UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
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(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 24, 2002 as reported on the Nasdaq National Market, was approximately
$142,468,000. 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.
28,286,737
(Number of shares of class A common stock outstanding as of September 24, 2002)
37,199,915
(Number of shares of class B common stock outstanding as of September 24, 2002)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders (the Definitive Proxy Statement), to be filed with the
SEC within 120 days of June 30, 2002, are incorporated by reference into Part
III of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended June 30, 2002
INDEX
PART I
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 21
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
Signatures 39
Certifications 41
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
With one of the most recognized brands in gift retailing, 1-800-FLOWERS.COM,
Inc. provides a broad range of thoughtful gift products including flowers,
plants, gourmet foods, candies, gift baskets and other unique gifts to customers
around the world via the Internet at (www.1800flowers.com); by calling
1-800-FLOWERS(R) (1-800-356-9377) 24 hours a day, 7 days a week; or by visiting
one of its Company-owned or franchised stores. The Company's product line is
extended by the merchandise sold through its subsidiaries including The Plow &
Hearth, Inc. ("Plow & Hearth(R)") (phone: 1-800-627-1712 and web:
www.plowandhearth.com), a direct marketer of home decor and garden merchandise,
GreatFood.com, Inc. ("GreatFood.com(R)") (www.greatfood.com), an online retailer
of gourmet food products, The Popcorn Factory, Inc. ("The Popcorn Factory(R)")
(www.thepopcornfactory.com), a manufacturer and direct marketer of premium
popcorn and specialty food gifts, and The Children's Group, Inc., a direct
marketer of children's gifts, operating under the HearthSong(R)
(www.hearthsong.com) and Magic Cabin Dolls(R) (www.magiccabindolls.com) brands.
1-800-FLOWERS.COM(R) currently maintains strategic online relationships with AOL
Time Warner ("AOL"), Yahoo! Inc. ("Yahoo!"), Microsoft Corporation ("Microsoft")
and American Greetings Corporation, among others. The Company's website was
recently named one of "The Best Places to Shop Online" by The Wall Street
Journal.
The Company offers more than 2,400 varieties of fresh-cut and seasonal flowers,
plants and floral arrangements, approximately 2,700 stock keeping units ("SKUs")
of gifts and gourmet foods, approximately 5,700 home and garden products,
including garden accessories and casual lifestyle furnishings, and more than
3,200 items for children, comprised of unique toys, games and educational
products. The Company is committed to providing its customers the best possible
shopping experience through superior service and a 100% satisfaction guarantee.
At June 30, 2002, the Company has a database of 18.1 million customers.
In 1992, Teleway, Inc. was formed under the laws of the State of Delaware and
acquired a majority of the outstanding shares of the common stock of
800-FLOWERS, Inc., a Texas corporation, under which entity the telemarketing
business was operated. In 1995, Teleway, Inc. changed its name to 1-800-FLOWERS,
Inc. and in 1996, 800-FLOWERS, Inc. was merged into 1-800-FLOWERS, Inc.
Subsequently, in 1999, 1-800-FLOWERS, Inc. changed its name to
1-800-FLOWERS.COM, Inc.
References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" 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's operations began in 1976 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 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 developed 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(R), 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 investments in its infrastructure, the Company
was able to quickly develop and implement an online presence. As a result, the
Company was one of the first companies to market products online through
CompuServe beginning in 1992 and 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, 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. As a result, the Company has developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption. 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
Plow & Hearth, as well as unique and educational children's toys and games when
it acquired the HearthSong and Magic Cabin Dolls product lines in June 2001. In
order to further expanded its gourmet food line, in November 1999, the Company
completed its acquisition of GreatFood.com, and most recently, in May 2002, the
Company completed its acquisition of selected assets of The Popcorn Factory,
adding premium popcorn and specialty snack foods to the Company's product
offerings.
The Company's Strategy
The Company has built its brand as a source for thoughtful gift products and
expects to 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 and 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 Brands. The Company believes that
1-800-FLOWERS.COM is one of the most recognized brands in the floral and gift
industry. The strength of its brand has enabled the Company to extend its
product offerings to complementary products, including giftware, gourmet foods,
home and garden merchandise, and children's toys and games. This extension of
product offerings, through its brands, has enabled the Company to increase the
frequency of purchases by existing customers who have come to trust the
1-800-FLOWERS.COM brand, as well as attract a significant number of new
customers.
The Company believes its brands are characterized by:
o Convenience. All of the Company's product offerings can be purchased
either via the Company's toll-free telephone numbers from their home or
office 24 hours a day, seven days a week, or via the web for those
customers who prefer a visual representation of their product selection.
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 and are integral to the brand loyalty that it has built
over the years. The Company offers its customers a 100% satisfaction
guarantee on all of its products.
o Delivery. The Company has developed a market-proven fulfillment
infrastructure that allows delivery on a same-day, next-day and any-day
basis. Key to the Company's fulfillment capability is an innovative
"hybrid" model which combines BloomNet(R)(comprised of independent
florists operating retail flower shops and Local Fulfillment Centers
("LFC's"), Company-owned stores and fulfillment centers, and franchise
stores), with the Company owned distribution centers in Madison,
Virginia, Vandalia, Ohio and Lake Forest, Illinois and brand-name vendors
who ship directly to to the Company's customers. These fulfillment
points are connected by the Company's proprietary "Bloomlink(R)"
communication system, an internet-based system through which orders and
related information are transmitted.
o Selection. Over the course of a year, the Company offers over 2,400
varieties of fresh-cut and seasonal flowers, plants and floral
arrangements, over 2,700 SKUs of gifts and gourmet foods, approximately
5,700 home and garden products, including garden accessories and casual
lifestyle furnishings, and over 3,200 items for children, comprised of
unique and educational toys and games.
o Customer Service. The Company ensures that customer service, whether
online, via the telephone, or in one of its retail stores is of the
highest caliber. The Company operates four customer service facilities
to provide helpful assistance on everything from advice on product
selection to the monitoring of the fulfillment and delivery process.
The Company's goal is to make the 1-800-FLOWERS.COM brands synonymous with
thoughtful gifting. To do this, the Company intends to continue to invest in its
brands through the use of selective media, public relations and strategic
Internet portal relationships, while capitalizing on the Company's large and
loyal customer base through cost-effective customer retention programs.
As part of the Company's continuing effort to serve the thoughtful gifting needs
of its customers, the Company intends to market other high-quality brands in
addition to 1-800-FLOWERS.COM. The Company intends to accomplish this through
internal development, co-branding arrangements, strategic relationships and/or
acquisitions of complementary businesses. In keeping with this strategy, in May
2002, the Company acquired The Popcorn Factory, a manufacturer and direct
marketer of giftable premium popcorn and related products food gift, and in June
2001, the Company acquired The Children's Group, including its two brands of
unique and educational children's toys and games. In fiscal 2000 the Company
acquired GreatFood.com and TheGift.com, Inc. ("TheGift"), online retailers of
gourmet foods and specialty gift products, respectively, and in 1998, the
Company acquired Plow & Hearth, a direct marketer of home decor and garden
merchandise. As a complement to the Company's own brands and product lines, the
Company has formed strategic relationships with Lenox(R), Waterford(R),
Godiva(R), Hershey's(R), Sharper Image(R), American Greetings Corporation(R),
Things Remembered(R) and The San Francisco Music Box Company(R), among others,
in order to provide our customers with an even broader selection of products to
further its position as a destination for all of their gifting needs.
Expand its Product Offerings. The Company's wide selection of products creates
the opportunity to have a relationship with customers who purchase items not
only for gift-giving occasions but also for everyday consumption. The Company's
merchandising team works closely with manufacturers and suppliers to select and
design its floral, gourmet food, home and garden and children's toys, as well as
other gift-related products that accommodate our customers' needs to celebrate a
special occasion, convey a sentiment or cater to a casual lifestyle. As part of
this continuing effort, the Company intends to increase the number of, as well
as expand its relationships with its existing product manufacturers or, where
appropriate, acquire businesses with complementary product lines.
Enhance its Customer Relationships. The Company intends to deepen its
relationship with its customers and be their trusted resource to fulfill their
need for quality, tasteful gifts. The Company plans to encourage more frequent
and extensive use of its Web site, by continuing to provide product-related
content and interactive features. The Company will also continue to improve its
customers' shopping experience by personalizing the features of its Web site
and, in compliance with the Company's privacy policy, utilizing customer
information to target product promotions, identify individual and mass market
consumption trends, remind customers of upcoming occasions and convey other
marketing messages. As of June 30, 2002, the Company's total database of
customers numbered approximately 18.1 million, 6.0 million of which have
transacted business with the Company online.
In addition, the Company believes it has a significant opportunity to expand its
corporate accounts and intends to focus greater resources on developing
customized plans for its corporate customers, such as its existing programs with
IBM, JPMorgan Chase, Ford, Carnival Cruise Lines and Paramount Pictures to meet
their corporate gifting needs and those of their employees.
Increase the Number of Online Customers. To increase the number of customer
orders placed through its cost-effective Web site, the Company intends to
continue to:
o actively promote its Web site through Web portals, online networks and
search engines;
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 facilitate access to the Company's Web site for its corporate
customers by implementing direct links from their internal corporate
networks.
Capitalize upon the Company's 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 shopping experience, whether
online or over the telephone.
The Company's online and telephonic orders are fed directly from the Company's
secure Web site, or with the assistance of a floral and gift counselor, into a
transaction processing system which captures the required customer and recipient
information. The system then routes the order to the appropriate Company
warehouse, or for florist fulfilled or drop-shipped items selects a vendor to
fulfill the customer's order and electronically transmits the necessary
information to assure timely delivery. In addition, the Company's customer
service representatives are electronically linked to this system, enabling them
to assist in order fulfillment and subsequently track other customer and/or
order information. During the past several years, the Company has invested
heavily in building a scalable technology platform to support the Company's
growing order volume. During fiscal 2002, the Company's technology cost
structure benefited by bringing its Web-hosting and development capabilities
in-house, resulting in significant year-over-year savings. In-sourcing also
provided improved operational flexibility, additional capacity and system
redundancy. Although the Company will continue to make significant investments,
and use the best available technologies in order to improve its operations, the
Company plans to leverage its existing information technology infrastructure
capabilities, thereby allowing for continued reduction in overall technology
spending as a percentage of revenues while providing resources to focus on
customer specific projects to ensure that our customers are provided an
enjoyable shopping experience. In particular, the Company intends to:
o continue to improve functionality, speed and ease of use of its Web
sites, including the implementation of an integrated shopping cart
to aid in cross-brand selling and optimization of site capabilities;
o enhance order tracking and provide for real-time delivery confirmation
capabilities;
o provide improved search options and gift lists and reminder programs;
o implement certain B2B client platforms to accommodate incremental
corporate business;
o improve its ability to analyze its database of customer and recipient
information and conduct personalized one-to-one marketing;
o further expand the functionality and features of BloomLink; and
o integrate the Lake Forest, Illinois distribution facility's warehouse
management system, acquired in May 2002 as part of the Company's
acquisition of The Popcorn Factory, to improve product flow and shipping
capabilities.
Continue to Improve the Company's Fulfillment Capabilities. A majority of the
Company's customers' purchases of floral and floral-related gift products are
fulfilled through one of approximately 1,500 fulfillment centers in BloomNet(R).
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 betterexperience for its customers and gift recipients. The Company
selects BloomNet(R) members for their high-quality products, superior customer
service and order fulfillment and delivery capabilities.
The Company fulfills most of its gift basket and gourmet food items, other than
its premium popcorn and related products (which are shipped from the Company's
148,000 square foot manufacturing and distribution center located in Lake
Forest, Illinois), primarily through members of BloomNet(R) or third-party gift
vendors that ship products directly to the customer by next-day or other
delivery options chosen by the customer. The Company selects its third-party
gift vendors based upon the quality of their products, their reliability and
ability to meet volume requirements. The Company primarily packages and ships
its home and garden products from its 300,000 square foot distribution center
located in Madison, Virginia, or through the Company's 200,000 square foot
distribution center in Vandalia, Ohio. Shipment of children's merchandise is
primarily facilitated through the Vandalia distribution center.
