & Hearth in April 1998. In addition, for the year ended July 2, 2000, as described further above, the Company recorded a one-time charge of approximately $1.0 million, included within depreciation and amortization, to reserve for the estimated unrecoverable book value of abandoned fixtures, equipment and leasehold improvements associated with the Company's redeployment plan. The Company expects that depreciation and amortization will continue to increase in fiscal year 2001 due to recent expenditures on short-lived information systems hardware and software and the full-year impact of the amortization of goodwill related to the Company's acquisitions of GreatFood.com and TheGift.com. OTHER INCOME (EXPENSE) <TABLE> <CAPTION> Years Ended ------------------------------------------------------------------ July 2, 2000 % Change June 27, 1999 % Change June 28, 1998 -------------- -------- --------------- -------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Interest income $8,645 508.8% $1,420 10.1% $1,290 Interest expense (1,444) (44.7%) (2,610) 121.8% (1,177) Other, net 221 3,057.1% 7 99.5% 1,541 </TABLE> Other income (expense) consists primarily of interest earned on the cash proceeds from the Company's IPO in August 1999, and private placement which was completed in May 1999, offset by interest expense attributable to the Company's mortgage notes, capital leases, credit facility, and promissory notes issued to sellers in certain acquisitions. The Company's credit facility, including a term loan ($18.0 million) and line of credit ($3.0 million) was repaid with the proceeds of the Company's IPO in August 1999, while certain seller financed acquisition obligations ($2.5 million) associated with the Company's franchise operations were repaid in November 1999. During the year ended June 28, 1998, the Company recorded other income net, of approximately $1.7 million, consisting primarily of a $1.5 million dividend from a minority investment. Income Taxes For the years ended July 2, 2000 and the June 27, 1999, the Company incurred a loss that provided a tax benefit of $1.3 million and $2.7 million, respectively. For the year ended July 2, 2000, the effective tax rate differed from the combined U.S. statutory tax rate as a result of providing a full valuation allowance on that portion of the Company's deferred tax assets, consisting primarily of net operating loss carryforwards, that exceeded the amount of recoverable income taxes due to allowable carryback claims, because of the uncertainty regarding its realizability. For the year ended June 27, 1999, the effective tax rate differed from the combined U.S. statutory tax rate primarily as a result of the non-deductibility of certain goodwill amortization and the provision of a valuation allowance on state tax benefits. For the year ended June 28, 1998, the Company provided for taxes of $3.2 million at an effective rate of 39.4%. 31
QUARTERLY RESULTS OF OPERATIONS The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2000 and 1999. The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly the Company's results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period. <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------------------------------------------------------------------------- JULY 2, MAR. 26, DEC. 26, SEPT. 26, JUNE 27, MAR. 28, DEC. 27, SEPT. 27, 2000 2000 1999 1999 1999 1999 1998 1998 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> Net revenues: Telephonic $67,731 $47,249 $77,618 $37,623 $57,640 $43,903 $67,972 $34,370 Online 47,494 30,051 29,703 11,771 22,638 13,219 10,771 6,258 Retail fulfillment 8,062 7,745 11,487 8,716 11,927 10,168 10,061 6,946 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- Total net revenues 123,287 85,045 118,808 58,110 92,205 67,290 88,804 47,574 Cost of revenues 75,607 54,143 71,216 36,527 55,959 42,098 51,847 29,793 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- Gross profit 47,680 30,902 47,592 21,583 36,246 25,192 36,957 17,781 Operating expenses: Marketing and sales 45,088 36,789 52,802 26,396 24,943 19,684 33,065 14,455 Technology and development 4,810 4,097 3,833 4,069 2,860 2,273 1,807 1,127 General and administrative 7,025 6,773 7,249 7,928 5,220 4,907 3,273 2,348 Depreciation and amortization 6,277 4,487 3,422 2,293 2,342 2,157 2,015 1,871 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- Total operating expenses 63,200 52,146 67,306 40,686 35,365 29,021 40,160 19,801 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- Operating (loss) income (15,520) (21,244) (19,714) (19,103) 881 (3,829) (3,203) (2,020) Other income (expense), net 2,191 1,711 1,954 1,609 (162) (378) (623) (227) Income tax benefit (provision) 420 268 249 349 (211) 1,178 1,071 677 --------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- Net (loss) income $(12,909) $(19,265) $(17,511) $(17,145) $508 $(3,029) $(2,755) $(1,570) ========= ========== ========== ========== ========== =========== =========== ========== </TABLE> The Company's quarterly results may experience seasonal fluctuations. Historically, revenues have been highest in the fourth fiscal quarter, due to a number of major floral gifting occasions, including Mother's Day, Secretaries' Week and Easter. Due to the Company's expansion into gift, home, gourmet and related products, sales volume generated during the Thanksgiving and Christmas holidays have increased significantly from historical levels, and as such, in the future, the Company expects its second fiscal quarter revenues to represent a larger proportion of its total revenues. LIQUIDITY AND CAPITAL RESOURCES At July 2, 2000, the Company had working capital of $82.1 million, including cash and equivalents of $111.6 million, compared to working capital of $85.6 million, including cash and equivalents of $99.2 million at June 27, 1999. Net cash used in operating activities of $34.4 million for the year ended July 2, 2000 was principally attributable to net losses, reduced by non-cash charges of depreciation and amortization and working capital changes comprised primarily of increases in accounts payable and accrued expenses, offset by increases in inventory associated with the Company's expansion into non-floral product lines, and other assets resulting from increases of deferred catalog costs. 32
Net cash used in investing activities of $45.7 million for the year ended July 2, 2000 consisted primarily of capital expenditures and the acquisitions of GreatFood.com and all of the remaining outstanding shares of common stock and stock options from the minority shareholders of the Company's Plow & Hearth subsidiary, partially offset by the sale of the Company's floral wholesale subsidiary Floral Works in January 2000. Net cash provided by financing activities of $92.5 million for the year ended July 2, 2000 resulted from the net proceeds from the issuance of Class A common stock in the Company's IPO, less repayments of amounts outstanding under the Company's credit facilities, seller financed acquisition obligations and capital lease obligations. The Company's material capital commitments consist of: o obligations outstanding under capital and operating leases as well as commercial notes related to obligations arising from, and collateralized by, the construction of the Company's warehousing/fulfillment facility in Madison, Virginia. o online marketing agreements with America Online, Inc. ("AOL"). On September 1, 2000, the Company entered into a new five year, $22.1 million interactive marketing agreement with AOL that effectively extends and enhances the term of the Company's previous agreement with AOL for an additional two years, through August 2005. Under the terms of the new agreement, the Company will continue as the exclusive marketer of fresh-cut flowers across six AOL properties including AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City and ICQ and receive increased promotions across several of the AOL properties. At July 2, 2000, the Company's