UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
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(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of each of the Registrant's classes of
common stock:
28,327,620
----------
(Number of shares of Class A common stock outstanding as of November 5, 2002)
37,199,915
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(Number of shares of Class B common stock outstanding as of November 5, 2002)
1-800-FLOWERS.COM, Inc.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2002
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 29, 2002
(Unaudited) and June 30, 2002 1
Consolidated Statements of Operations (Unaudited) - Three
Months Ended September 29, 2002 and September 30, 2001 2
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended September 29, 2002 and September 30, 2001 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 29, June 30,
2002 2002
----------------------------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 25,143 $ 40,601
Short-term investments 21,345 22,798
Receivables, net 9,290 9,345
Inventories 24,861 15,647
Prepaid and other 4,797 2,220
----------------------------
Total current assets 85,436 90,611
Property, plant and equipment, net 49,103 51,002
Investments 3,419 9,591
Capitalized investment in leases 418 465
Goodwill 37,825 37,772
Other intangibles, net 3,773 4,074
Other assets 17,395 13,642
----------------------------
Total assets $197,369 $207,157
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 62,051 $ 64,156
Current maturities of long-term debt and obligations under capital leases 3,155 3,154
----------------------------
Total current liabilities 65,206 67,310
Long-term debt and obligations under capital leases 11,420 12,244
Other liabilities 4,021 3,695
----------------------------
Total liabilities 80,647 83,249
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000 shares authorized,
28,351,905 and 28,319,677 shares issued at September 29, 2002 and June 30,
2002, respectively 283 283
Class B common stock, $.01 par value, 200,000,000 shares authorized,
42,479,915 and 42,480,925 shares issued at September 29, 2002 and
June 30, 2002, respectively 425 425
Additional paid-in capital 246,605 246,497
Retained deficit (127,483) (120,189)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
----------------------------
Total stockholders' equity 116,722 123,908
----------------------------
Total liabilities and stockholders' equity $197,369 $207,157
============================
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
-------------------------------
September 29, September 30,
2002 2001
---------------- --------------
Net revenues $89,225 $79,169
Cost of revenues 52,547 47,877
-------------- --------------
Gross profit 36,678 31,292
Operating expenses:
Marketing and sales 28,953 26,631
Technology and development 3,578 3,690
General and administrative 7,407 6,914
Depreciation and amortization 4,029 3,594
-------------- --------------
Total operating expenses 43,967 40,829
-------------- --------------
Operating loss (7,289) (9,537)
Other income (expense):
Interest income 351 924
Interest expense (314) (298)
Other (42) (35)
-------------- --------------
Total other income (expense), net (5) 591
-------------- --------------
Net loss $(7,294) $(8,946)
============== ==============
Basic and diluted net loss per common share $(0.11) $ (0.14)
============== ==============
Shares used in the calculation of basic and diluted
net loss per common share 65,476 64,310
============== ==============
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
September 29, September 30,
2002 2001
-------------- --------------
Operating activities:
Net loss ($7,294) ($8,946)
Reconciliation of net loss to net cash provided by (used in) operations:
Depreciation and amortization 4,029 3,594
Bad debt expense 82 114
Other non-cash items 72 -
Changes in operating items:
Receivables (27) (1,191)
Inventories (9,214) (4,265)
Prepaid and other (2,577) (17)
Accounts payable and accrued expenses (2,105) (2,913)
Other assets (3,796) (411)
Other liabilities 326 (120)
-------------- --------------
Net cash used in operating activities (20,504) (14,155)
Investing activities:
Purchase of investments (5,026) (2,412)
Sale of investments 12,651 -
Capital expenditures, net of non-cash expenditures (1,962) (1,486)
Notes receivable, net 56 198
-------------- --------------
Net cash provided by (used in) investing activities 5,719 (3,700)
Financing activities:
Proceeds from exercise of employee stock options 108 418
Repayment of notes payable and bank borrowings (244) (203)
Payment of capital lease obligations (537) (431)
-------------- --------------
Net cash used in financing activities (673) (216)
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Net change in cash and equivalents (15,458) (18,071)
Cash and equivalents:
Beginning of period 40,601 63,896
-------------- --------------
End of period $25,143 $45,825
============== ==============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended September 29, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 29, 2003.