Beginning in fiscal 2001, the Company began entering into Order Fulfillment
Agreement(s) with selected BloomNet(R) members to operate LFC's to facilitate
the fulfillment of the Company's floral and gift orders, improving the economics
of florist fulfilled transactions, and improving the Company's ability to
control product quality and branding.
To ensure reliable and efficient communication of online and telephonic orders
to its BloomNet(R) members and third party gift vendors, the Company created
BloomLink, a proprietary Internet-based communications system. All BloomNet(R)
members and third-party gift vendors have adopted BloomLink. The Company also
has the ability to arrange for international delivery of floral products through
independent wire services and direct relationships.
The Company intends to improve its fulfillment capabilities to make its
operations more efficient by:
o strengthening relationships and increasing the number of its vendors
and BloomNet(R) member florists and to ensure geographic coverage and
shorten delivery times;
o implementing alternative means of fulfillment, including centralized
production and strategic expansion and logistical positioning of
Company owned fulfillment centers and LFC's;
o continuing to improve warehousing operations and reduce fulfillment
times in support of its gift, gourmet food, home and garden and
children's product lines;
o integrating the Company's Lake Forest, Illinois distribution
facility within the Company's existing fulfillment network to improve
shipping rates and delivery capabilities.
The Company's Products
The Company offers a wide range of products, including fresh-cut and seasonal
flowers, floral arrangements, gifts, gourmet foods, home and garden merchandise
and unique toys and games for children. 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, holiday and
other special needs of its customers. For the years ended June 30, 2002, July 1,
2001, and July 2, 2000 the flowers category represented 54.2%, 59.3%, and 67.6%
of total net revenues, respectively.
Over the course of a year, the Company's product selection consists of:
Flowers. The Company offers more than 1,700 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 700 varieties of popular
plants to brighten the home and/or office, and accent the gardens and
landscapes.
Gourmet Food. Through The Popcorn Factory and GreatFood.com brands, the Company
offers more than 2,700 premium popcorn and specialty snack products, as well as
carefully selected gourmet food and sweet products from around the world,
including candies, chocolates, nuts, cookies, fruit, imported cheeses and
giftable surf-and-turf dinners. The Company's most popular items are offered in
beautiful and innovative gift baskets, providing customers with an assortment of
over 500 baskets. Through the acquisition of The Popcorn Factory in May 2002,
the Company now offers premium popcorn and related products packaged in
seasonal, occasion specific, decorative tins, fitting the "giftable" requirement
of our individual customers, while also adding the capability to customize the
tins with corporate logos and other personalized features for the Company's
corporate customer's gifting needs.
Unique and Specialty Gifts. The Company offers 1,100 specially selected gift
items, including plush toys, balloons, bath and spa items, candles, wreaths,
ornaments, collectibles, home accessories, giftware and fine jewelry.
Home and Garden. Through its Plow & Hearth brand, the Company offers more than
3,700 SKUs for home, hearth and outdoor living, including casual lifestyle
furniture and home accessories, clothing, footwear, candles and lighting, vases,
kitchen items and accents and approximately 2,000 gardening items, including
tools and accessories, pottery, nature-related products, books and related
products.
Children's Gifts. Through the HearthSong and Magic Cabin Dolls brands the
Company offers over 3,200 products, including environmentally friendly toys,
plush stuffed animals, crafts and books with educational, nature and art themes,
as well as, natural-fiber soft dolls, kits and accessories for children ages 3
through 12.
Greetings. Through its relationships with American Greetings Corporation and
Cardstore.com, the Company provides its customers the ability to send
personalized electronic and printed greeting cards with hundreds of fun and
creative ways to express emotions, offer congratulations, or just keep in touch.
In addition to giving its customers the ability to send electronic greetings
through AmericanGreetings.com, the online greetings division of American
Greetings Corporation, the revenue sharing agreement provides that the Company
will be the exclusive floral provider on American Greetings.com,
BlueMountain.com and Egreetings.com.
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 providers. These providers include AOL (keyword:flowers),
Yahoo! and Microsoft and approximately 40,000 members of its online affiliate
program. The Company also offers home and garden products through the Plow &
Hearth Web site (www.plowandhearth.com), gourmet food products through
GreatFood.com (www.greatfood.com), premium popcorn and specialty food products
through The Popcorn Factory (www.thepopcornfactory.com) and children's gifts
through its Hearthsong (www.hearthsong.com) and Magic Cabin Dolls
(www.magiccabindolls.com) Web sites. As of June 30, 2002, approximately 6.0
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, personalized shopping services,
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 sites to be fast, secure and easy to use and allows
customers to order products with minimal effort. The Company's 1-800-FLOWERS.COM
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 its customers:
Product Search and Order Tracking. The Company has implemented sophisticated
search capabilities, which enable customers to search for products by occasion,
category/department, price point, flower type, brand or keyword. The Company
also has a "Gift Finder" search tool that provides popular gift ideas for each
occasion. The Company's online order tracking capabilities allows customers to
quickly and easily view the delivery status of their purchase, while its
"Delivery Wizard" provides customers with expected delivery dates for each
product selection.
Personalization. The Company utilizes its Web site to enhance the direct
relationship with its customers, including greeting customers by name and
personalized Web pages tailored to its registered customers. The "Member
Benefits" provide customers with an online address book for names and addresses
of their gift recipients, access to their purchasing history and e-mail
notification of special promotions, product previews and events. The Company's
registered customers can also utilize its "Gift Reminder Program," which sends
e-mail reminders prior to any pre-selected occasion and offers suggestions to
specific flower and/or gift products.
Multiple Channel Access to Gifting Consultants. The Company's Web site offers
customers the ability to use e-mail, real-time online keyboard-to-keyboard chat
messaging and "click-to-talk" capability to reach one of the Company's gift
consultants who can answer product questions, provide gifting suggestions or
resolve order issues.
Security. The Company provides a safe and secure shopping experience within its
Web site through the use of secure server software, which encrypts the
customer's credit card number to protect against interception as the information
is transmitted over the Internet.
Privacy. The Company recognizes the importance of maintaining the privacy of its
customers. The Company uses the information gathered on its Web site from time
to time to send promotional materials and to enhance the customer's shopping
experience. The Company periodically makes certain information available to
selected third parties for direct marketing purposes. However, customers may
elect not to receive promotional information and/or instruct the Company not to
make their information available to third parties. 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.COM brands, 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, Plow & Hearth,
GreatFood.com, The Popcorn Factory, TheGift.com, Hearthsong and Magic Cabin
Dolls brands through internal development, co-branding arrangements, strategic
relationships and/or acquisitions of complementary businesses. The Company
markets and promotes its brands 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, AOL, Yahoo!, Microsoft,
American Greetings Corporation and various search engines.
The Company's Online Affiliate Program. In addition to securing alliances with
frequently visited Web sites, the Company developed an affiliate network that
has grown to approximately 40,000 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. The affiliates include such Web sites as Looksmart.com, Upromise.com,
Ebates.com, iWon.com, BizRate.com and SchoolPop.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,
HearthSong and Magic Cabin Dolls catalogs the Company has cross-promoted its
floral and gift products to its home and garden customers and the Company
similarly cross-promotes the home and garden products to its floral and gift
customers. The same cross-promotional efforts are being planned for The Popcorn
Factory brand, as the customer profiles for this brand matches well with the
Company's established brands. In addition to providing a direct sale mechanism,
the Company believes that these catalogs will attract additional customers to
the Company's Web sites. For the year ended June 30, 2002, the Company mailed in
excess of 85 million branded catalogs.
E-mails. The Company is able to capitalize on its customer database of
approximately 18.1 million customers, 6.0 million of which have transacted
business with the Company on-line, by utilizing cost-effective, targeted e-mails
to notify customers of product promotions, remind them of upcoming gifting
occasions and convey other marketing messages.
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 American and
Delta Airlines as well as OfficeMax, Cablevision, American Express, VISA and
MasterCard, among others.
Fulfillment Operations
The Company's customers primarily place their orders either online or over the
telephone. The Company's development of a hybrid fulfillment system which
enables the Company to offer same-day, next-day and any-day delivery, combines
the use of BloomNet(R)(independent florists operating retail flower shops
and LFC's, Company-owned stores and fulfillment centers, and franchise stores),
with the Company owned distribution centers and brand-name vendors who ship
directly to the Company's customers. While providing a significant competitive
advantage in terms of delivery options, the Company's fulfillment system also
has the added benefit of reducing the Company's capital investments in inventory
and infrastructure. Fulfillment of products is as follows:
Flowers. A majority of the Company's floral orders are fulfilled through
BloomNet(R). The Company selects retail florists for BloomNet(R) based upon the
historical volume of floral deliveries in a particular geographic area, the
number of BloomNet(R) 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. The Company regularly
monitors BloomNet(R) florists' performance and adherence to the Company's
quality standards to ensure proper product branding and packaging.
By fulfilling floral orders through BloomNet(R), the Company is able to deliver
floral products on a same-day, next-day or any 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(R) members are non-exclusive. Many
florists, including many BloomNet(R) florists, also are members of other floral
fulfillment organizations. The BloomNet(R) 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. As of
June 30, 2002, the Company had entered into 28 Order Fulfillment Agreements with
selected BloomNet(R) members to operate LFC's. Generally, these agreements
provide for a three-year term, terminable upon 30 days notice upon breach and
immediately by the Company in the event of certain specified defaults by the
operator of the LFC. In consideration of the operator's satisfactory
performance, the Company agrees to use reasonable efforts to forward orders with
a specified minimum merchandise value during each year of the agreement. The
Company has not granted an exclusive territory to any operator.
In certain instances, the Company is required to fulfill orders through
non-BloomNet(R) members, and transmits these orders to the fulfilling florist
using the communication system of an independent wire service. In addition, to
orders fulfilled by BloomNet(R) and non-BloomNet(R) member florists, the Company
ships overnight via common carrier to its customers directly from growers and
through its fulfillment centers.
As of June 30, 2002, the Company operates 24 floral retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 7 fulfillment
centers. 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.
Plants, Gift Baskets, Gourmet Food, Premium Popcorn and Unique Gifts. The
Company's plants, gift baskets, gourmet food, premium popcorn and unique gifts
are shipped directly to the customer by members of BloomNet(R), third-party
product suppliers or through its Madison, Virginia, Vandalia, Ohio and Lake
Forest, Illinois fulfillment centers using next-day or other delivery option
selected by the customer. The Company's business is not dependent on any single
third-party supplier. During fiscal 2003, the Company will be integrating its
Lake Forest, Illinois distribution facility into the Company's overall
fulfillment plan to improve product flow and shipping capabilities.
Home and Garden and Children's Toys. The Company fulfills purchases of home and
garden merchandise from its Madison, Virginia and Vandalia, Ohio fulfillment
center or by third-party product suppliers using next-day or other delivery
option selected by the customer. In fiscal 2002, the Company shipped
approximately 2.1 million packages from these facilities which employ advanced
technology for receiving, packaging, shipping and inventory control.
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, scalability and flexibility. To minimize
the risk of service interruptions from unexpected component or
telecommunications failure, maintenance and upgrades, the Company has built full
back-up and system redundancies 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.
During the latter half of fiscal 2001, the Company brought its primary
Web-hosting and development capabilities in-house, resulting in significant cost
savings, while also providing improved operational flexibility and additional
back-up capacity and system redundancy. During fiscal 2002, the Company opened
up a secondary hosting location to house its back-up operations, previously
handled by a third party, thereby providing additional control and load
balancing capabilities.
The Company's transaction processing system captures customer profile and
history in a customized Oracle database and selects the florist, third-party
vendor, or Company-owned warehouse to fulfill the order. 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 customer service centers and third-party outsourcers 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 its BloomNet(R)
members and non-floral vendors.
The Company's operations 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
The growing popularity and convenience of e-commerce has continued to give rise
to established businesses 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.
Certain mass merchants have expanded their offerings to include competing
products and may continue to do so in the future. These mass merchants, as well
as other potential competitors, may be able to:
o undertake more extensive marketing campaigns for their brands and services;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees, distributors 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 in the industry. 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, mass merchants and specialty retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, unique gifts, children's toys
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 the strength of its brands, 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 laws and regulations directly
applicable to e-commerce. Legislatures are also 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
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,"1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com",
"The Popcorn Factory", "TheGift.com", "HearthSong" and "Magic Cabin Dolls." The
Company also has rights to numerous domain names, including www.1800flowers.com,
www.800flowers.com, www.flowers.com, www.plowandhearth.com, www.greatfood.com,
www.thepopcornfactory.com, www.hearthsong.com and www.magiccabindolls.com. In
addition, the Company has developed transaction processing and operating systems
as well as marketing data, and customer and recipient 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, vendors 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 its products and services
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 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.