significant known commitments for the subsequent twelve months totaled approximately $26.5 million and were comprised of fees related to online marketing agreements (including the new AOL agreement), co-marketing fees related to airline frequent flier programs, expenses under its operating leases, interest expense and the current portion of long term debt and capital lease obligations. The Company intends to continue to invest heavily to support its growth strategy. These investments include continued advertising and marketing programs designed to enhance the Company's brand name recognition with customers, continued expansion of its product lines to include a broad variety of specialty gift and gourmet items, and the further development of its Web site operating infrastructure. The Company believes that current cash and equivalents will be sufficient to meet these anticipated cash needs for at least the next twelve months. However, any projection of future cash needs and cash flows are subject to substantial uncertainty. If current cash and cash that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain lines of credit, in addition to the $5.7 million credit line currently available. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the Company will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Management believes that the provision of SAB No. 101 will not impact the Company's revenue recognition policies. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative 33
Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the consolidated financial position of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds with portfolios of investment grade corporate and U.S. government securities and, secondarily, its long-term debt arrangements. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Annual Financial Statements: See Part IV, Item 14 of this Annual Report on Form 10-K. Selected Quarterly Financial Data: See Part II, Item 7 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Incorporated by reference from the portions of the Definitive Proxy Statement entitled "Proposal 1-Election of Directors," "Additional Information" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from the portions of the Definitive Proxy Statement entitled "Executive Compensation" and "Additional Information-Compensation of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the portion of the Definitive Proxy Statement entitled "Security Ownership by Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from the portion of the Definitive Proxy Statement entitled "Certain Relationships and Related Transactions." 35
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. Upon written request, the Company will provide, without charge, a copy of this Annual Report on Form 10-K, including the consolidated financial statements, financial statement schedule and any exhibits for the Company's most recent fiscal year. All requests should be sent to: 1-800-FLOWERS.COM, Inc. Investor Relations 1600 Stewart Avenue Westbury, New York 11590 (516) 237-6000 (a) List of Documents Filed as a Part of this Annual Report on Form 10-K: <TABLE> <CAPTION> (1) Index to Consolidated Financial Statements: Page ---- <S> <C> Report of Independent Auditors F-1 Consolidated Balance Sheets as of July 2, 2000 and June 27, 1999 F-2 Consolidated Statements of Operations for the years ended July 2, 2000, June 27, 1999 and June 28, 1998 F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended July 2, 2000, June 27, 1999 and June 28, 1998 F-4 Consolidated Statements of Cash Flows for the years ended July 2, 2000, June 27, 1999 and June 28, 1998 F-5 Notes to Consolidated Financial Statements F-6 (2) Index to Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts S-1 </TABLE> All other information and financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (3) Index to Exhibits The following exhibits are required to be filed with this Report by Item 14. Other than exhibits 10.23, 21.1, 23.1 and 27.1, which are filed herewith, the following exhibits are incorporated by reference to the exhibits of same number contained in the Company's registration statement on Form S-1 (No. 333-78985), dated August 2, 1999. Exhibit Description Number - -------------- 3.1 Third Amended and Restated Certificate of Incorporation. 3.2 Amendment No. 1 to Third Amended and Restated Certificate of Incorporation. 3.3 Amended and Restated By-laws. 4.1 Specimen class A common stock certificate. 4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of Incorporation and By-laws of the Registrant 36
defining the rights of holders of Common Stock of the Registrant. 4.3 Reserved. 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 Reserved 10.5 Reserved 10.6 Reserved 10.7* E-Commerce Merchant Agreement for The Plaza on MSN, with a term start date of October 21, 1997, between The Microsoft Network, L.L.C. and 800-FLOWERS, Inc., as amended. 10.8 Reserved 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 Reserved 10.12 Reserved 10.14 Employment Agreement, effective as of April 3, 1998, between Peter G. Rice 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 Reserved 10.22# Amended and Restated Interactive Marketing Agreement, made and entered into on September 1, 2000, by and between America Online, Inc. and 1-800-FLOWERS.COM, Inc. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (included in the signature page). 27.1 Financial Data Schedule for the year ended July 2, 2000. - ---------------------------------------------- * Confidential treatment granted for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. # Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Exchange Act. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended July 2, 2000 37
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 29, 2000 1-800-FLOWERS.COM, Inc. By: /s/ James F. McCann James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) POWER OF ATTORNEY We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc. (the "Company"), hereby severally constitute and appoint James F. McCann and William E. Shea, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, to sign any and all amendments to this Annual Report, and other documents in connection therewith, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below: Date: September 29, 2000 By: /s/ James F. McCann ------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: September 29, 2000 By: /s/ William E. Shea ------------------------- William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer) 38
Date: September 29, 2000 By: /s/ Christopher G. McCann ------------------------------- Christopher G. McCann Director, President Date: September 29, 2000 By: /s/ David Beirne ------------------------------- David Beirne Director Date: September 29, 2000 By: /s/ Lawrence Calcano ------------------------------- Lawrence Calcano Director Date: September 29, 2000 By: /s/ Charles R. Lax ------------------------------- Charles R. Lax Director Date: September 29, 2000 By: /s/ T. Guy Minetti ------------------------------- T. Guy Minetti Director, Vice Chairman Date: September 29, 2000 By: /s/ Kevin J. O'Connor ------------------------------- Kevin J. O'Connor Director Date: September 29, 2000 By: /s/ Jeffrey C. Walker ------------------------------- Jeffrey C. Walker Director 39
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 July 2, 2000 and June 27, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 2, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 1-800-FLOWERS.COM, Inc. and Subsidiaries at July 2, 2000 and June 27, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 2, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Melville, New York August 16, 2000, except for Note 12, Commitments and Contingencies- Online Marketing Agreements, as to which the date is September 1, 2000 F-1