The balance sheet at June 30, 2002 has been derived from the audited financial
statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended June 30, 2002.
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.
Comprehensive Income (Loss)
For the three months ended September 29, 2002 and September 30, 2001, the
Company's comprehensive losses were equal to the respective net losses for each
of the periods presented.
Note 2 - Acquisition of Selected Assets of The Popcorn Factory
On May 3, 2002, the Company extended the breadth of its gourmet food product
assortment when it completed the acquisition of selected operating assets and
liabilities of The Popcorn Factory, Inc.("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.
Pro forma Results of Operations
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisition of The Popcorn Factory business had taken place
at the beginning of fiscal year 2002. 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 acquisition of The
Popcorn Factory taken place at the beginning of the period presented.
Three Months Ended
-------------------------------------
September 29, September 30,
2002 2001
---------------- ------------------
(in thousands, except per share
data)
Net revenues $89,225 $80,485
Loss from operations (7,289) (12,007)
Net loss (7,294) (11,519)
Net loss per common share ($0.11) ($0.18)
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 3 - Goodwill and Intangible Assets
The Company's goodwill and intangible assets consist of the following:
September 29, 2002 June 30, 2002
---------------------------------------- ---------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
--------------------------- --------------------------- ----------- --------------- -----------
(in thousands)
Goodwill - $51,730 $13,905 $37,825 $51,677 $13,905 $37,772
============ =========================== =========== ===========================
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $2,549 $2,378 $4,927 $2,468 $2,459
Customer lists 3 years 910 126 784 910 51 859
Technology 3 years 1,659 1,567 92 1,659 1,428 231
Other 20 years 171 128 43 171 122 49
------------ --------------------------- ----------- ---------------------------
7,667 4,370 3,297 7,667 4,069 3,598
Trademarks with
indefinite lives - 480 4 476 480 4 476
------------ --------------------------- ----------- --------------- -----------
Total identifiable
intangible assets $8,147 $4,374 $3,773 $8,147 $4,073 $4,074
============ =========================== =========== ===========================
Estimated amortization expense is as follows: fiscal 2003: $0.9 million, fiscal
2004: $0.6 million, fiscal 2005: $0.6 million, fiscal 2006: $0.3 million, fiscal
2007: $0.3 million, fiscal 2008: $0.3million, and thereafter: $1.1 million.
Note 4 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
September 29, June 30,
2002 2002
------------- -----------
(in thousands)
Commercial notes and revolving credit lines $7,137 $7,380
Seller financed acquisition obligations 201 202
Obligations under capital leases 7,237 7,816
----------- -----------
14,575 15,398
Less current maturities of long-term debt and obligations under
capital leases 3,155 3,154
----------- -----------
$11,420 $12,244
=========== ===========
Note 5 - Net Loss Per Common Share
Net loss per common share is computed using the weighted-average number of
common shares outstanding. Shares associated with stock options, prior to
exercise of 2,052,000 and 3,363,000 for the three months ended September 29,
2002 and September 30, 2001, are not included in the computation as their
inclusion would be antidilutive.
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 6 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q 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" within the
Company's Annual Report on Form 10-K. 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 Quarterly Report on Form 10-Q 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, gift
baskets, gourmet food, 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.magiccabindolls.com), unique and
educational children's toys and games.
Although the Company incurred a loss during the quarter ended September 29,
2002, the Company expects to be profitable for the full year of fiscal 2003. 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 challenging retail environment, including
those more fully described under the caption "Risk Factors that May Affect
Future Results" within the Company's Annual Report on Form 10-K.
7
Results of Operations
Net Revenues
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Net revenues:
Telephonic $42,531 $40,967 3.8%
Online 40,800 32,340 26.2%
Retail/fulfillment 5,894 5,862 0.5%
-------- -------
Total net revenues $89,225 $79,169 12.7%
======== =======
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 three months ended
September 29, 2002 was due primarily to an increase in order volume, resulting
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 39.5% of total combined telephonic and online net
revenues during the three months ended September 29, 2002 as compared to 38.2%
during the same period of the prior year.