Employees
As of June 30, 2002, the Company had a total of approximately 2,500 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service, manufacturing 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.
Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only risks and
uncertainties 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 may suffer.
The Company has incurred losses in recent years, and no assurances can be made
that positive net income can be achieved in the foreseeable future. After a
period of significant investment in the Company's systems and infrastructure, as
well as brand name building and product line extensions, the Company expects to
return to profitability during fiscal 2003. However, the Company has incurred
losses in recent years, and no assurances can be made that positive net income
can be achieved on this schedule or in the foreseeable future. In order to
achieve and maintain profitability, the Company will need to generate revenues
exceeding historical levels and/or reduce operating expenditures. Management
cannot assure you that the Company will generate revenues or reduce operating
expenses sufficiently to achieve positive 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 significantly fluctuate 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 retail economy;
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 online marketing agreements;
and
o competition.
The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue
without a corresponding reduction 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 results of operations may be below the
expectations of public market analysts and investors, which 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 further and the Company's customers have less disposable income,
consumers may spend less on its products and its quarterly operating results may
suffer.
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 fourth calendar quarter, due to the Thanksgiving
and Christmas-time holidays, and the second calendar quarter, due to Mother's
Day and Administrative and Professionals' Week. 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.
Although the Company has been successful in the introduction of its expanded
product lines including plants, gift baskets, gourmet food, unique or specialty
gifts, home and garden accessories and children's gifts, it 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 brands, it may not increase or
maintain its customer base or its revenues. The Company must continue to develop
and maintain the 1-800-FLOWERS.COM brands 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. If the Company fails to advertise and market its products
effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
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 brands would be diminished and 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. Although the Company expects a significant portion of its online
customers will continue to come to its Web site directly, it will also rely on
third party Web sites with which the Company has strategic relationships,
including AOL Time Warner, Yahoo! and Microsoft Corporation, 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 or maintain
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. In many cases, floral orders placed by the Company's customers are
fulfilled by local independent florists, a majority of which are a members of
BloomNet(R). 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.
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 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 geographic 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 replace the product for the customer or issue
the customer a refund or credit. The Company's net income would decrease if a
significant number of customers request replacement products, refunds or credits
and the Company is unable to pass such costs onto the supplier.
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 fulfillment centers
located in New York, Virginia, Ohio and Illinois. 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 our
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, specialty gift,
children's toys and games 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, mass merchants and specialty gift retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, specialty gift, children's toys
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.
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 will be required to increase inventory levels and the number of products
maintained in its warehouses. 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 brands could be
diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
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 could 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 systems could lead to
inefficiencies in conducting the Company's business and subject it to increased
expenses. The Company's expansion efforts may strain its operational and
financial systems. To accommodate the Company's growth, the Company continues to
improve its operating infrastructure through technology initiatives and 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.
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 selected assets and may continue to do so in the
future. If the Company is unable to fully integrate The Popcorn Factory
acquisition, or any future acquisitions 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 franchisees may damage its brands 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 brands 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.
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 brands 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, whether under
existing top level domains or those issued in the future. 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
brands.
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 toll-free "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 brands. In addition, under
applicable FCC rules, ownership rights to phone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS (1-800-356-9377).
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 if it does not obtain a
cardholder's signature.
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 does not continue to gain acceptance 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 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
revenues and harm to the Company's brand. 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'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 AT&T and MCI do not adequately maintain the Company's telephone service, the
Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and MCI to provide telephone services to its
customer service centers. Although the Company maintains redundant
telecommunications systems, if AT&T and MCI experience system failures or fail
to adequately maintain the Company's systems, the Company may experience
interruptions and its customers might not continue to utilize its services. If
the Company loses 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 telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms 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
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 could experience difficulties in fulfilling its customers' orders and
those customers might not continue to shop with the Company.
The Company's operating results may suffer due to economic, political and social
unrest or disturbances. Like other American businesses, the Company is unable to
predict what long-term effect, the terrorist attacks on the World Trade Center
and the Pentagon, or similar future events, may have on its business. The
Company's results of operations and financial condition could be adversely
impacted if such events cause a downturn in the economy, or other negative
effects that cannot now be anticipated.
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 as well as
its senior management team which help manage its business and growth. The loss
of the services of any of the Company's executive management or key personnel or
its inability to attract qualified additional personnel could cause its business
and 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, or those of other governmental bodies, 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 brands. Unauthorized use of the Company's intellectual property by
third parties may damage its brands 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 Company may be unable to register its
intellectual property in some foreign countries and, furthermore, 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 the products it sells, or services
it offers, 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 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 broader guidelines to state sales and use taxes, the
Company may lose sales or incur significant expenses in satisfaction of these
obligations. In addition to the Company's retail store operations, the Company
collects sales or other similar taxes in states where the Company's online and
telephonic sales channels have applicable nexus. Our customer service and
fulfillment networks, and any further expansion of those networks, along with
other aspects of our evolving business, may result in additional sales and use
tax obligations. One or more states may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies which engage in
e-commerce. A successful assertion by one or more states that we should collect
sales or other taxes on the sale of merchandise could result in substantial tax
liabilities for past sales, decrease our ability to compete with traditional
retailers, and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales
made over the Internet. However, a number of states, as well as the U.S.
Congress, have been considering various initiatives that could limit or
supersede the Supreme Court's position regarding sales and use taxes on Internet
sales. If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect additional sales and use taxes. The imposition by state and
local governments of various taxes upon Internet commerce could create
administrative burdens for us and could decrease our future sales.
Product liability claims may subject the Company to increased costs. Several of
the products the Company sells, including perishable food products, home and
garden products, or children's toys 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 brands. 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.
Item 2. PROPERTIES
Square
Location Type Principal Use Footage Ownership
- ------------------ -------------------- ------------------------------------------------ --------------- -----------------
Westbury, NY Office Headquarters & customer service 77,000 leased
Alamogordo, NM Office Customer service 23,000 owned
Ardmore, OK Office Customer service 24,000 leased
Madison, VA Office & warehouse Distribution, marketing, administrative
& customer service 300,000 owned
Lake Forest, IL Office, plant & Manufacturing, distribution,
warehouse & administrative 148,000 leased
Vandalia, OH Warehouse Distribution 200,000 owned
In addition to the above properties, the Company leases approximately 311,000
square feet for owned or franchised retail stores and local fulfillment centers
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.
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.
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 ticker 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 fiscal years ended June 30, 2002 and
July 1, 2001.
High Low
-------------- --------------
Year ended June 30, 2002
July 2, 2001 - September 28, 2001 $ 14.78 $ 9.90
October 01, 2001 - December 28, 2001 $ 16.50 $ 8.20
December 31, 2001 - March 28, 2002 $ 17.86 $ 10.72
April 01, 2002 - June 30, 2002 $ 14.68 $ 9.85
Year ended July 1, 2001
July 3, 2000 - October 1, 2000 $ 6.13 $ 4.50
October 2, 2000 - December 31, 2000 $ 5.13 $ 2.55
January 1, 2001 - April 1, 2001 $ 8.13 $ 4.13
April 2, 2001 - July 1, 2001 $ 15.50 $ 5.96
Rights of Common Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. 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 24, 2002, there were approximately 100 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 24, 2002,
there were approximately 17 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.
Resales of Securities
45,730,302 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 24, 2002, 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.
Stock Repurchase Plan
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. No repurchases have been made
as of June 30, 2002.
Equity Compensation Plan Information
The following table gives information about the Company's common stock that may
be issued upon the exercise of options under all of the Company's equity
compensation plans as of June 30, 2002. The table includes the 1-800-FLOWERS.COM
1997 Stock Option Plan and the 1-800-FLOWERS.COM, Inc. Stock Incentive Plan.
Number of
securities
remaining
available for future
Number of issuance under
securities to be Weighted- equity
issued upon average compensation
exercise of exercise price plans (excluding
outstanding of outstanding securities reflected
Plan Category options options in column (a))
______________________________________________________________________________________________
(a) (b) (c)
__________________ ________________ ________________
Equity compensation plans
approved by security holders 8,113,144 $8.95 7,789,412
Equity compensation plans
not approved by security
holders - - -
__________________ ________________ ________________
Total 8,113,144 $8.95 7,789,412
================== ================ ================
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended June
30, 2002, July 1, 2001 and July 2, 2000, and the consolidated balance sheet data
as of June 30, 2002 and July 1, 2001, 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 27, 1999 and June 28, 1998, and the selected consolidated
balance sheet data as of July 2, 2000, June 27, 1999 and June 28, 1998, are
derived from the Company's audited consolidated financial statements which are
not included in this Annual Report on Form 10-K.
The following tables summarize the Company's consolidated statement of
operations and balance sheet data. The Company acquired The Popcorn Factory in
May 2002, The Children's Group in June 2001, disposed of Floral Works in January
2000, acquired GreatFood.com and TheGift.com 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. This information should be read together
with the discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes to those statements included elsewhere in this Annual
Report on Form 10-K.
Years ended
-----------------------------------------------------------------------
June 30, July 1, July 2, June 27, June 28,
2002 2001 2000 1999 1998
------------- ------------- -------------- ------------ --------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Telephonic $ 248,931 $ 230,723 $227,380 $201,467 $159,715
Online 218,179 182,924 116,810 52,668 26,684
Retail/fulfillment 30,095 28,592 35,338 38,717 31,813
------------- ------------- -------------- ------------ --------------
Total net revenues 497,205 442,239 379,528 292,852 218,212
Cost of revenues 293,269 267,779 237,493 179,697 136,966
------------- ------------- -------------- ------------ --------------
Gross profit 203,936 174,460 142,035 113,155 81,246
Operating expenses:
Marketing and sales 150,638 154,321 155,353 89,126 53,037
Technology and development 13,723 16,853 16,809 8,067 1,794
General and administrative 28,179 27,043 28,975 15,748 15,832
Depreciation and amortization 15,061 21,716 16,479 8,385 4,168
------------- ------------- -------------- ------------ --------------
Total operating expenses 207,601 219,933 217,616 121,326 74,831
------------- ------------- -------------- ------------ --------------
Operating (loss) income (3,665) (45,473) (75,581) (8,171) 6,415
Other income (expense), net 1,448 4,152 7,422 (1,183) 1,654
------------- ------------- -------------- ------------ --------------
(Loss) income before income taxes and
minority interests (2,217) (41,321) (68,159) (9,354) 8,069
Benefit (provision) for income taxes 706 - 1,286 2,715 (3,181)
------------- ------------- -------------- ------------ --------------
(Loss) income before minority interests (1,511) (41,321) (66,873) (6,639) 4,888
Minority interests - - 43 (207) 186
------------- ------------- -------------- ------------ --------------
Net (loss) income (1,511) (41,321) (66,830) (6,846) 5,074
Redeemable Class C common stock dividends - - - (5,215) (1,608)
------------- ------------- -------------- ------------ --------------
Net (loss) income applicable to common
stockholders $ (1,511) $ (41,321) $(66,830) $(12,061) $ 3,466
============= ============= ============== ============ ==============
Net (loss) income per common share
applicable to commom stockholders
Basic $(0.02) $(0.64) $ (1.10) $(0.27) $0.08
============= ============= ============== ============ ==============
Diluted $(0.02) $(0.64) $(1.10) $(0.27) $0.07
============= ============= ============== ============ ==============
Shares used in the calculation of net
(loss)income per common share
Basic 64,703 64,197 60,889 44,035 44,120
============= ============= ============== ============ ==============
Diluted 64,703 64,197 60,889 44,035 46,610
============= ============= ============== ============ ==============
As of
------------- ------------ ------------- --------------- -------------
June 30, July 1, July 2, 2000 June 27, 1999 June 28,
2002 2001 1998
------------- ------------ ------------- --------------- -------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short term $ 63,399 $ 63,896 $111,624 $99,183 $ 8,873
investments
Working capital 23,301 27,409 82,129 85,619 1,950
Investments 9,591 16,284 1,918 984 1,383
Total assets 207,157 195,257 224,641 182,355 81,746
Long-term liabilities 15,939 16,029 12,947 37,766 35,359
Redeemable class C common stock - - - - 17,692
Total stockholders' equity 123,908 117,816 158,918 109,003 672
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 the Private
Securities Litigation Reform Act of 1995. 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, including those 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 gift retailer, providing a broad range of
thoughtful gift products including an extensive array of flowers, plants,
gourmet food, gift baskets, candies, home decor, garden merchandise, unique
children's toys and other specialty products. With one of the most recognized
brands in retailing and a history of successfully integrating technologies and
business innovations, the Company has become the trusted guide to gifting for
our customers, providing convenient, multi-channel access for customers via the
Internet, telephone, catalogs and retail stores.