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> JULY 2, JUNE 27, 2000 1999 ------------- ------------ <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 111,624 $ 99,183 Receivables, net 8,382 9,284 Inventories 10,569 7,496 Prepaid and other 4,330 3,738 Deferred tax assets - 1,504 ------------- ------------ Total current assets 134,905 121,205 Property, plant and equipment at cost, net 40,854 27,525 Capitalized investment in leases 965 1,452 Goodwill and investment in licenses, net of accumulated amortization of $8,797 and $3,636 in 2000 and 1999, respectively 38,040 25,077 Other assets 9,877 7,096 ------------- ------------ Total assets $224,641 $182,355 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 50,937 $ 28,939 Current maturities of long-term debt and obligations under capital leases 1,839 6,647 ------------- ------------ Total current liabilities 52,776 35,586 Long-term debt and obligations under capital leases 9,441 27,457 Deferred tax liabilities - 183 Management put liability - 6,300 Other liabilities 3,506 3,826 ------------- ------------ Total liabilities 65,723 73,352 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued in 2000 and 1,127,546 shares issued and outstanding in 1999, stated at liquidation value - 117,573 Class A common stock, $.01 par value, 200,000,000 shares authorized, 26,362,068 and 4,100,012 shares issued in 2000 and 1999, respectively 264 41 Class B common stock, $.01 par value, 200,000,000 shares authorized, 43,141,645 and 45,579,005 shares issued in 2000 and 1999, respectively 432 456 Additional paid-in capital 239,475 6,038 Retained deficit (77,357) (10,527) Deferred compensation (788) (1,470) Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108) ------------- ------------ Total stockholders' equity 158,918 109,003 ------------- ------------ Total liabilities and stockholders' equity $ 224,641 $182,355 ============= ============ </TABLE> SEE ACCOMPANYING NOTES. F-2
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED -------------------------------------------- JULY 2, JUNE 27, JUNE 28, 2000 1999 1998 -------------- -------------- ------------- <S> <C> <C> <C> Net revenues $385,250 $295,873 $220,592 Cost of revenues 237,493 179,697 136,966 -------------- ----------------------------- Gross profit 147,757 116,176 83,626 Operating expenses: Marketing and sales 161,075 92,147 55,417 Technology and development 16,809 8,067 1,794 General and administrative 28,975 15,748 15,832 Depreciation and amortization 16,479 8,385 4,168 -------------- ----------------------------- Total operating expenses 223,338 124,347 77,211 -------------- ----------------------------- Operating (loss) income (75,581) (8,171) 6,415 Other income (expense): Interest income 8,645 1,420 1,290 Interest expense (1,444) (2,610) (1,177) Other, net 221 7 1,541 -------------- ----------------------------- Total other income (expense) 7,422 (1,183) 1,654 -------------- ----------------------------- (Loss) income before income taxes and minority interests (68,159) (9,354) 8,069 Benefit (provision) for income taxes 1,286 2,715 (3,181) -------------- ----------------------------- (Loss) income before minority interests (66,873) (6,639) 4,888 Minority interests in operations of consolidated subsidiaries 43 (207) 186 -------------- ----------------------------- Net (loss) income (66,830) (6,846) 5,074 Redeemable Class C common stock dividends - (5,215) (1,608) -------------- ----------------------------- Net (loss) income applicable to common stockholders $(66,830) $(12,061) $3,466 ============== ============================= Net (loss) income per common share applicable to common stockholders: Basic $(1.10) $(0.27) $0.08 ============== ============================= Diluted $(1.10) $(0.27) $0.07 ============== ============================= Shares used in the calculation of net (loss) income per common share applicable to common stockholders: Basic 60,889 44,035 44,120 ============== ============================= Diluted 60,889 44,035 46,610 ============== ============================= </TABLE> SEE ACCOMPANYING NOTES. F-3
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JULY 2, 2000, JUNE 27, 1999 AND JUNE 28, 1998 (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> COMMON STOCK --------------------------------------------- PREFERRED STOCK CLASS A CLASS B ----------------------- --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- --------- ----------- ------ ----------- ----- <S> <C> <C> <C> <C> <C> <C> Balance at June 29, 1997 -- $ -- 480,870 $ 5 48,849,927 $ 488 Accrual of Redeemable Class C common stock dividends -- -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- -- Comprehensive income: Net income -- -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- -- ----- Total comprehensive income -- -- -- -- -- -- ---------- --------- ----------- ----- ----------- ----- Balance at June 28, 1998 -- -- 480,870 5 48,849,927 488 Accrual of Redeemable Class C common stock dividends -- -- -- -- -- -- Employee stock options -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- Issuance of Series A preferred stock 1,127,546 117,573 -- -- -- -- Issuance of Class A common stock in connection with redemption of Class C common stock -- -- 263,452 3 -- -- Issuance of Class B common stock in connection with redemption of Class C common stock -- -- -- -- 84,768 1 Conversion of Class B common stock into Class A common stock -- -- 3,836,560 38 (3,836,560) (38) Conversion of Class A common stock into Class B common stock -- -- (480,870) (5) 480,870 5 Comprehensive loss: Net loss -- -- -- -- -- -- Unrealized loss on marketable securities -- -- -- -- -- -- ----- Total comprehensive loss -- -- -- -- -- -- ---------- --------- ----------- ----- ----------- ----- Balance at June 27, 1999 1,127,546 117,573 4,100,012 41 45,579,005 456 Exercise of stock options and warrants -- -- 2,431,857 25 -- -- Forfeiture of employee stock options -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- Conversion of preferred stock into Class A common stock (1,127,546) (117,573) 11,275,460 113 -- -- Issuance of common stock in connection with Initial Public Offering, net of issuance costs of $11,236 -- -- 6,000,000 60 -- -- Conversion of Class B common stock into Class A common stock -- -- 2,437,360 24 (2,437,360) (24) Issuance of shares of common stock in connection with the acquisition of TheGift.com -- -- 117,379 1 -- -- Comprehensive loss: Net loss -- -- -- -- -- -- ----- Total comprehensive loss -- -- -- -- -- -- ---------- --------- ----------- ----- ----------- ----- Balance at July 2, 2000 -- $ -- 26,362,068 $ 264 43,141,645 $ 432 ========== ========= =========== ===== =========== ===== <CAPTION> ACCUMULATED OTHER TOTAL ADDITIONAL COMPREHENSIVE RETAINED TREASURY STOCK STOCKHOLDERS' PAID-IN INCOME EARNINGS DEFERRED --------------------- EQUITY CAPITAL (LOSS) (DEFICIT) COMPENSATION SHARES AMOUNT (DEFICIT) --------- ---- -------- ------- --------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at June 29, 1997 $ 1,739 $ 5 $ (1,932) $ -- 5,191,400 $(2,975) $ (2,670) Accrual of Redeemable Class C common stock dividends -- -- (1,608) -- -- -- (1,608) Purchase of treasury stock -- -- -- -- 141,400 (133) (133) Comprehensive income: Net income -- -- 5,074 -- -- -- 5,074 Unrealized gain on marketable securities -- 9 -- -- -- -- 9 --------- Total comprehensive income -- -- -- -- -- -- 5,083 --------- ---- -------- ------- --------- ------- --------- Balance at June 28, 1998 1,739 14 1,534 -- 5,332,800 (3,108) 672 Accrual of Redeemable Class C common stock dividends -- -- (1,584) -- -- -- (1,584) Employee stock options 1,680 -- -- (1,680) -- -- -- Amortization of deferred compensation -- -- -- 210 -- -- 210 Issuance of Series A preferred stock (1,008) -- -- -- -- -- 116,565 Issuance of Class A common stock in connection with redemption of Class C common stock 2,744 -- (2,747) -- -- -- -- Issuance of Class B common stock in connection with redemption of Class C common stock 883 -- (884) -- -- -- -- Conversion of Class B common stock into Class A common stock -- -- -- -- -- -- -- Conversion of Class A