During the three months ended September 29, 2002 the Company fulfilled
approximately 1,309,000 orders through its combined telephonic and online sales
channels, an increase of 15.2% over the prior year period. This growth resulted
from increases in both online order volume, which increased 25.4% over the prior
year period driven by traffic directly to the Company's websites as well as
through third party portals, and telephonic order volume, which increased 5.3%
over the prior year period resulting primarily from the acquisition of the
Company's gourmet popcorn product line in May 2002. Although the Company's
combined telephonic and online sales channels average order value decreased 1.3%
to $63.66, as a result of seasonal changes in product offerings during the three
months ended September 29, 2002, the Company anticipates that its average sale
will continue to increase on a seasonally adjusted basis during the remainder of
fiscal 2003. 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 array 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 the relationship with its
customers 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.
Retail/fulfillment revenues for the three months ended September 29, 2002 were
consistent with the same period of the prior year.
Gross Profit
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Gross profit $36,678 $31,292 17.2%
Gross margin % 41.1% 39.5%
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 indirectly to florists through 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
8
properties that are sublet to the Company's franchisees. Gross profit increased
during the three months ended September 29, 2002, in comparison to the same
period of the prior year, primarily as a result of increased order volume and an
improved gross margin percentage. Gross margin percentage increased by 160 basis
points during the three months ended September 29, 2002, primarily as a result
of the continued growth in non-floral product sales, which generate a higher
gross margin, and an increase of 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
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Marketing and sales $28,953 $26,631 8.7%
Percentage of net revenues 32.4% 33.6%
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. As a result of volume related efficiencies and cost-effective
advertising, coupled with the Company's strong brand name and order processing
cost reduction initiatives, marketing and sales expenses decreased to 32.4% of
net revenues during the three months ended September 29, 2002, compared to 33.6%
during the same period of the prior fiscal year, despite the disproportionately
high level of expenses associated with The Popcorn Factory, acquired in May
2002. Due to the seasonal nature of its business, The Popcorn Factory has low
sales volume relative to its overhead during the summer months. As a result of
the Company's cost efficient customer retention programs, of the 1,122,000
customers who placed orders during the three months ended September 29, 2002,
approximately 56.0% represented repeat customers as compared to 53.6% in the
prior year period. In addition, as a result of the strength of the Company's
brands, combined with its cost-efficient marketing programs, the Company added
approximately 494,000 new customers during the three months ended September 29,
2002.
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 these 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
the same periods of the prior year.
Technology and Development Expense
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Technology and development $3,578 $3,690 (3.0%)
Percentage of net revenues 4.0% 4.7%
9
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 three months ended September 29, 2002 in comparison to the same
period of the prior year, as a result of cost efficiencies realized by both
in-sourcing technology applications and bringing the Company's disaster recovery
web-hosting platform in-house. Internalizing the Company's development functions
has enabled the Company to cost effectively enhance the content and
functionality of its Web sites and improve the performance of the Company's
fulfillment and database systems, while adding improved operational flexibility
and supplemental back-up and system redundancy. These efficiencies were offset
in part by the incremental technology costs associated with The Popcorn Factory
integration in preparation for the Holiday selling season. During the three
months ended September 29, 2002, the Company expended $5.1 million on technology
and development, of which $1.5 million 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 periods, particularly in
the areas of Web site 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
mitigate 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 Expense
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
General and administrative $7,407 $6,914 7.1%
Percentage of net revenues 8.3% 8.7%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. The increase in general and administrative
expense during the three months ended September 29, 2002, in comparison to the
same period of the prior year, was primarily attributable to incremental costs
associated with the operation of The Popcorn Factory, acquired in May 2002, and
increased insurance costs resulting from overall market conditions, partially
offset by various cost reduction initiatives.
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
operation of recently acquired businesses, general and administrative expenses
are expected to continue to decline as a percentage of net revenues, on a
seasonally adjusted basis.
Depreciation and Amortization Expense
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Depreciation and amortization $4,029 $3,594 12.1%
Percentage of net revenues 4.5% 4.5%
The increase in depreciation and amortization expense during the three months
ended September 29, 2002, in comparison to the same period of the prior year,
was primarily the result of the additional depreciation and amortization
associated with The Popcorn Factory, acquired in May 2002, as well as increased
capital expenditures.