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 extended by its other brands which include Plow & Hearth, home decor and
garden merchandise, (www.plowandhearth.com), GreatFood.com, gourmet food
products, (www.greatfood.com), The Popcorn Factory, premium popcorn and
specialty food gifts (www.thepopcornfactory.com) and HearthSong
(www.hearthsong.com) and Magic Cabin Dolls (www.magiccabindoll.com), unique and
educational children's toys and games.
A majority of the Company's floral orders are fulfilled through BloomNet(R)
(comprised of independent florists operating retail flower shops and Local
Fulfillment Centers ("LFC's"), Company-owned stores and fulfillment centers and
franchise stores). The Company transmits its orders either through BloomLink,
its proprietary Internet-based electronic communication system, or the
communication system of a third-party. A portion of the Company's floral and
gift merchandise as well as its home and garden merchandise, non-floral gift
products and gourmet food merchandise are shipped by the Company, members of
BloomNet(R) or third parties directly to the customer using common carriers.
Most of the Company's home and garden products are fulfilled from its Madison,
Virginia fulfillment center or its Vandalia, Ohio distribution facility, while
the Company's children's merchandise is fulfilled from its Vandalia facility.
The Company's gourmet popcorn and related merchandise is fulfilled primarily
from its Lake Forest, Illinois manufacturing facility.
As of June 30, 2002 the Company owned retail fulfillment operations consisted of
28 retail stores and 7 fulfillment centers. 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(R)" network and royalties, fees and sublease
rent paid to the Company by its 83 franchise stores. Company owned stores serve
as local points of fulfillment and enable the Company to test new products and
marketing programs. As such, a significant percentage of the revenues derived
from Company owned stores and fulfillment centers represent fulfillment of its
telephonic and online sales channel floral orders and are eliminated as
inter-company revenues.
After a period of significant investment in the Company's systems and
infrastructure, as well as brand name building and product line extensions, the
Company expects to return to profitability during fiscal 2003. However, the
Company has incurred losses in recent years, and no assurances can be made that
positive net income can be achieved on this schedule or in the foreseeable
future. In order to achieve and maintain profitability, the Company will need to
generate revenues exceeding historical levels and/or reduce operating
expenditures. 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,
including those described under the caption "Additional Risk Factors that May
Affect Future Results" and elsewhere in this Annual Report.
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal years 2002 and 2001, which ended on June 30, 2002 and
July 1, 2001, respectively, consisted of 52 weeks, while fiscal year 2000, which
ended July 2, 2000, consisted of 53 weeks. As such, the Company's fiscal year
2000 revenues, and associated variable expenses, contained an additional week of
activity in comparison to fiscal year 2001 or 2002.
Net Revenues
Years Ended
----------------------------------------------------------------------
June 30, July 1, 2001 July 2, 2000
2002 % Change % Change
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
Telephonic $248,931 7.9% $230,723 1.5% $227,380
Online 218,179 19.3% 182,924 56.6% 116,810
Retail/fulfillment 30,095 5.3% 28,592 (19.1%) 35,338
------------ ------------- ------------
$497,205 12.4% $442,239 16.5% $379,528
============ ============= ============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined telephonic and online revenue growth during the fiscal years ended June
30, 2002 and July 1, 2001 was due primarily to an increase in order volume and
average order value, which resulted from efficient marketing efforts, strong
brand name recognition and the Company's continued expansion of its non-floral
product offerings, including a broad range of items such as plants, candies and
gourmet foods, as well as items for the home and garden, children's toys and
other specialty gifts. Non-floral gift products accounted for 45.8%, 40.7% and
32.4% of total combined telephonic and online net revenues during the fiscal
years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively.
The Company fulfilled approximately 7,172,000, 6,520,000, and 5,616,000 orders
through its combined telephonic and online sales channels during the fiscal
years ended June 30, 2002, July 1, 2001, and July 2, 2000, respectively,
representing increases of 10.0%, and 16.1% over the respective prior fiscal
years. The growth was primarily the result of increases in online order volume
driven by traffic both directly to the Company's URL's ("Universal Resource
Locators") and through third-party portals and Websites, and telephonic order
volume resulting primarily from the addition of the Company's children's gifts
product line in June 2001. Additionally, the Company's combined telephonic and
online sales channel average order value increased 2.5% to $65.02 and 3.6% to
$63.42 during the fiscal years ended June 30, 2002 and July 1, 2001. The Company
intends to continue to drive revenue growth through its online business, and
continue the migration of its customers from the telephone to the Web for
several important reasons: (i) online orders are less expensive to process than
telephonic orders, (ii) online customers can view the Company's full range of
gift offerings - including non-floral gifts, which yield higher gross margin
opportunities, (iii) online customers can utilize all of the Company's services,
such as the various gift search functions, order status check and reminder
service, thereby deepening its relationship with them and leading to increased
order rates, and (iv) when customers visit the Company online, it provides an
opportunity to engage them in an electronic dialog via cost efficient e-mail
marketing programs.
Revenues derived from The Popcorn Factory, which is included in the Company's
results of operations since it was acquired on May 3, 2002, was immaterial in
relation to consolidated revenues for the fiscal year ended June 30, 2002.
Retail/fulfillment revenues for the fiscal year ended June 30, 2002 increased in
comparison to the prior fiscal year primarily due to the November 2001 opening
of a new home and garden outlet store in Williamsburg, VA, and an increase in
same store sales, offset in part by the reduction in retail stores late in the
fiscal year. The decrease in retail/fulfillment revenues for the fiscal year
ended July 1, 2001 was primarily due to a reduction in floral wholesale net
revenues of $7.2 million as a result of the Company's disposition of its Floral
Works subsidiary in January 2000, partially offset by an increase in net
revenues resulting from addition of three company-owned retail locations.
Gross Profit
Years Ended
-----------------------------------------------------------------------
June 30, July 1, July 2,
2002 % Change 2001 % Change 2000
------------- ------------- ----------- ------------- --------------
(in thousands)
Gross profit $203,936 16.9% $174,460 22.8% $142,035
Gross margin % 41.0% 39.4% 37.4%
Gross profit consists of net revenues less cost of revenues which is comprised
primarily of florist fulfillment costs (fees paid directly to florists and fees
paid to wire services that serve as clearinghouses for floral orders, net of
wire service rebates), the cost of floral and non-floral merchandise sold from
inventory or through third parties, and associated costs including inbound and
outbound shipping charges. Additionally, cost of revenues include labor and
facility costs related to direct-to-consumer merchandise production operations,
as well as facility costs on properties that are sublet to the Company's
franchisees. Gross profit increased during the fiscal years ended June 30, 2002
and July 1, 2001 as a result of increased order volume, and an improved gross
margin percentage. Gross margin percentage increased by 160 basis points and 200
basis points during the fiscal years ended June 30, 2002 and July 1, 2001,
respectively, primarily as a result of the continued growth in non-floral
product sales, which in fiscal 2002, was further complemented by the addition of
the Company's children's gifts product line, which generate a higher gross
margin, and an increase in online service and shipping charges, aligning them
with industry norms. In addition, the Company's continued focus on customer
service and operational efficiencies further enhanced the gross margin
percentage through the implementation of stricter quality control standards and
enforcement methods which reduced the rate of credits/returns and replacements.
As the Company continues to expand its higher margin, non-floral business, the
Company expects that gross margin percentage, while varying by quarter due to
seasonal changes in product mix, will continue to increase.
Marketing and Sales Expense
Years Ended
-----------------------------------------------------------------------
June 30, July 1, July 2,
2002 % Change 2001 % Change 2000
------------- ------------- ------------- -------------- -------------
(in thousands)
Marketing and sales $150,638 (2.4)% $154,321 (0.7)% $155,353
Percentage of sales 30.3% 34.9% 40.9%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expenses decreased to 30.3% of net revenues
during the fiscal year ended June 30, 2002, compared to 34.9% (33.3%, exclusive
of the non-recurring charge discussed below) during the prior fiscal year, as a
result of volume related cost, operating efficiencies and cost-effective
advertising, coupled with the Company's strong brand name and savings realized
from successful renegotiations of certain of its portal agreements. In fiscal
2001, the Company incurred a non-recurring charge of $7.3 million ($0.11 per
share), as a result of the modification of an interactive marketing agreement
with one of the Company's portal providers. As a result of the Company's cost
efficient customer retention programs, of the 4,934,000 customers who placed
orders during the fiscal year ended June 30, 2002, approximately 39.2%
represented repeat customers compared to 33.5% in the prior fiscal year. In
addition, despite the overall reduction in spending, as a result of the strength
of the Company's brands, combined with its cost effective marketing programs,
the Company added approximately 3.0 million new customers during each of the
fiscal years ended June 30, 2002 and July 1, 2001.
Although the Company incurred a non-recurring charge of $7.3 million (as
discussed above) during fiscal 2001, marketing and sales expense during the
fiscal year ended July 1, 2001, decreased to 34.9% of net revenues, compared to
40.9% of net revenues during the fiscal year ended July 2, 2000 as a result of
volume related efficiencies and cost effective advertising, coupled with the
Company's strong brand name and savings realized from successful renegotiations
of certain of its portal agreements.
In order to continue to execute its business plan, the Company expects to
continue to invest in its marketing and sales efforts 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 most recent market research,
including changing economic conditions, and seeks 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 providers to ensure that such relationships continue to generate
cost-effective incremental volume. As such, although the Company expects
spending will increase due to the incremental marketing efforts associated with
the acquisition of The Popcorn Factory in May 2002, and volume related expenses
associated with the Company's customer service operations, spending as a
percentage of net revenues is expected to continue to decrease in comparison to
prior fiscal years.
Technology and Development Expense
Years Ended
-----------------------------------------------------------------------
June 30, July 1, July 2,
2002 % Change 2001 % Change 2000
-------------- ------------- ----------- ------------- -------------
(in thousands)
Technology and development $13,723 (18.6%) $16,853 0.3% $16,809
Percentage of sales 2.8% 3.8% 4.4%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Technology and development expense decreased
during the fiscal year ended June 30, 2002 in comparison to the prior year as a
result of cost efficiencies realized by bringing Web-hosting and development
capabilities in-house during the latter half of fiscal 2001. Internalizing the
Company's hosting and development functions has enabled the Company to cost
effectively enhance the content and functionality of its Web sites, including
the September 2001 relaunch of its Plow & Hearth Web site
(www.plowandhearth.com), and improve the performance of the Company's
fulfillment and database systems, while adding improved operational flexibility
and supplemental back-up and system redundancy. During the fiscal years ended
June 30, 2002, July 1, 2001, and July 2, 2000, the Company expended $24.5
million, $30.7 million, and $35.3 million on technology and development, of
which $10.8 million, $13.8 million, and $18.5 million, respectively, has been
capitalized.
Although the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending in comparison to prior fiscal years, particularly in
the areas of Website hosting and development and database management, will
continue to decrease as a percentage of net revenues, as the ongoing benefits
from previous investments in the Company's current technology platform will
reduce the effect of incremental costs expected to be incurred as a result of
the acquisition of The Popcorn Factory in May 2002.