common stock into Class B common stock -- -- -- -- -- -- -- Comprehensive loss: Net loss -- -- (6,846) -- -- -- (6,846) Unrealized loss on marketable securities -- (14) -- -- -- -- (14) --------- Total comprehensive loss -- -- -- -- -- -- (6,860) --------- ---- -------- ------- --------- ------- --------- Balance at June 27, 1999 6,038 -- (10,527) (1,470) 5,332,800 $(3,108) 109,003 Exercise of stock options and warrants 98 -- -- -- -- -- 123 Forfeiture of employee stock options (315) -- -- 315 -- -- -- Amortization of deferred compensation -- -- -- 367 -- -- 367 Conversion of preferred stock into Class A common stock 117,460 -- -- -- -- -- -- Issuance of common stock in connection with Initial Public Offering, net of issuance costs of $11,236 114,704 -- -- -- -- -- 114,764 Conversion of Class B common stock into Class A common stock -- -- -- -- -- -- -- Issuance of shares of common stock in connection with the acquisition of TheGift.com 1,490 -- -- -- -- -- 1,491 Comprehensive loss: Net loss -- -- (66,830) -- -- -- (66,830) --------- Total comprehensive loss -- -- -- -- -- -- (66,830) --------- ---- -------- ------- --------- ------- --------- Balance at July 2, 2000 $ 239,475 $ -- $(77,357) $ (788) 5,332,800 $(3,108) $ 158,918 ========= ==== ======== ======= ========= ======= ========= </TABLE> SEE ACCOMPANYING NOTES. F-4
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> YEARS ENDED ------------------------------------------------ JULY 2, 2000 JUNE 27, 1999 JUNE 28, 1998 --------------- ------------------------------- <S> <C> <C> <C> Operating activities: Net (loss) income $(66,830) $ (6,846) $ 5,074 Reconciliation of net (loss) income to net cash (used in) provided by operations: Depreciation and amortization 16,479 8,385 4,168 Deferred income taxes 1,321 (1,016) 265 Management put liability 1,451 (1,631) 1,631 Bad debt expense 221 444 383 Minority interests (43) 207 (186) Amortization of deferred compensation 367 210 - Loss on disposal of equipment and other 560 364 313 Changes in operating items, excluding the effects of acquisitions: Receivables (838) (1,296) (1,908) Inventories (3,574) (2,525) (373) Prepaid and other 166 (2,712) 732 Accounts payable and accrued expenses 20,663 4,203 1,265 Other assets (4,699) (3,787) (1,821) Other liabilities 344 715 (43) --------------- --------------- --------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (34,412) (5,285) 9,500 INVESTING ACTIVITIES: Acquisitions, net of cash acquired (25,515) - (15,206) Capital expenditures, net of non-cash expenditures-$1,445, $3,009 and $561 in 2000, 1999 and 1998, respectively (21,901) (11,960) (10,302) Purchases of investments (1,000) - (4,050) Proceeds from sales of investments 15 5,419 3,754 Proceeds from sale of business 2,488 - - Notes receivable, net 222 178 341 --------------- ------------------------------- NET CASH USED IN INVESTING ACTIVITIES (45,691) (6,363) (25,463) FINANCING ACTIVITIES: Redemption of Class C common stock - (4,347) - Proceeds from issuance of preferred stock, net - 101,636 - Proceeds from issuance of common stock, net 115,899 - - Payment of deferred offering costs - (1,019) - Proceeds from bank borrowings 21,717 35,402 15,500 Repayment of notes payable and bank borrowings (43,568) (28,075) (326) Payments of capital lease obligations (1,504) (1,639) (1,648) Acquisition of treasury stock - - (133) --------------- --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 92,544 101,958 13,393 --------------- --------------- --------------- Net change in cash and equivalents 12,441 90,310 (2,570) Cash and equivalents: Beginning of year 99,183 8,873 11,443 --------------- --------------- --------------- End of year $ 111,624 $ 99,183 $ 8,873 =============== =============================== </TABLE> SUPPLEMENTAL CASH FLOW INFORMATION: -Interest paid amounted to $1,457, $2,723 and $879 for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. -The Company received tax refunds of approximately $472 for the year ended July 2, 2000 and paid income taxes, net of refunds, of approximately $400 and $2,930 for the years ended June 27, 1999 and June 28, 1998, respectively. SEE ACCOMPANYING NOTES. F-5
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 2, 2000 NOTE 1. DESCRIPTION OF BUSINESS 1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading multi-channel source of thoughtful gift products, offering a wide array of fresh-cut flowers, plants, gift baskets, gourmet foods, and other unique products. Through its wholly-owned subsidiary, The Plow & Hearth, Inc. ("Plow & Hearth"), the Company offers an extensive mix of home and garden merchandise. The Company operates in one business segment, providing its customers with convenient, multi-channel access via the Internet, telephone, catalogs and retail stores. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal year 2000, which ended July 2, 2000 consisted of 53 weeks, while fiscal years 1999 and 1998, which ended on June 27, 1999 and June 28, 1998, respectively, consisted of 52 weeks. BASIS OF PRESENTATION The consolidated financial statements include the accounts of 1-800-FLOWERS.COM and its wholly-owned and majority-owned subsidiaries and partnerships (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements and footnotes thereto have been retroactively adjusted for a ten-for-one stock split effected in the form of a stock dividend on July 28, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method of accounting. 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 F-6
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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: LIFE ---------------- Building 40 years Leasehold improvements 5-20 years Furniture, fixtures and equipment (including computer equipment, software development costs and telecommunication equipment) 3-10 years GOODWILL AND LICENSES Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Amortization expense relating to goodwill is amortized on a straight-line basis over periods ranging from 3 to 20 years. Licenses represent the fair value of franchise agreements acquired in 1-800-FLOWERS.COM's acquisition of Amalgamated Consolidated Enterprises, Inc. and are amortized on a straight-line basis over a 16 year period. 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 26-weeks. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. An impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. FAIR VALUES OF FINANCIAL INSTRUMENTS The recorded amounts of the Company's cash and equivalents, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of the Company's long-term obligations are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method, the Company's fair value of long-term obligations was not significantly different than the stated values at July 2, 2000 and June 27, 1999. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of its holdings of cash and equivalents and accounts receivable. Cash and equivalents are deposited with high credit, quality financial institutions. Concentration of credit risk with respect to accounts receivable are limited due to the Company's large number of customers and their dispersion F-7