10
Other Income (Expense)
Three Months Ended
----------------------------
September 29, September 30,
2002 2001 % Change
------------- --------------- -----------
(in thousands)
Interest income $351 $924 (62.0%)
Interest expense (314) (298) 5.4%
Other (42) (35) (20.0%)
------------- ------------
($5) $591 (100.8%)
============ ============
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 other income (expense) for the three months ended September 29,
2002 was primarily due to the decline in invested cash and investment balances
in order to fund operations, capital expenditures and the acquisition of The
Popcorn Factory in May 2002, as well as a decline of the Company's average rate
of return on its investments.
Income Taxes
During the three months ended September 29, 2002 and September 30, 2001 no
income tax benefit has been recorded as all available loss carrybacks have been
fully utilized. The Company has provided a full valuation allowance on that
portion of its deferred tax assets, consisting primarily of net operating loss
carryforwards.
Liquidity and Capital Resources
At September 29, 2002, the Company had working capital of $20.2 million,
including cash and equivalents and short-term investments of $46.5 million,
compared to working capital of $23.3 million, including cash and equivalents and
short-term investments of $63.4 million, at June 30, 2002. The decrease in
working capital resulted primarily from the funding of operations, expenditures
for promotional mailings related to the upcoming holidays and capital
expenditures.
Net cash used in operating activities of $20.5 million for the three months
ended September 29, 2002 was primarily attributable to net losses, working
capital changes comprised primarily of reductions in accounts payable and
accrued expenses and a seasonal increase in promotional mailings and inventory,
associated with the Company's expansion into non-floral product lines and in
anticipation of the upcoming holidays, reduced by non-cash charges of
depreciation and amortization.
Net cash provided by investing activities of $5.7 million for the three months
ended September 29, 2002 was principally comprised of the net redemption of
investments, offset by capital expenditures for computer hardware and software.
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 $0.7 million for the three months
ended September 29, 2002, resulting primarily from the repayment of amounts
outstanding under the Company's credit facilities and capital lease obligations,
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
guarantees of $0.5 million), as well as commercial notes related to
obligations arising from, and collateralized by, the underlying assets
of the Company's warehousing/fulfillment facility in Madison, Virginia
(fiscal 2003: $9.5 million, fiscal 2004: $10.2 million, fiscal 2005:
$8.9 million, fiscal 2006: $5.2 million, fiscal 2007: $3.2 million, fiscal
2008: $1.6 million, and thereafter: 9.4 million);
o online marketing agreements ($10.0 million); and
o inventory commitments for the upcoming holiday season ($18.3 million).
11
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 November 5, 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 believes that current cash and
equivalents 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 the Company's 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, affects the Company's
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 reduction in the net realizable value
of inventory.
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. 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.
12
ITEM 3. 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
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 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
For purposes of rule 13a-14 and 15d-14 of the Securities Exchange Act of
1934 ("Exchange Act") the term "disclosure controls and procedures" refers
to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act, is recorded, processed, summarized
and reported within required time periods. Within 90 days prior to the date
of this report ("Evaluation Date"), the Company carried out an evaluation
under the supervision and with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer of the effectiveness of
the design and operation of its disclosure controls and procedures.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date, such
controls and procedures were effective at ensuring that required information
will be disclosed on a timely basis in our periodic reports filed under the
Exchange Act.
(b) Changes in internal controls
There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls subsequent to
the Evaluation Date.
13
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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.
(b) Reports on Form 8-K
On October 21, 2002, the Company filed a Form 8-K announcing that
John J. Conefry, Jr., Vice Chairman of Astoria Financial
Corporation and Chairman of the Board of Trustees of Hofstra
University, was added to the board of directors on Friday,
October 18, 2002.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
----------------------------------
(Registrant)
Date: November 13, 2002 /s/ James F. McCann
- --------------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 13, 2002 /s/ William E. Shea
- --------------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
15
CERTIFICATIONS
I, James McCann, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
1-800-FLOWERS.COM, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ James F. McCann
- --------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
16
I, William Shea, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
1-800-FLOWERS.COM, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ William E. Shea
- --------------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
17