General and Administrative Expenses
Years Ended
-----------------------------------------------------------------------
June 30, July, 1 July 2,
2002 % Change 2001 % Change 2000
-------------- ------------- ----------- ------------- -------------
(in thousands)
General and administrative $28,179 4.2% $27,043 (6.7%) $28,975
Percentage of sales 5.7% 6.1% 7.6%
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. General and administrative expenses increased
during the fiscal year ended June 30, 2002, in comparison to the prior fiscal
year as a result of the incremental costs associated with an increase in
insurance resulting from overall market conditions and the acquisitions of The
Children's Group and The Popcorn Factory, in June 2001 and May 2002,
respectively. The decrease in general and administrative expenses during the
fiscal year ended July 1, 2001, in comparison to the prior fiscal year, was
primarily the result of a $1.5 million charge recorded in fiscal 2000 to account
for the increase in the management put liability associated with the Company's
acquisition of the minority shareholders' interest in Plow & Hearth. Exclusive
of such charge, general and administrative expense decreased by $0.4 million
over the prior fiscal year due to various cost reduction initiatives, offset in
part by increased insurance costs.
The Company believes that its current general and administrative infrastructure
is sufficient to support existing requirements and, as such, while increasing in
absolute dollars due primarily to the incremental costs associated with the
acquisition of The Popcorn Factory in May 2002, general and administrative
expenses is expected to continue to decline as a percentage of net revenues, on
a seasonally adjusted basis.
Depreciation and Amortization
Years Ended
-----------------------------------------------------------------------
June 30, July 1, July 2,
2002 % Change 2001 % Change 2000
-------------- ------------- ----------- ------------- -------------
(in thousands)
Depreciation and amortization $15,061 (30.6%) $21,716 31.8% $16,479
Percentage of sales 3.0% 4.9% 4.3%
The decrease in depreciation and amortization expense during the fiscal year
ended June 30, 2002 in comparison to the prior fiscal year, was primarily the
result of the Company's early adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, which requires the discontinuance of amortization of goodwill
and other intangible assets with indefinite useful lives. As a result,
depreciation and amortization expense for the years ended July 1, 2001 and July
2, 2000 include $7.5 million ($0.12 per share) and $4.7 million ($0.08 per
share), respectively, of goodwill amortization which is not included in fiscal
2002. Increases in depreciation and amortization, net of the aforementioned
goodwill amortization over the past two years resulted from incremental capital
expenses, primarily in information systems hardware and software.
Other Income (Expense)
Years Ended
-----------------------------------------------------------------------
June 30, July 1, July 2,
2002 % Change 2001 % Change 2000
-------------- ------------- ----------- ------------- -------------
(in thousands)
Interest income $2,688 (55.0%) $5,971 (30.9%) $8,645
Interest expense (1,245) 1.5% (1,264) 12.5% (1,444)
Other, net 5 100.9% (555) (351.1%) 221
-------------- ----------- -------------
$1,448 (65.1%) $4,152 (44.1%) $7,422
============== =========== =============
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt.
The decrease in interest income during the fiscal years ended June 30, 2002 and
July 1, 2001 was primarily due to the decline in invested cash balances which
were used to fund the Company's capital expenditures (and operations during
fiscal 2001), as well as a decline in the Company's average rate of return on
its investments. Additionally, during fiscal 2001, the Company recorded a
non-recurring charge of $1.0 million (included above in "Other, net") associated
with the write-down of the Company's minority investment in a technology
partner, purchased in fiscal 2000. Offsetting this write-down was a gain of $0.3
million, recognized by the Company in November 2000, on the sale of its
investment in American Floral Services, Inc. ("AFS").
Income Taxes
As a result of recent tax law changes, which extended the period for which
companies are allowed to carry-back losses, the Company was able to recover
previously paid income taxes, thereby resulting in an income tax benefit of $0.7
million during the fiscal year ended June 30, 2002. The Company has provided a
full valuation allowance on its deferred tax assets, consisting primarily of net
operating loss carryforwards.
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2002 and 2001. 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.
- ---------------------------------------------------------------------------------------------------------------------
Three months ended
--------------------------------------------------------------------------------------
Jun. 30, Mar. 31, Dec. 30, Sep. 30, Jul. 1, Apr. 1, Dec. 31, Oct. 1,
2002 2002 2001 2001 2001 2001 2000 2000
--------- ---------- ---------- ---------- ---------- --------- ---------- ----------
(in thousands)
Net revenues:
Telephonic $63,699 $50,715 $93,550 $40,967 $61,607 $48,642 $79,182 $41,292
Online 68,468 56,874 60,497 32,340 62,655 47,139 47,708 25,422
Retail fulfillment 8,120 7,835 8,278 5,862 7,997 7,440 7,353 5,802
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total net revenues 140,287 115,424 162,325 79,169 132,259 103,221 134,243 72,516
Cost of revenues 83,076 70,690 91,626 47,877 79,569 64,020 79,099 45,091
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Gross profit 57,211 44,734 70,699 31,292 52,690 39,201 55,144 27,425
Operating expenses:
Marketing and sales 37,529 31,533 54,945 26,631 36,715 32,251 50,827 34,528
Technology and development 3,279 3,222 3,532 3,690 3,492 4,253 4,482 4,626
General and administrative 7,353 6,847 7,065 6,914 6,062 6,969 6,617 7,395
Depreciation and amortization 3,912 3,788 3,767 3,594 6,012 5,383 5,280 5,041
--------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total operating expenses 52,073 45,390 69,309 40,829 52,281 48,856 67,206 51,590
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------
Operating income (loss) 5,138 (656) 1,390 (9,537) 409 (9,655) (12,062) (24,165)
Other income (expense), net 322 115 420 591 (183) 1,145 1,526 1,664
Income tax benefit - 706 - - - - - -
---------- ---------- ---------- ---------- ---------- --------- ---------- --------
Net income (loss) $5,460 $165 $1,810 $(8,946) $226 $(8,510) $(10,536) $(22,501)
========= ========== ========== ========== ========== ========= ========== ==========
Net income (loss) per share $0.08 $0.00 $0.03 $(0.14) $0.00 $(0.13) $(0.16) $(0.35)
========= ========== ========== ========== ========== ========= ========== ==========
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into gift, home, gourmet and other related products, the
Thanksgiving through Christmas holiday season, which fall within the Company's
second fiscal quarter, generate the highest proportion of the Company's annual
revenues. Additionally, as the result of a number of major floral gifting
occasions, including Mother's Day, Administrative Professionals Week and Easter,
revenues also rise during the Company's fiscal fourth quarter, in relation to
its fiscal first and third quarters.
Liquidity and Capital Resources
At June 30, 2002, the Company had working capital of $23.3 million, including
cash and equivalents and short-term investments of $63.4 million, compared to
working capital of $27.4 million, including cash and equivalents and short-term
investments of $63.9 million, at July 1, 2001. The decrease in working capital
resulted primarily from the funding of capital expenditures and the acquisition
of The Popcorn Factory in May 2002, offset in part by the cash provided by
operations.
Net cash provided by operating activities of $11.6 million for the fiscal year
ended June 30, 2002 was primarily attributable to income, before depreciation
and amortization and other non-cash charges of $14.1 million, partially offset
by changes in working capital, primarily associated with the addition of The
Popcorn Factory in May 2002.
Net cash used in investing activities of $34.6 million for the fiscal year ended
June 30, 2002 was principally comprised of purchases of short-term investment
grade government and corporate securities, capital expenditures for computer
hardware and software, including those associated with the construction of a new
300 seat service center in Alamogordo, New Mexico, and the acquisition of The
Popcorn Factory in May 2002. The Popcorn Factory purchase price of $12.6 million
was funded through the issuance of 353,003 shares of the Company's Class A
common stock and $7.6 million in cash, $7.3 million of which was used to retire
The Popcorn Factory's outstanding debt, while the remaining $0.3 million was
used to pay for costs of the transaction. The Company expects that as it
continues its return to positive cash flow, it will reallocate available cash
balances into longer term securities in order to maximize the return on its
investments.
Net cash used in financing activities was $0.3 million for the fiscal year ended
June 30, 2002, resulting primarily from the repayment of amounts outstanding
under the Company's credit facilities, offset in part by the net proceeds
received upon the exercise of employee stock options.
The Company's material capital commitments consist of:
o obligations outstanding under capital and operating leases (including
guarentees of $0.5 million)as well as commercial notes related to
obligations arising from, and collateralized by, underlying assets of
the Company's warehousing/fulfillment facility in Madison, Virginia
($12.2 million-2003, $10.2 million-2004, $8.9 million-2005, %5.2 million
-2006, $3.2 million-2007, $11.0 million-thereafter);
o online marketing agreements ($8.9 million); and
o inventory commitments for the upcoming Thanksgiving through Christmas
holiday season ($17.4 million).
At June 30, 2002, the Company's significant known commitments for the subsequent
twelve months totaled approximately $38.5 million and were comprised of fees
related to online marketing agreements, rent and other expenses under its
operating leases, interest expense and the current portion of long term debt and
capital lease obligations.
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Although no
repurchases have been made as of September 23, 2002, any such purchases could be
made from time to time in the open market and through privately negotiated
transactions, subject to general market conditions. The repurchase program will
be financed utilizing available cash.
The Company intends to continue to invest in support of its growth strategy.
These investments include continued advertising and marketing programs designed
to enhance the Company's brand name recognition, retain and acquire new
customers, expand its current product offerings and further develop its Web site
and operating infrastructure. The Company expects to be cash flow positive in
fiscal 2003 and believes that current cash and investments 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 equivalents 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 increase its
lines of credit. 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.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon 1-800-Flowers' consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amount of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates its
estimates, including those related to revenue recognition, inventory and
long-lived assets, including goodwill and other intangible assets related to
acquisitions. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions. Management
believes the following critical accounting policies, among others, affect its
more significant judgments and estimates used in preparation of its consolidated
financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a change in the required inventory
reserve.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. Prior to fiscal
2002, goodwill was amortized over periods not exceeding 20 years. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses is
impaired.
Recently Issued Accounting Pronouncements
On July 2, 2001, the Company adopted Financial Accounting Standards Board
Statements No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations completed on or after July 1,
2001 and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with determinable useful lives will
continue to be amortized. Beginning July 2, 2001, the Company ceased amortizing
goodwill. During 2002, the Company has completed its assessment of the assets
impacted by the adoption of SFAS 142, and based upon such review no impairment
to the carrying value of goodwill was identified.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which addresses the financial accounting and reporting
for obligations associated with the retirement of long-lived assets and the
associated retirement costs. In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"),
which addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company will adopt both SFAS 143 and SFAS 144
on July 1, 2002, and does not expect these statements to materially impact the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). This pronouncement is effective for
exit or disposal activities that are initiated after December 31, 2002, and
requires these costs to be recognized when the liability is incurred and not at
project initiation. The Company does not expect this statement to have a
material impact on its financial statements.
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 and investment grade corporate and U.S. government securities
and, secondarily, certain of its financing arrangements. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
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."
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:
(1) Index to Consolidated Financial Statements:
Page
------
Report of Independent Auditors F-1
Consolidated Balance Sheets as of June 30, 2002 and July 1, 2001 F-2
Consolidated Statements of Operations for the years ended
June 30, 2002, July 1, 2001 and July 2, 2000 F-3
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2002, July 1, 2001 and July 2, 2000 F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, July 1, 2001 and July 2, 2000 F-5
Notes to Consolidated Financial Statements F-6
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S-1
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(a)(3). Other than exhibits 10.23, 21.1 and 23.1, 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, except for
exhibit 10.23, which is incorporated by reference to the exhibit of the
same number contained in the Company's registration statement on Form
S-8 (No. 333-54590), dated January 30, 2001.
Exhibit Description
--------- -----------
3.1 Third Amended and Restated Certificate of Incorporation.
3.2 Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation.
3.3 Amended and Restated By-laws.
4.1 Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate
of Incorporation and By-laws of the Registrant defining the
rights of holders of Common Stock of the Registrant.
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.
10.10 1997 Stock Option Plan, as amended.
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.
10.22 #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.