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) throughout the United States, and the fact that a substantial portion of receivables are related to balances owed by major credit card companies. INCOME TAXES 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. 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 product shipment. 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 direct-to-consumer 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 and merchandising activities. The Company expenses all advertising costs at the time the advertisement is first shown. Advertising expense (including the amortization of catalog costs of $21,839,000, 17,606,000 and $2,604,000 for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively) was $80,538,000, $42,233,000, and $20,121,000 for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. TECHNOLOGY AND DEVELOPMENT Technology and development expenses consist primarily of expenses incurred by the Company to maintain, monitor and manage the Company's Web site and its associated order entry, customer service, fulfillment and database systems. Costs associated with the acquisition or development of software for internal use are recognized in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. As such, if the software is expected to have a useful life beyond one year, development costs are capitalized and amortized over the software's useful life, typically three years. Costs associated with repair, maintenance or the development of Web site content are expensed as incurred as the useful life of such software modifications are less than one year. STOCK-BASED COMPENSATION The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion F-8
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Management believes that the provision of SAB No. 101 will not impact the Company's revenue recognition policies. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the consolidated financial position of the Company. RECLASSIFICATIONS Certain balances in the prior fiscal years have been reclassified to conform with the presentation in the current fiscal year. NOTE 3. ACQUISITIONS AND DISPOSITION ACQUISITION OF GREATFOOD.COM, INC. Pursuant to an agreement and plan of reorganization, on November 24, 1999, the Company completed its acquisition of GreatFood.com, Inc. ("GreatFood.com"), an online retailer of specialty and gourmet food products. The purchase price of approximately $18,900,000 was funded with a portion of the net proceeds available from the Company's initial public offering ("IPO"). The acquisition has been accounted for as a purchase and, accordingly, the operating results of GreatFood.com have been included in the Company's consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximating $19,000,000, is being amortized over three years. ACQUISITION OF THEGIFT.COM, INC. Pursuant to an agreement and plan of reorganization, on November 12, 1999, the Company completed its acquisition of TheGift.com, Inc. ("TheGift.com"), an online retailer of specialty gift products. The purchase price of approximately $1,500,000 was funded through the issuance of 117,379 shares of the Company's common stock, as determined based upon the average closing price of the Company's common stock for the five days prior to the date of acquisition. The acquisition has been accounted for as a purchase and, accordingly, the operating results of TheGift.com have been included in the Company's consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximating $1,700,000, is being amortized over three years. DISPOSITION OF FLORAL WORKS, INC. On January 12, 2000, the Company completed the sale of its Floral Works, Inc. ("Floral Works") subsidiary to a private investment firm, Eaglestone Partners, and the management of Floral Works. Floral Works is a provider of wholesale floral bouquets to supermarkets and grocery store chains. The sales price of F-9
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $3,100,000 approximated the Company's carrying value of the subsidiary's net assets at the time of divestiture. The following unaudited pro forma consolidated financial information has been prepared as if the acquisitions of GreatFood.com, TheGift.com, Plow & Hearth and the sale of Floral Works had taken place at the beginning of fiscal year 1998. The following unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisitions of GreatFood.com, TheGift.com, Plow & Hearth and the sale of Floral Works taken place at the beginning of the periods presented. <TABLE> <CAPTION> YEARS ENDED --------------------------------------------- JULY 2, 2000 JUNE 27, 1999 JUNE 28, 1998 -------------- ------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Net revenues (*) $ 378,565 $ 284,854 $244,854 Loss from operations $ (86,478) $ (19,116) $(1,632) Net loss applicable to common stockholders $ (77,418) $ (22,720) $(4,808) Net loss per common share $ (1.27) $ (0.52) $ (0.11) </TABLE> (*) Pre-acquisition net revenues for GreatFood.com and TheGift.com were not material to the Company's results of operations. ACQUISITION OF THE PLOW & HEARTH, INC. In April 1998, 1-800-FLOWERS.COM acquired 88% of the issued and outstanding shares of common stock (70% of the fully diluted equity due to the existence of outstanding management stock options) of Plow & Hearth, a home and garden catalog company located in Madison, Virginia. The purchase price was $16,100,000, exclusive of the management put liability described below. Pursuant to the terms of the Plow & Hearth stockholders' agreement between the Company, Plow & Hearth and Plow & Hearth management shareholders, upon completion of the Company's IPO on August 6, 1999, the Company acquired, for cash of approximately $7,900,000, net of Plow & Hearth stock option exercise proceeds of approximately $500,000, all of the remaining outstanding shares of common stock and stock options from the minority stockholders of Plow & Hearth, thereby satisfying its obligation under the management put liability initially established under the terms of the 1998 agreement. In accordance with the 1998 agreement, as amended, and the terms of the management put liability, each management shareholder and option holder had the right to cause Plow & Hearth to purchase its remaining minority equity interest, comprised of outstanding common stock and stock options, at a price contingent upon the operating profits of Plow & Hearth. Accordingly, the Company recorded a liability of $6,300,000, based on the value of such equity at the date of acquisition. In accordance with the valuation formula defined in the agreement, the liability was subsequently increased to $8,700,000 at June 28, 1998 and reduced to $6,300,000 at June 27, 1999. This resulted in a charge and subsequent reduction of general and administrative expenses of approximately $1,600,000 for the years ended June 28, 1998 and June 27, 1999, respectively, reflecting the change in value of the option holders' interest in Plow & Hearth, with the remaining adjustment of $800,000 increasing and subsequently reducing goodwill, reflecting the change in value of the minority holder's interest in Plow & Hearth. As of August 6, 1999, the Company's obligation under the management put liability increased to $7,900,000 based upon the valuation formula contained in the agreement. Accordingly, the $1,600,000 incremental F-10
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) funding required to satisfy the management put liability was recorded in the Company's fiscal year 2000 first quarter ended September 26, 1999 as general and administrative expense and goodwill in the amounts of $1,500,000 and $100,000, respectively. 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 $18,900,000 has been recorded as goodwill and is being amortized over 20 years. Concurrently with the acquisition of Plow & Hearth, the Company also acquired Plow & Hearth LP which owns the land and distribution center/office facility operated by 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. MINORITY OWNERSHIP INTEREST IN AMERICAN FLORAL SERVICES, INC. The Company owns a minority investment in American Floral Services, Inc. ("AFS"), a floral wire service, in the form of Class A common stock and 15% preferred stock. In fiscal year 1998, AFS repurchased, on a pro-rata basis, a portion of its then outstanding shares of Class A common stock. Accordingly, the Company recorded a gain on its investment in AFS of approximately $1,545,000, which was received and recorded as other income during the year ended June 28, 1998. In addition, during the years ended July 2, 2000, June 27, 1999 and June 28, 1998, the Company recorded $122,000, $123,000 and $123,000, respectively, of other income representing the accrual of cumulative preferred stock dividends. NOTE 4. REDEPLOYMENT CHARGE In June 2000, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a redeployment charge of approximately $2,100,000. The principal actions of the charge include the closure of certain retail stores in connection with the Company's strategic redeployment of its retail network of direct fulfillment centers and the relocation of certain customer service centers, enabling the Company to meet increasing call volume requirements, while reducing costs per call. The redeployment will be completed in phases during fiscal year 2001. The major components of the redeployment charge include the estimated unrecoverable book value of abandoned fixtures, equipment and leasehold improvements in the amount of approximately $1,100,000 (charged to depreciation and amortization), and the estimated provision for the present value of future lease obligations and related facility shut down costs in the amount of approximately $1,000,000 (charged to marketing and sales expense). F-11