10.23 Employee Stock Purchase Plan
21.1 Subsidiaries of the Registrant.
23.1 Consent of independent auditors.
24.1 Powers of Attorney (included in the signature page).
99.1 Certification by James F. McCann, Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by William E. Shea, Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------------------------------------------
* 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:
On May 6, 2002, the Company reported the acquisition of The Popcorn
Factory for a purchase price of approximately $12.2 million, comprised
of $7.3million used to retire The Popcorn Factory's outstanding debt
and 353,003 shares of the Company's Class A common stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
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 27, 2002 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:
Dated: September 27, 2002 By: /s/ James F. McCann
---------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 27, 2002 By: /s/ William E. Shea
---------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
Dated: September 27, 2002 By: /s/ Christopher G. McCann
--------------------------------
Christopher G. McCann
Director, President
Dated: September 27, 2002 By: /s/ Lawrence Calcano
---------------------------
Lawrence Calcano
Director
Dated: September 27, 2002 By: /s/ T. Guy Minetti
---------------------------
T. Guy Minetti
Director, Vice Chairman
Dated: September 27, 2002 By: /s/ Kevin J. O'Connor
---------------------------
Kevin J. O'Connor
Director
Dated: September 27, 2002 By: /s/ Mary Lou Quinlan
---------------------------
Mary Lou Quinlan
Director
Dated: September 27, 2002 By: /s/ Jeffrey C. Walker
---------------------------
Jeffrey C. Walker
Director
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, James F. McCann, certify that:
1. I have reviewed this annual report on Form 10-K of
1-800-FLOWERS.COM, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002 /s/ James F. McCann
-------------------------
James F. McCann
Chairman and Chief
Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, William E. Shea, certify that:
1. I have reviewed this annual report on Form 10-K of
1-800-FLOWERS.COM, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002 /s/ William E. Shea
-------------------------
William E. Shea
Senior Vice President and
Chief Financial Officer
Report of Independent Auditors
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of June 30, 2002 and
July 1, 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2002. 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 June 30, 2002 and July 1, 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2002, 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.
As discussed in Note 1 to the consolidated financial statement, the Company
changed its method of accounting for goodwill and other indefinite-lived
intangible assets effective July 2, 2001 to conform with the provisions of
Financial Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets."
/s/ Ernst & Young LLP
Melville, New York
August 2, 2002
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 30, July 1,
2002 2001
------------- ------------
Assets
Current assets:
Cash and equivalents $ 40,601 $ 63,896
Short-term investments 22,798 -
Receivables, net 9,345 8,209
Inventories 15,647 14,885
Prepaid and other 2,220 1,831
------------- ------------
Total current assets 90,611 88,821
Property, plant and equipment, net 51,002 49,861
Investments 9,591 16,284
Capitalized investment in leases 465 706
Goodwill 37,772 25,632
Other intangibles, net 4,074 4,152
Other assets 13,642 9,801
------------- ------------
Total assets $207,157 $195,257
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 64,156 $ 58,481
Current maturities of long-term debt and obligations under capital leases 3,154 2,931
------------- ------------
Total current liabilities 67,310 61,412
Long-term debt and obligations under capital leases 12,244 12,519
Other liabilities 3,695 3,510
------------- ------------
Total liabilities 83,249 77,441
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued in
2002 and 2001 - -
Class A common stock, $.01 par value, 200,000,000 shares authorized,
28,319,677 and 26,586,875 shares issued in 2002 and 2001, respectively 283 266
Class B common stock, $.01 par value, 200,000,000 shares authorized,
42,480,925 and 43,028,525 shares issued in 2002 and 2001, respectively 425 430
Additional paid-in capital 246,497 238,906
Retained deficit (120,189) (118,678)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 123,908 117,816
------------- ------------
Total liabilities and stockholders' equity $ 207,157 $195,257
============= ============
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Years ended
--------------------------------------------
June 30, July 1, July 2,
2002 2001 2000
-------------- -------------- -------------
Net revenues $497,205 $442,239 $379,528
Cost of revenues 293,269 267,779 237,493
-------------- -------------- -------------
Gross profit 203,936 174,460 142,035
Operating expenses:
Marketing and sales 150,638 154,321 155,353
Technology and development 13,723 16,853 16,809
General and administrative 28,179 27,043 28,975
Depreciation and amortization 15,061 21,716 16,479
-------------- -------------- -------------
Total operating expenses 207,601 219,933 217,616
-------------- -------------- -------------
Operating loss (3,665) (45,473) (75,581)
Other income (expense):
Interest income 2,688 5,971 8,645
Interest expense (1,245) (1,264) (1,444)
Other, net 5 (555) 221
-------------- -------------- -------------
Total other income 1,448 4,152 7,422
-------------- -------------- -------------
Loss before income taxes and minority interests (2,217) (41,321) (68,159)
Benefit from income taxes 706 - 1,286
-------------- -------------- -------------
Loss before minority interests (1,511) (41,321) (66,873)
Minority interests in operations of consolidated subsidiaries - - 43
-------------- -------------- -------------
Net loss $(1,511) $(41,321) $(66,830)
============== ============== =============
Basic and diluted net loss per common share $(0.02) $(0.64) $(1.10)
============== ============== =============
Shares used in the calculation of basic and diluted net loss
per common share 64,703 64,197 60,889
============== ============== =============
See accompanying notes.
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2002, July 1, 2001 and July 2, 2000
(in thousands, except share data)
Common Stock
-------------------------------------------------
Preferred Stock Class A Class B
---------------------- ---------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ------------ --------- ------------ ----------
Balance at June 27, 1999 1,127,546 $117,573 4,100,012 $41 45,579,005 $455
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 - -
Total comprehensive loss - - - - - -
---------- ---------- ------------ --------- ------------ --------
Balance at July 2, 2000 - - 26,362,068 264 43,141,645 431
Exercise of stock options - - 97,175 1 - -
Employee stock purchase plan - - 14,512 - - -
Amortization of deferred compensation - - - - - -
Forfeiture of employee stock options - - - - - -
Conversion of Class B common stock into Class A
common stock - - 113,120 1 (113,120) (1)
Total comprehensive loss - - - - - -
---------- ---------- ------------ ---------- ------------- ---------
Balance at July 1, 2001 - - 26,586,875 266 43,028,525 430
Exercise of stock options - - 788,008 8 - -
Employee stock purchase plan - - 44,191 - - -
Conversion of Class B common stock into Class A
common stock - - 547,600 5 (547,600) (5)
Issuance of shares of common stock in connection
with the acquisition of The Popcorn Factory - - 353,003 4 - -
Total comprehensive loss - - - - - -
---------- ---------- ------------ ---------- ------------- ---------
Balance at June 30, 2002 - $ - 28,319,677 $283 42,480,925 $425
========== ========== =========== ========== ============= =========
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2002, July 1, 2001 and July 2, 2000
(in thousands, except share data)
Additional Treasury Stock Total
Paid-In Retained Deferred ----------------------- Stockholders
Capital Deficit Compensation Shares Amount Equity
--------- ----------- ------------ ----------- ---------- ------------
Balance at June 27, 1999 $6,039 $(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
Total comprehensive loss - (66,830) - - - (66,830)
--------- ----------- ---------- ----------- ---------- -----------
Balance at July 2, 2000 239,476 (77,357) (788) 5,332,800 (3,108) 158,918
Exercise of stock options 299 - - - - 300
Employee stock purchase plan 75 - - - - 75
Amortization of deferred compensation - - (156) - - (156)
Forfeiture of employee stock options (944) - 944 - - -
Conversion of Class B common stock into Class A
common stock - - - - - -
Total comprehensive loss - (41,321) - - - (41,321)
--------- ----------- ---------- ----------- ---------- -----------
Balance at July 1, 2001 238,906 (118,678) - 5,332,800 (3,108) 117,816
Exercise of stock options 2,228 - - - - 2,236
Employee stock purchase plan 382 - - - - 382
Conversion of Class B common stock into Class A
common stock - - - - - -
Issuance of shares of common stock in connection
with the acquisition of The Popcorn Factory 4,981 - - - - 4,985
Total comprehensive loss - (1,511) - - - (1,511)
---------- ----------- ----------- ----------- ---------- -----------
Balance at June 30, 2002 $246,497 $(120,189) $ - 5,332,800 $(3,108) $123,908
========== =========== =========== =========== ========== ===========
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
June 30, 2002 July 1, 2001 July 2, 2000
--------------- --------------- ---------------
Operating activities:
Net loss $(1,511) $(41,321) $(66,830)
Reconciliation of net loss to net cash provided by
(used in) operations:
Depreciation and amortization 15,061 21,716 16,479
Deferred income taxes - - 1,321
Management put liability - - 1,451
Bad debt expense 107 377 221
Minority interests - - (43)
Credit to/amortization of deferred compensation - (156) 367
Loss on disposal of equipment and other 425 743 560
Changes in operating items, excluding the effects of
acquisitions:
Receivables (1,031) (204) (838)
Inventories (7) (1,622) (3,574)
Prepaid and other (215) 2,499 166
Accounts payable and accrued expenses 2,264 7,226 20,663
Other assets (3,544) (1,875) (4,699)
Other liabilities 59 (13) 344
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 11,608 (12,630) (34,412)
Investing activities:
Acquisitions, net of cash acquired (7,037) (4,892) (25,515)
Capital expenditures, net of non-cash expenditures-$2,894,
$4,176 and $1,445 in 2002, 2001 and 2000, respectively (11,994) (15,791) (21,901)
Purchases of investments (22,798) (16,284) (1,000)
Proceeds from sales of investments 6,693 1,194 15
Proceeds from sale of business - - 2,488
Other 495 76 222
--------------- --------------- ---------------
Net cash used in investing activities (34,641) (35,697) (45,691)
Financing activities:
Proceeds from issuance of common stock, net 2,618 375 115,899
Proceeds from bank borrowings - 16,510 21,717
Repayment of notes payable and bank borrowings (826) (14,827) (43,568)
Payments of capital lease obligations (2,054) (1,459) (1,504)
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (262) 599 92,544
--------------- --------------- ---------------
Net change in cash and equivalents (23,295) (47,728) 12,441
Cash and equivalents:
Beginning of year 63,896 111,624 99,183
--------------- --------------- ---------------
End of year $ 40,601 $ 63,896 $111,624
=============== =============== ===============
Supplemental Cash Flow Information:
-----------------------------------
-Interest paid amounted to $1,245, $1,264 and $1,457 for the years ended
June 30, 2002, July 1, 2001 and July 2, 2000, respectively.
-The Company received tax refunds, net of income taxes paid of approximately
$706, $1,613 and $472 for the years ended June 30, 2002, July 1, 2001 and
July 2, 2000, respectively.
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading gift retailer,
providing a broad range of thoughtful gift products including flowers, plants,
gourmet foods, candies, gift baskets, and other unique gifts to our customers
around the world. The Company has extended its product offerings through several
of its subsidiaries, including The Plow & Hearth, Inc. ("Plow & Hearth"), a
direct marketer of home decor and garden merchandise, GreatFood.com, Inc.
("Greatfood.com"), a source for gourmet products, The Popcorn Factory, Inc., a
manufacturer and direct marketer of premium popcorn and specialty food gifts,
and the Children's Group, Inc., a direct marketer of unique children's toys and
games operating under the HearthSong and Magic Cabin Dolls brand names. 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 30th. Fiscal years 2002 and 2001, which ended on June 30, 2002
and July 2, 2001, respectively, consisted of 52 weeks, while fiscal year 2000,
which ended on July 2, 2000, consisted of 53 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts 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 the consolidated 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, United States government securities, 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 using the first-in,
first-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated
depreciation. Depreciation expense is recognized over the assets' estimated
useful lives using the straight-line method. Estimated useful lives are based on
Company averages ranging from 3 to 10 years for furniture, fixtures and
equipment and 40 years for buildings. Amortization of leasehold improvements,
which range from 5 to 20 years, 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. Estimated useful
lives are periodically reviewed and, where appropriate, changes are made
prospectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. Prior to fiscal
2002, goodwill was amortized over periods not exceeding 20 years.
The cost of intangible assets with determinable lives is amortized to reflect
the pattern of economic benefits consumed, on a straight-line basis, over the
estimated periods benefited, ranging from 3 to 16 years.
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. Included within
other assets was $2.7 million and $2.2 million at June 30, 2002 and July 1,
2001, respectively relating to prepaid catalog costs.
Investments
The Company considers all of its debt and equity securities, for which there is
a determinable fair market value and no restrictions on the Company's ability to
sell within the next 12 months, as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. For the years ended June 30,
2002, July 1, 2001 and July 2, 2000, there were no significant unrealized gains
or losses. Realized gains and losses are included in other income. The cost
basis for realized gains and losses on available-for-sale securities is
determined on a specific identification basis.
Fair Values of Financial Instruments
The recorded amounts of the Company's cash and equivalents, short-term
investments, receivables, accounts payable, and accrued liabilities approximate
their fair values principally because of the short-term nature of these items.
The fair value of investments, including available-for-sale securities, is based
on quoted market prices where available. 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 carrying values at June 30, 2002 and July 1, 2001.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and equivalents,
investments and accounts receivable. The Company maintains cash and equivalents
and investments 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 throughout the United
States, and the fact that a substantial portion of receivables are related to
balances owed by major credit card companies. Allowances relating to accounts
receivable ($1.0 million and $1.1 million at June 30, 2002 and July 1, 2001,
respectively) have been recorded based upon previous experience and management's
evaluation.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Cost of Revenues
Cost of revenues consists primarily of florist fulfillment costs (fees paid
directly to florists and fees paid to wire services that serve as clearinghouses
for floral orders, net of wire service rebates), the cost of floral and
non-floral merchandise sold from inventory or through third parties, and
associated costs including inbound and outbound shipping charges. Additionally,
cost of revenues includes labor and facility costs related to direct-to-consumer
merchandise production operations, as well as facility costs on properties that
are sublet to the Company's franchisees.
Marketing and Sales
Marketing and sales expenses consist primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues), and
customer service center expenses, as well as the operating expenses of the
Company's departments 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
$37.8 million, $26.9 million and $21.8 million for the years ended June 30,
2002, July 1, 2001 and July 2, 2000, respectively) was $69.6 million, $71.0
million and $79.5 million for the years ended June 30, 2002, July 1, 2001 and
July 2, 2000, respectively.
Technology and Development
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Costs associated with the acquisition or
development of software for internal use are capitalized if the software is
expected to have a useful life beyond one year 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 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.
Comprehensive Income (Loss)
For the years ended June 30, 2002, July 1, 2001 and July 2, 2000, the Company's
comprehensive losses were equal to the respective net losses for each of the
periods presented.
Loss Per Share
Net loss per common share is computed using the weighted-average number of
common shares outstanding. Shares associated with stock options and warrants
prior to exercise, are not included in the computation as their inclusion would
be antidilutive. The shares of the Company's preferred stock were converted into
common stock upon completion of its initial public offering, and were excluded
from the diluted loss per share computation until such date, as this effect
would have been antidilutive.
Recent Accounting Pronouncements
On July 2, 2001, the Company adopted Financial Accounting Standards Board
Statements No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations completed on or after July 1,
2001 and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with determinable useful lives will
continue to be amortized. During fiscal 2002, the Company completed its
assessment of the assets impacted by the adoption of SFAS 142. Based upon such
review no impairment to the carrying value of goodwill was identified, and the
Company ceased amortizing goodwill effective July 2, 2001. (See Note 4)
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which addresses the financial accounting and reporting
for obligations associated with the retirement of long-lived assets and the
associated retirement costs. In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"),
which addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company will adopt both SFAS 143 and SFAS 144
on July 1, 2002, and does not expect these statements to materially impact the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). This pronouncement is effective for
exit or disposal activities that are initiated after December 31, 2002, and
requires these costs to be recognized when the liability is incurred and not at
project initiation. The Company does not expect this statement to have a
material impact on its financial statements.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform to
the presentation in the current fiscal year.
Note 3. Acquisitions and Disposition
Acquisition of Selected Assets of The Popcorn Factory
On May 3, 2002, the Company extended its gourmet food product assortment when it
completed the acquisition of selected operating assets and liabilities of The
Popcorn Factory, a manufacturer and direct marketer of premium popcorn and
specialty food gifts. The purchase price of approximately $12.6 million,
including $0.3 million of transaction costs, was comprised of $7.3 million used
to retire The Popcorn Factory's outstanding debt and the issuance of 353,003
shares of the Company's Class A common stock, valued at approximately $5.0
million, based upon the average closing price of the Company's common stock on
the date of and the two days preceding and following the closing of the
transaction. The acquisition was accounted for as a purchase and, accordingly,
acquired assets and liabilities are recorded at their fair values, and the
operating results of The Popcorn Factory have been included in the Company's
consolidated results of operations since the date of acquisition.
The initial purchase price allocation of The Popcorn Factory business resulted
in the following condensed balance sheet of assets acquired and liabilities
assumed.
The Popcorn Factory
Initial Purchase Price Allocation
-----------------------------------------
(in thousands)
Current assets $1,704
Property, plant and equipment 1,061
Intangible assets 1,120
Goodwill (*) 12,081
------------
Total assets acquired 15,966
------------
Current liabilities 3,200
Non-current liabilities 142
------------
Total liabilities assumed 3,342
------------
Net assets acquired $12,624
============
(*) Approximately $12.1 million is expected to be deductible for
tax purposes.
The Popcorn Factory acquisition resulted in $1.1 million in total intangible
assets acquired, other than goodwill, with $0.2 million allocated to trademarks
with indefinite lives. The remaining $0.9 million of acquired intangibles were
allocated to customer list, and is being amortized over the asset's determinable
useful life of 3 years.
Acquisition of Selected Assets of The Children's Group
On June 8, 2001, the Company completed its acquisition of selected assets from
subsidiaries of Foster & Gallagher, Inc., adding unique and educational
children's toys and games to the Company's product offering, sold under the
HearthSong and Magic Cabin Dolls brand names. The purchase price of
approximately $4.9 million, paid in cash, included the acquisition of a
fulfillment center located in Vandalia, Ohio, inventory, and certain other
assets, as well as, the assumption of certain related liabilities. The
acquisition was accounted for as a purchase and, accordingly, acquired assets
and liabilities are recorded at their fair values, which approximated the
purchase price, and the operating results of The Children's Group have been
included in the Company's consolidated results of operations since the date of
acquisition.
Acquisition of GreatFood.com, Inc.
On November 24, 1999, the Company completed its acquisition of GreatFood.com, an
online retailer of specialty and gourmet food products. The purchase price of
approximately $18.9 million was funded with a portion of the net proceeds
available from the Company's initial public offering. 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, $18.9 million, was allocated
to goodwill and was being amortized over three years. In accordance with the
provisions of SFAS 142, effective July 2, 2001, the Company ceased amortizing
the goodwill associated with this acquisition, which at such time had a
remaining balance of $8.9 million.
Acquisition of TheGift.com, Inc.
On November 12, 1999, the Company completed its acquisition of TheGift.com, an
online retailer of specialty gift products. The purchase price of approximately
$1.5 million 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 $1.7
million, was allocated to intangible assets and is being amortized over the
asset's determinable useful life of 3 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. Floral Works is a
provider of wholesale floral bouquets to supermarkets and grocery store chains.
The sales price of $3.1 million approximated the Company's carrying value of the
subsidiary's net assets at the time of divestiture.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of The Popcorn Factory, The Children's Group,
GreatFood.com, TheGift.com and the sale of Floral Works had taken place at the
beginning of fiscal year 2000. The following unaudited pro forma information is
not necessarily indicative of the results of operations in future periods or
results that would have been achieved had the acquisitions of The Popcorn
Factory, The Children's Group, GreatFood.com and TheGift.com and the disposition
of Floral Works taken place at the beginning of the periods presented.
Years Ended
---------------------------------------------
June 30, 2002 July 1, 2001 July 2, 2000
-------------- -------------- --------------
(in thousands, except per share data)
Net revenues (*) $ 528,103 $ 509,214 $443,090
Loss from operations $ (6,407) $ (50,392) $(85,823)
Net loss $ (4,688) $ (46,671) $(78,676)
Net loss per common share $ (0.07) $ (0.73) $ (1.29)
(*) Pre-acquisition operations related to the Children's Group include
revenues derived from six retail stores which were discontinued by
the previous owners at various times during fiscal 2001. Operating
results associated with these retail stores were not material to the
consolidated operations of the Company during such time.
Pre-acquisition net revenues for GreatFood.com and TheGift.com were
not material to the Company's results of operations.
Disposition of Minority Interest in American Floral Services, Inc.
On November 21, 2000, the Company sold its minority investment in American
Floral Services, Inc., a floral wire service, to Teleflora, Inc. The Company
received cash proceeds of $1.2 million and recorded a gain on sale of $0.3
million as a result of this transaction.
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 for approximately $16.1
million. Upon completion of the Company's initial public offering in August
1999, the Company satisfied its obligation under the Plow & Hearth management
put liability when it acquired the remaining outstanding shares of common stock
and stock options from the minority shareholders of Plow & Hearth for cash of
approximately $7.9 million, net of Plow & Hearth stock option exercise proceeds
of approximately $0.5 million. Accordingly, the incremental amount of funding
required to satisfy the management put liability, which was $6.3 million at June
27, 1999, was recorded in fiscal 2000 as general and administrative expense and
goodwill in the amounts of $1.5 million and $0.1 million, 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, $18.9
million, was allocated to goodwill and was being amortized over 20 years. In
accordance with the provisions of SFAS 142, effective July 2, 2001, the Company
ceased amortizing the goodwill associated with this acquisition, which at such
time had a remaining balance of $15.9 million.
Note 4. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill for the year ended June 30,
2002 is as follows:
June 30, 2002
---------------
(in thousands)
Goodwill, net, beginning of year $25,632
Acquisition of The Popcorn Factory 12,081
Other 59
---------------
Goodwill, net, end of year $37,772
===============
Identifiable intangible assets as of June 30, 2002 and July 1, 2001 are
comprised as follows:
June 30, 2002 July 1, 2001
------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ---------------- ------------- ----------------
(in thousands)
Intangible Assets with Determinable
Lives:
Investment in licenses (*) $4,927 $2,468 $4,927 $2,145
Customer lists 910 51 - -
Technology 1,659 1,428 1,659 875
Other 171 122 641 306
------------- ---------------- ------------- ----------------
7,667 4,069 7,227 3,326
Trademarks with indefinite lives: 480 4 255 4
------------- ---------------- ------------- ----------------
Total identifiable intangible assets $8,147 $4,073 $7,482 $3,330
============= ================ ============= ================
* Investment in 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 the franchise estimated lives
ranging from 14 to 16 years.
The amortization of intangible assets for the years ended June 30, 2002, July 1,
2001 and July 2, 2000 was $0.7 million, $0.9 million and $0.8 million,
respectively. Estimated amortization expense over the next five years is as
follow: 2003-$0.9 million, 2004 - $0.6 million, 2005 - $0.6 million, 2006 - $0.3
million and 2007 - $0.3 million.
The following table provides pro forma disclosure of net loss and net loss per
share for the years ended July 1, 2001 and July 2, 2000, as if goodwill and
indefinite-lived intangibles had not been amortized:
July 1, July 2,
2001 2000
--------------- ----------------
(in thousands, except per share data)
Reported net loss $(41,321) $(66,830)
Amortization 7,458 4,732
--------------- ---------------
Adjusted net loss $(33,863) $(62,098)
=============== ================
Reported net loss per common share $(0.64) $(1.10)
Amortization per common share 0.11 0.08
--------------- --------------
Adjusted net loss per common share $(0.53) $(1.02)
=============== ==============
Note 5. 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 $2.1 million. The principal actions of the charge relate to the
Company's plan to close certain retail stores in connection with its strategic
redeployment of its retail network as 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 major
components of the redeployment charge include the estimated unrecoverable book
value of abandoned fixtures, equipment and leasehold improvements in the amount
of approximately $1.1 million, and the estimated provision for the future lease
obligations and related facility shut down costs in the amount of approximately
$1.0 million.
As part of the redeployment plan, in November 2000, the Company opened a new
service center in Ardmore, Oklahoma to replace its Marietta, Georgia facility,
which was closed in October 2000. An additional service center, located in
Alamagordo, New Mexico became operational in November 2001, replacing its
Phoenix, Arizona and San Antonio, Texas service centers, which were closed in
June 2001. In addition, in fiscal 2001 the Company completed the planned
conversion of certain retail stores into direct fulfillment centers, while
closing certain other non-performing retail stores. During fiscal 2002 and
fiscal 2001, $0.2 million and $1.6 million respectively was charged against the
accrual, leaving a balance of $0.3 million, consisting primarily of accruals for
future lease commitments related to the closed service center facilities.