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. PROPERTY, PLANT AND EQUIPMENT <TABLE> <CAPTION> JULY 2, 2000 JUNE 27, 1999 -------------- -------------- (IN THOUSANDS) <S> <C> <C> Computer equipment $ 23,085 $ 15,547 Software development costs 17,222 7,767 Telecommunication equipment 5,798 4,285 Leasehold improvements 8,608 6,363 Building and building improvements 6,421 5,745 Equipment 3,427 2,616 Furniture and fixtures 2,684 2,373 Land 396 389 -------------- -------------- 67,641 45,085 Accumulated depreciation and amortization 26,787 17,560 -------------- -------------- $ 40,854 $ 27,525 ============= ============== </TABLE> NOTE 6. LONG-TERM DEBT <TABLE> <CAPTION> JULY 2, 2000 JUNE 27, 1999 -------------- -------------- (IN THOUSANDS) <S> <C> <C> Bank term loan and revolving credit line (1) $ -- $21,000 Commercial notes and revolving credit line (2-5) 6,431 4,675 Seller financed acquisition obligations (6-7) 295 3,351 Obligations under capital leases (See Note 12) 4,554 5,078 -------------- -------------- 11,280 34,104 Less current maturities of long-term debt and obligations under capital leases 1,839 6,647 -------------- -------------- $9,441 $27,457 ============== ============== </TABLE> - ----------- (1) In connection with the completion of its IPO in August 1999, the Company repaid $21,000,000 of bank borrowings, representing all amounts outstanding under a term loan and revolving credit line. The following notes and credit lines relate to obligations arising from, and collateralized by, the construction and operation of the Company's warehousing/distribution facility in Madison, Virginia: (2) $5,700,000 revolving credit line dated December 13, 1999, renewable annually, (none outstanding at July 2, 2000 and June 27, 1999) bearing interest equal to the monthly LIBOR Index plus 1.75% per annum (8.40% at July 2, 2000). (3) $2,400,000 note dated June 13, 1997 ($2,181,000 outstanding at July 2, 2000), bearing interest at 8.19% per annum. The note is payable in 203 equal monthly installments of principal and interest commencing July 13, 1997. (4) $1,460,000 note dated July 1, 1998 ($1,353,000 outstanding at July 2, 2000), bearing interest F-12
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) equal to the monthly Treasury Bill rate plus 2.1% per annum (6.45% at July 2, 2000). The note is payable in 180 equal monthly installments of principal and interest commencing November 1, 1998. (5) $2,980,000 note dated May 12, 1999 ($2,897,000 outstanding at July 2, 2000), bearing interest at 7.61% per annum. The note is payable in 180 equal monthly installments of principal and interest commencing in October 15, 1994. The following notes relate to seller-financed acquisition obligations, all of which have been collateralized by either the stock or assets of various subsidiaries of the Company. Seller financed acquisition obligations associated with the Company's franchise operations were repaid in November 1999 using a portion of the proceeds of the Company's IPO, while obligations associated with the Company's acquisition of its Floral Works subsidiary were assumed by the purchaser upon the Company's divestiture of this subsidiary in January 2000: (6) $275,000 promissory note dated November 1, 1994 ($146,000 outstanding at July 2, 2000), bearing interest at 8% per annum. The note is payable in 120 equal monthly installments of principal and interest commencing December 1, 1994. (7) $160,000 non-interest bearing promissory note dated September 30, 1999 ($149,000 outstanding at July 2, 2000). The note is payable in 8 monthly installments of commencing August 31, 2001. As of July 2, 2000, long-term debt maturities, excluding amounts relating to capital leases, are as follows (in thousands): Debt Year Maturities ---- -------------- 2001 $309 2002 345 2003 370 2004 398 2005 404 Thereafter 4,900 -------------- $6,726 ============== F-13
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. INCOME TAXES Significant components of the benefit (provision) for income taxes are as follows: <TABLE> <CAPTION> YEARS ENDED -------------------------------------------- JULY 2, 2000 JUNE 27, 1999 JUNE 28,1998 -------------- ----------------------------- (IN THOUSANDS) <S> <C> <C> <C> Current: Federal $2,607 $1,699 $(2,039) State and local - - (877) -------------- ----------------------------- 2,607 1,699 (2,916) Deferred (1,321) 1,016 (265) -------------- ----------------------------- $1,286 $2,715 $(3,181) ============== ============================= </TABLE> The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax benefit (expense) is as follows: <TABLE> <CAPTION> YEARS ENDED -------------------------------------------- JULY 2, 2000 JUNE 27, 1999 JUNE 28, 1998 ------------- ----------------------------- <S> <C> <C> <C> Tax at U.S. statutory rates 34.0% 34.0% (34.0)% State income taxes, net of federal tax benefit 3.9 4.3 (7.5) Nondeductible goodwill amortization (2.6) (4.8) (2.1) Dividends received deduction - 0.2 4.4 Change in deferred tax asset valuation (32.0) (2.8) - Other (1.4) (1.9) (0.2) ------------- ----------------------------- 1.9% 29.0% (39.4)% ============= ============================= </TABLE> The significant components of the Company's deferred tax assets (liabilities) are as follows: <TABLE> <CAPTION> July 2, 2000 June 27, 1999 June 28, 1998 -------------- -------------- -------------- <S> <C> <C> <C> Deferred tax assets: Net operating loss carryforwards $ 20,909 $ 260 $ - Accrued expenses and reserves 3,086 1,504 1,637 Valuation allowance (22,098) (260) - Deferred tax liabilities: Installment sales (70) (147) (157) Tax in excess of book depreciation (1,827) (36) (1,175) -------------- -------------- -------------- Net deferred tax assets $ - $ 1,321 $ 305 ============== ============== ============== </TABLE> At July 2, 2000, the Company's U.S. federal and state net operating loss carryforwards for income tax purposes were approximately $52,300,000. If not utilized, these net operating loss carryforwards will begin to expire in fiscal year 2020. F-14