Note 6. Property, Plant and Equipment
June 30, 2002 July 1, 2001
-------------- -------------
(in thousands)
Computer equipment $33,989 $27,853
Software development costs 27,451 23,659
Telecommunication equipment 6,059 5,559
Leasehold improvements 11,588 11,333
Building and building improvements 11,489 8,439
Equipment 6,253 5,732
Furniture and fixtures 3,576 3,207
Land 666 637
-------------- -------------
101,071 86,419
Accumulated depreciation and amortization 50,069 36,558
-------------- -------------
$ 51,002 $ 49,861
============== =============
Note 7. Long-Term Debt
June 30, 2002 July 1, 2001
-------------- --------------
(in thousands)
Commercial notes and revolving credit line (1-5) $7,380 $8,153
Seller financed acquisition obligations (6-7) 202 256
Obligations under capital leases (see Note 13) 7,816 7,041
-------------- --------------
15,398 15,450
Less current maturities of long-term debt and obligations under
capital leases 3,154 2,931
-------------- --------------
$12,244 $12,519
============== ==============
- -----------
The following notes and credit lines relate to obligations arising from, and
collateralized by, the underlying assets of the Company's Plow & Hearth
facility in Madison, Virginia:
(1) $5,000,000 revolving credit line dated May 31, 2002, renewable on
September 30, 2002 (none outstanding at June 30, 2002 and July 1, 2001)
bearing interest equal to the monthly LIBOR Index plus 1.75% per annum
(3.59% at June 30, 2002).
(2) $2,400,000 note dated June 13, 1997 ($2,001,000 outstanding at June
30, 2002), bearing interest at 8.19% per annum. The note is payable in
203 equal monthly installments of principal and interest commencing
July 13, 1997.
(3) $1,460,000 note dated July 1, 1998 ($1,222,000 outstanding at June 30,
2002), bearing interest equal to the monthly Treasury Bill rate plus
2.1% per annum (3.78% at June 30, 2002). The note is payable in 180
equal monthly installments of principal and interest commencing
November 1, 1998.
(4) $2,980,000 note dated May 12, 1999 ($2,653,000 outstanding at June 30,
2002), bearing interest at 7.61% per annum. The note is payable in 180
equal monthly installments of principal and interest commencing
October 15, 1999.
(5) $2,300,000 note dated August 8, 2000 ($1,504,000 outstanding June 30,
2002) bearing interest at a fixed rate of 8.83% per annum. The note is
payable in 60 equal monthly installments of principal and interest
commencing September 10, 2000.
The following notes relate to seller-financed acquisition obligations, all of
which have been collateralized by either the stock or assets of various
subsidiaries of the Company:
(6) $275,000 promissory note dated November 1, 1994 ($88,000 outstanding
at June 30, 2002), 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
($114,000 outstanding at June 30, 2002). The note is payable in 84
monthly installments commencing January 1, 2001.
As of June 30, 2002, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
Debt
Year Maturities
------------- --------------
(in thousands)
2003 $820
2004 890
2005 942
2006 441
2007 448
Thereafter 4,041
--------------
$7,582
==============
Note 8. Income Taxes
Significant components of the benefit for income taxes are as follows:
Years ended
------------------------------------------------
-------------- -------------- ---------------
June 30, July 1, July 2,
2002 2001 2000
------------- -------------- ---------------
(in thousands)
Current:
Federal (*) $706 $ - $2,607
State and local - - -
------------- -------------- ---------------
706 - 2,607
Deferred - - (1,321)
------------- -------------- ---------------
$706 $ - $1,286
============= ============== ===============
* As a result of tax law changes enacted in fiscal 2002, which
extended the period for which companies are allowed to
carry-back losses, the Company was able to recover previously
paid income taxes, thereby resulting in an income tax benefit of
$0.7 million.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit is as follows:
Years ended
--------------------------------------------
June 30, July 1, July 2,
2002 2001 2000
------------- -------------- --------------
Tax at U.S. statutory rates 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.6 4.9 3.9
Goodwill amortization (13.8) (6.8) (2.6)
Change in deferred tax asset valuation 8.6 (33.0) (32.0)
Other (0.6) 0.9 (1.4)
------------- -------------- --------------
31.8% 0.0% 1.9%
============= ============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets (liabilities) are as follows:
June 30, July 1, July 2,
2002 2001 2000
-------------- -------------- --------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 37,946 $ 37,097 $ 20,909
Accrued expenses and reserves 3,031 2,946 3,086
Valuation allowance (38,242) (37,447) (22,098)
Deferred tax liabilities:
Installment sales (54) (61) (70)
Tax in excess of book depreciation (2,681) (2,535) (1,827)
-------------- -------------- --------------
Net deferred tax assets $ - $ - $ -
============== ============== ==============
At June 30, 2002, the Company's U.S. federal and state net operating loss
carryforwards for income tax purposes were approximately $94.9 million. If not
utilized, these net operating loss carryforwards will begin to expire in fiscal
year 2020. To the extent that net operating losses, when realized, relate to
stock option deductions of approximately $6.8 million, the resulting benefits
will be credited to additional paid-in capital.
Note 9. Capital Stock Transactions
Initial Public Offering
On August 6, 1999, the Company closed its initial public offering 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 $114.8 million, net of underwriting
discounts, commissions and other offering costs of approximately $11.2 million.
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 $101.6 million. 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 $14.9
million 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.
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.
Stock Repurchase Plan
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. No repurchases have been made
as of June 30, 2002.
Note 10. 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. 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 shares from the 1997 Stock Option Plan. Additionally, the shares
authorized automatically increase on the first trading day in January of each
calendar year, by an amount equal to 3% (1,933,702 shares, 1,925,615 shares and
1,852,172 shares during fiscal 2002, 2001 and 2000, respectively) 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 plans
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 $1.7
million associated with the January 1999 option grants, of which $0.4 million
was amortized during the year ended July 2, 2000. During the year ended July 1,
2001, the Company reversed $0.2 million of amortization, representing previously
amortized deferred compensation expense associated with unvested stock options
which were forfeited upon the employee's separation from the Company.
The following table summarizes activity in stock options:
Years ended
--------------------------------------------------------------------------
June 30, 2002 July 1, 2001 July 2, 2000
----------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
---------- ---------- ------------ ----------- ------------ ------------
Balance, beginning of year 6,455,262 $6.64 5,788,171 $8.53 1,237,500 $1.73
Grants 2,897,950 $12.43 2,143,925 $3.91 5,099,550 $10.57
Exercises (788,008) $2.72 (97,175) $3.83 (61,250) $2.00
Forfeitures (452,060) $9.94 (1,379,659) $10.52 (487,629) $13.38
------------ ------------- -------------
Balance, end of year 8,113,144 $8.95 6,455,262 $6.64 5,788,171 $8.53
============ ============= =============
Weighted-average fair
value of options
issued during the year $7.32 $2.21 $6.33
The following table summarizes information about stock options outstanding at
June 30, 2002:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- ------------------- -------------- ------------------ --------------- --------------- ---------------
$1.61 - 3.65 2,175,142 7.9 years $3.30 869,367 $2.82
$4.02 - 5.50 1,747,575 7.7 years $4.56 570,245 $4.55
$5.63 - 12.44 1,632,544 8.6 years $11.40 213,837 $11.81
$12.63 - 15.77 1,863,309 9.4 years $12.98 108,428 $13.40
$17.38 - 23.10 694,574 7.0 years $21.08 408,014 $21.04
-------------- --------------
8,113,144 8.3 years $8.95 2,169,891 $8.11
============== ==============
At June 30, 2002, the Company has reserved approximately 15,903,000 shares of
common stock for issuance under common stock option plans.
Fair Value Disclosures
Pro forma information regarding net income (loss) is required by SFAS 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 initial public offering, and the Black-Scholes option
pricing model thereafter, with the following assumptions: risk free interest
rate of 4.50%, 5.35% and 6.15% in 2002, 2001 and 2000, respectively; no dividend
yield; 66%, 60% and 70% volatility in 2002, 2001 and 2000 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:
Years ended
-------------------------------------------
June 30, 2002 July 1, 2001 July 2, 2000
-------------- -------------- -------------
(in thousands, except per share data)
Net loss:
As reported $(1,511) $(41,321) $(66,830)
Pro forma (6,958) (46,272) (71,766)
Basic and diluted net loss per share:
As reported $(0.02) $(0.64) $(1.10)
Pro forma (0.11) (0.72) (1.18)
Note 11. Employee Stock Purchase Plan
In December 2000, the Company's board of director's approved the
1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a
non-compensatory employee stock purchase plan under Section 423 of the Internal
Revenue Code, to provide substantially all employees who have completed six
months of service, an opportunity to purchase shares of the Company's Class A
common stock. Employees may contribute a maximum of 15% of eligible
compensation, but in no event can an employee purchase more than 500 shares on
any purchase date. Offering periods have a duration of six months, and the
purchase price per share will be the lower of: (i) 85% of the fair market value
of a share of Class A common stock on the last trading day of the applicable
offering period, or (ii) 85% of the fair market value of a share of Class A
common stock on the last trading day before the commencement of the offering
period. The maximum number of shares of Class A common stock that may be issued
under the ESPP is 1,300,000 shares. The share pool shall be increased on the
first trading day of each calendar year, beginning in 2002, by a number equal to
the lesser of (i) 1% of the total number of shares of common stock then
outstanding, or (ii) 750,000 shares of Class A common stock. At June 30, 2002,
the Company has reserved approximately 1,886,000 shares of common stock for
issuance under its ESPP.
Note 12. 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 contributions based upon years of service. The
Company made contributions of $0.3 million, $0.2 million and $0.1 million, for
the years ended June 30 2002, July 1, 2001 and July 2, 2000, respectively.
Note 13. Commitments and Contingencies
Leases
The Company currently leases office, store facilities, and equipment under
various operating leases through fiscal 2019. 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 $18.4 million and $15.5 million at June 30,
2002 and July 1, 2001, respectively, and accumulated amortization of $12.4
million and $9.8 million, 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).
The Company has a $10.0 million equipment lease line of credit with a bank.
Interest under this line, which is renewable annually, is determined on the date
of each commitment to borrow and is based on the bank's base rate on such date.
At June 30, 2002, the Company had financed $7.1 million of equipment purchases
through such lease line. The borrowings, which bear interest at rates ranging
from 5.39% to 6.36% annually, are payable in 60 monthly installments of
principal and interest commencing in February 2001. Borrowings under the line
are collateralized by the underlying equipment purchased and an equal amount of
pledged investments.
As of June 30, 2002, 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:
Obligations
Under Capitalized
Capital Investment Operating
Leases In Leases Leases
------------ ------------ ------------
(in thousands)
2003 $ 2,887 $ 244 $ 4,606
2004 2,144 134 4,275
2005 1,857 53 3,739
2006 1,438 29 1,402
2007 353 20 942
Thereafter 20 20 3,176
------------ ------------ ------------
Total minimum lease payments 8,699 500 $ 18,140
============
Less amounts representing interest (883) (35)
------------ ------------
Present value of net minimum lease payments $7,816 $465
============ ============
At June 30, 2002, 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:
Sublease Sublease
Income Expense
-------------- --------------
(in thousands)
2003 $ 2,829 $ 2,816
2004 2,413 2,398
2005 1,879 1,870
2006 1,528 1,521
2007 1,106 1,100
Thereafter 2,690 2,667
-------------- --------------
$ 12,445 $ 12,372
============== ==============
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 June
30, 2002, the aggregate minimum rent payable by franchisees guaranteed by the
Company was approximately $0.5 million.
Rent expense was approximately $8.7 million, $8.4 million, and $10.2 million for
the years ended June 30, 2002, July 1, 2001, and July 2, 2000 respectively.
Online Marketing Agreements
The Company has commitments under online marketing agreements with
various portal providers. Such online marketing costs are capitalized and
amortized on a straight-line basis over the term of the agreements. On
September 1, 2000, the Company entered into a five-year $22.1 million online
marketing agreement with an Internet company commencing October 1, 2001 and
ending August 31, 2005. As a result of the modification of the previous
agreement, the Company recorded a one-time charge of approximately $7.3 million
during fiscal 2001.
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.