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. CAPITAL STOCK TRANSACTIONS INITIAL PUBLIC OFFERING On August 6, 1999, the Company closed its IPO of its Class A common stock, issuing 6,000,000 shares at a price of $21.00 per share. The Company raised proceeds of approximately $114,800,000, net of underwriting discounts, commissions and other offering costs of approximately $11,200,000. In anticipation of its IPO, the Company amended and restated its certificate of incorporation on July 7, 1999 to provide that all previously outstanding shares of Class A common stock, of which the holders 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 entitled to 10 votes per share. Additionally, a new series of Class A common stock was established that entitles the holders to one vote per share. Each share of new Class B common stock shall automatically convert into one share of new Class A common stock upon transfer, with limited exceptions, and at the option of the holder. PREFERRED STOCK AND CLASS C COMMON STOCK CONVERSION On May 20, 1999, the Company completed a private placement of 984,493 shares of preferred stock, yielding net proceeds of $101,600,000. In connection with this private placement, and pursuant to the terms of its 1995 investment agreement with the Company's venture capital partner, the Company redeemed the Class C common stock held by the venture capital partner for approximately $14,900,000 and issued to it 263,452 shares of Class A common stock. The venture capital partner used the redemption proceeds to purchase 143,053 shares of the Company's preferred stock. Concurrent with the completion of the private placement, the Company redeemed 84,768 shares of Class C common stock owned by its Chief Executive Officer for $4,300,000 and issued him 84,768 shares of Class B common stock. During the fiscal year ended June 27, 1999, the Company recorded a dividend in the amount of $5,200,000 as a result of the issuances of common stock in exchange for the redemption of all of the outstanding Class C common stock, as well as for the accrual of the 10% cumulative dividend on the Class C common stock through the date of redemption. In accordance with the preferred stock purchase agreement, and effective with the Company's IPO, each issued and outstanding share of preferred stock was converted into ten shares of Class A common stock, resulting in the issuance of 11,275,460 shares of Class A common stock. EXERCISE OF CLASS A COMMON STOCK WARRANT On February 22, 2000, the Company issued 2,370,607 shares of Class A common stock, upon the exercise, for a nominal price per share, of a warrant issued to the aforementioned venture capital partner pursuant to the terms of its 1995 investment agreement. NOTE 9. STOCK OPTION PLAN In January 1997, the Company's board of directors approved 1-800-FLOWERS.COM's 1997 Stock Option Plan which authorized the granting to key employees, officers, directors and consultants of the Company options to purchase an aggregate of 5,985,440 shares of 1-800-FLOWERS.COM's Class B common stock. On July 7, 1999, the 1-800-FLOWERS.COM, Inc., 1999 Stock Incentive Plan was adopted by the Company's board of directors and approved by its stockholders. Pursuant to the terms of the plan, 9,900,000 shares of Class A common stock have been authorized for issuance, inclusive of any unissued F-15
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) shares from the 1997 Stock Option Plan. The shares reserved will automatically increase on the first trading day in January of each calendar year, beginning January 2, 2000, by an amount equal to 3% (1,849,000 shares) of the total number of shares of common stock outstanding on the last trading day in December in the preceding calendar year, but in no event will this annual increase exceed 2,000,000 shares. The components of the plan include a discretionary option grant program, an automatic option grant program, a stock issuance program, and a salary investment option grant program. Options granted under the plans may be either incentive stock options or non-qualified stock options. The exercise price of an option shall be determined by the Company's board of directors or compensation committee of the board at the time of grant, provided, however, that in the case of an incentive stock option the exercise price may not be less than 100% of the fair market value of such stock at the time of the grant, or less than 110% of such fair market value in the case of options granted to a 10% owner of the Company's stock. The vesting and expiration periods of options issued under the stock option plan are determined by the Company's board of directors or compensation committee as set forth in the applicable option agreement, provided that the expiration date shall not be later than ten years from the date of grant. In January 1999, the Company 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. Such options vested at the rate of 25% per year on the anniversary of the grant date. Soon thereafter, the Company entered into discussions with an investor to purchase shares of common stock at $10.43 per share. Accordingly, for accounting purposes, the Company used such per share value to record a deferred compensation charge of $1,680,000 associated with the January 1999 option grants, of which $367,000 and $210,000 was amortized during the years ended July 2, 2000 and June 27, 1999, respectively. The following table summarizes activity in stock options: <TABLE> <CAPTION> Years ended ------------------------------------------------------------------------- July 2, 2000 June 27, 1999 June 28, 1998 ---------------------- -------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Exercise Under Exercise Under Exercise Option Price Option Price Option Price ----------- ---------- ------------ ---------------------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance, beginning of year 1,237,500 $1.73 525,500 $1.36 427,750 $1.30 Grants 5,099,550 $10.57 712,000 $2.00 102,500 $1.61 Exercises (61,250) $2.00 - - - - Forfeitures (487,629) $13.38 - - (4,750) $1.18 ----------- ------------ ------- Balance, end of year 5,788,171 $8.53 1,237,500 $1.73 525,500 $1.36 =========== ============ ======= Weighted-average fair value of options issued during the year $6.33 $0.90 $0.73 </TABLE> F-16
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at July 2, 2000: <TABLE> <CAPTION> WEIGHTED- WEIGHTED- AVERAGE AVERAGE OPTIONS OPTIONS REMAINING EXERCISE EXERCISE PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE PRICE - -------------- ----------- ----------- ---------------- ----------- <S> <C> <C> <C> <C> $ 1.30- 1.61 525,500 389,650 6.8 years $1.36 2.00- 2.00 598,250 411,186 8.1 years $2.00 4.50- 4.50 2,402,300 - 9.8 years $4.50 6.81- 7.88 45,000 - 9.7 years $7.40 10.75-16.00 1,336,471 50,000 9.4 years $13.34 16.43-21.00 880,650 - 9.1 years $21.00 ------------- ------------- 5,788,171 850,836 $8.53 ============= ============= </TABLE> At July 2, 2000, the Company has reserved approximately 12,925,000 shares of common stock for issuance under common stock option plans. FAIR VALUE DISCLOSURES Pro forma information regarding net (loss) income 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 the Company had accounted for its stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the minimum value option pricing model prior to the Company's IPO, and the Black-Scholes option pricing model thereafter, with the following assumptions: risk free interest rate of 6%; no dividend yield; 70%, 0% and 0% volatility in 2000, 1999 and 1998, respectively, and a weighted-average expected life of the options of 5 years at date of grant. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma financial information is as follows: <TABLE> <CAPTION> YEARS ENDED --------------------------------------------- JULY 2, 2000 JUNE 27, 1999 JUNE 28, 1998 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Net (loss) income applicable to common stockholders: As reported $(66,830) $(12,061) $3,466 Pro forma (71,766) (12,501) 3,438 Basic (loss) income per share applicable to common stockholders: As reported $ (1.10) $(0.27) $0.08 Pro forma (1.18) (0.28) 0.08 Diluted (loss) income per share applicable to common stockholders: As reported $ (1.10) $(0.27) $0.07 Pro forma (1.18) (0.28) 0.07 </TABLE> F-17
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. PROFIT SHARING PLAN The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employees who have attained the age of 21 are eligible to participate upon completion of one year of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceeding federal guidelines. On an annual basis the Company, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company's contribution based upon years of service. The Company made contributions of $149,000, $87,000 and $92,000 for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. NOTE 11. BASIC AND DILUTED (LOSS) INCOME PER SHARE The following sets forth the data used in the computation of basic and diluted (loss) earnings per common share: <TABLE> <CAPTION> YEARS ENDED -------------------------------------- JULY 2, JUNE 27, JUNE 28, 2000 1999 1998 ------------ ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> Numerator: Net (loss) income $(66,830) $ (6,846) $ 5,074 Redeemable Class C common stock dividends - (5,215) (1,608) ------------ ------------------------ Net (loss) income applicable to common stockholders $(66,830) $(12,061) $3,466 ============ ======================== Denominator: Denominator for basic (loss) income per share-weighted average common shares outstanding 60,889 44,035 44,120 Effect of dilutive securities: Employee stock options - - 120 Warrants - - 2,370 ------------ ------------------------ Dilutive potential common shares - - 2,490 ------------ ------------------------ Denominator for diluted (loss) income per share-weighted average common shares outstanding and assumed conversions 60,889 44,035 46,610 ============ ======================== </TABLE> During the years ended July 2, 2000 and June 27, 1999, 1,127,546 shares of convertible preferred stock were excluded from the diluted loss per share computation until their associated conversion in August 1999, as their effect would have been antidilutive. During the years ended July 2, 2000 and June 27, 1999, options and warrants (prior to their exercise in February 2000) to purchase 2,060,000 and 3,322,000 shares, respectively of common stock (using the treasury method) were excluded from the diluted loss per share computation, as their effect would be antidilutive. During the years ended June 27, 1999 and June 28, 1998, 348,220 shares of common stock issued upon the conversion of Class C common stock were excluded from the diluted loss per share computation until their associated conversion/redemption in May 1999, as their inclusion would have been antidilutive. F-18
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. COMMITMENTS AND CONTINGENCIES LEASES The Company currently leases office, store facilities, and equipment under various operating leases through fiscal 2009. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company has also entered into leases that are on a month-to-month basis. The Company leases certain computer, telecommunication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $11,489,000 and $10,124,000 at July 2, 2000 and June 27, 1999, respectively, and accumulated amortization of $8,245,000 and $6,897,000, respectively. In addition, the Company subleases land and buildings (which are leased from third parties) to certain of its 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). As of July 2, 2000, future minimum payments under non-cancelable capital lease obligations, lease receipts due from franchisees (shown as Capitalized Investment in Leases) and operating leases with initial terms of one year or more consist of the following: <TABLE> <CAPTION> OBLIGATIONS UNDER CAPITALIZED CAPITAL INVESTMENT OPERATING LEASES IN LEASES LEASES ------------ ------------ ------------ (IN THOUSANDS) <S> <C> <C> <C> 2001 $ 1,852 $ 346 $ 4,772 2002 1,574 273 4,564 2003 1,052 163 4,157 2004 459 119 3,633 2005 186 53 3,039 Thereafter 69 69 2,837 ------------ ------------ ------------ Total minimum lease payments 5,192 1,023 $23,002 ============ Less amounts representing interest (638) (58) ------------ ------------ Present value of net minimum lease payments $4,554 $965 ============ ============ </TABLE> F-19
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At July 2, 2000, the aggregate future sublease rental income under long-term operating sub-leases for land and buildings and corresponding rental expense under long-term operating leases were as follows: <TABLE> <CAPTION> Sublease Sublease Income Expense --------- --------- (in thousands) <S> <C> <C> 2001 $ 2,928 $ 2,908 2002 2,296 2,283 2003 1,925 1,915 2004 1,672 1,664 2005 1,328 1,322 Thereafter 3,892 3,853 --------- --------- $ 14,041 $ 13,945 ========= ========= </TABLE> In addition to the above, the Company has agreed to provide rent guarantees for leases entered into by certain franchisees with third party landlords. At July 2, 2000, the aggregate minimum rent due by franchisees guaranteed by the Company during the seven year period ending in fiscal year 2007 was approximately $420,000. Rent expense was approximately $10,157,000, $7,692,000 and $5,637,000 for the years ended July 2, 2000, June 27, 1999 and June 28, 1998, respectively. ONLINE MARKETING AGREEMENTS The Company has commitments under exclusive online marketing agreements with various portal partners. Such online marketing costs are capitalized and amortized on a straight-line basis over the term of the agreements. The Company has a long-term commitment with America Online, Inc. ("AOL"), whereby the Company is required to pay a minimum of $42,000,000 over a fifty-month period commencing July 1, 1999. Through July 2, 2000, the Company paid $12,600,000 pursuant to the agreement. On September 1, 2000, the Company entered into a new five year $22,100,000 interactive marketing agreement with AOL that effectively extends and enhances the terms of the July 1, 1999 agreement for an additional two years, through August 2005. Under the terms of the new agreement, the Company will continue as the exclusive marketer of fresh-cut flowers across six AOL properties including AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City and ICQ and receive increased promotions across several AOL properties. As a result of the termination of the previous agreement, the Company will record a one-time charge of approximately $7,300,000 in its fiscal year 2001 first quarter to write-off amounts previously owed, paid and unamortized under the old agreement. LITIGATION There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. F-20
1-800-FLOWERS.COM, INC. Schedule II - Valuation and Qualifying Accounts <TABLE> <CAPTION> Additions -------------------------------- Description Balance at Charged to Charged to Balance at Beginning Costs Other Accounts- Deductions- End of of Period and Expenses Describe Describe Period -------------- ------------- ----------------- ------------------ --------------- <S> <C> <C> <C> <C> <C> Year ended July 2, 2000: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts-accounts receivable $1,182,000 $221,000 $ - $ (731,000)(a) $ 672,000 Reserve for estimated doubtful accounts-notes receivable 300,000 - - (46,000)(a) 254,000 Valuation allowance on deferred tax assets 260,000 - 21,838,000(b) - 22,098,000 -------------- ------------- ----------------- ------------------ --------------- $1,742,000 $221,000 $21,838,000 $ (777,000) $23,024,000 ============== ============= ================= ================== =============== Year ended June 27,1999: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts-accounts receivable $ 784,000 $444,000 $ - $ (46,000)(a) $ 1,182,000 Reserve for estimated doubtful accounts-notes receivable 593,000 - - (293,000)(a) 300,000 Valuation allowance on deferred tax assets - - 260,000(b) - 260,000 -------------- ------------- ----------------- ------------------ --------------- $1,377,000 $444,000 $ 260,000 $ (339,000) $ 1,742,000 ============== ============= ================= ================== =============== Year ended June 28,1998: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts-accounts receivable $ 509,000 $213,000 $ 62,000(c) $ - $ 784,000 Reserve for estimated doubtful accounts-notes receivable 423,000 170,000 - - 593,000 -------------- ------------- ----------------- ------------------ --------------- $ 932,000 $383,000 $ 62,000 $ - $ 1,377,000 ============== ============= ================= ================== =============== </TABLE> - ----------------------------------- (a) Reduction in allowance due to write-off of accounts/notes receivable balances. (b) Record a valuation allowance for deferred tax assets. (c) Increase in reserve due to acquisition of Plow & Hearth. S-1