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 December 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
---------------------------------------------
(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:
28,398,260
----------
(Number of shares of Class A common stock outstanding as of February 5, 2003)
37,199,915
----------
(Number of shares of Class B common stock outstanding as of February 5, 2003)
1-800-FLOWERS.COM, Inc.
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 29, 2002
INDEX
Page
------
Part I. Financial Information
- ------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 29, 2002
(Unaudited) and June 30, 2002 1
Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 29, 2002
and December 30, 2001 2
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 29, 2002 and December 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 12
Item 4. Controls and Procedures 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications 15
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
December 29, June 30,
2002 2002
----------------------------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 71,149 $ 40,601
Short-term investments 10,953 22,798
Receivables, net 15,367 9,345
Inventories 20,408 15,647
Prepaid and other 2,837 2,220
------------- ------------
Total current assets 120,714 90,611
Property, plant and equipment, net 46,747 51,002
Investments 1,367 9,591
Capitalized investment in leases 371 465
Goodwill 37,825 37,772
Other intangibles, net 3,527 4,074
Other assets 12,859 13,642
------------- ------------
Total assets $223,410 $207,157
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 77,471 $ 64,156
Current maturities of long-term debt and obligations under capital leases 2,950 3,154
------------- ------------
Total current liabilities 80,421 67,310
Long-term debt and obligations under capital leases 10,708 12,244
Other liabilities 5,248 3,695
------------- ------------
Total liabilities 96,377 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,
28,390,715 and 28,319,677 shares issued at December 29, 2002 and June 30,
2002, respectively 284 283
Class B common stock, $.01 par value, 200,000,000 shares authorized,
42,479,915 and 42,480,925 shares issued at December 29, 2002 and June 30,
2002, respectively 425 425
Additional paid-in capital 246,828 246,497
Retained deficit (117,396) (120,189)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 127,033 123,908
------------- ------------
Total liabilities and stockholders' equity $223,410 $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 Six Months Ended
-------------------------- ---------------------------
December December December December
29, 2002 30, 2001 29, 2002 30, 2001
-------------- ----------- ------------- ------------
Net revenues $197,429 $162,325 $286,654 $241,494
Cost of revenues 107,335 91,626 159,882 139,503
-------------- ----------- ------------- ------------
Gross profit 90,094 70,699 126,772 101,991
Operating expenses:
Marketing and sales 64,978 54,945 93,931 81,576
Technology and development 3,415 3,532 6,993 7,222
General and administrative 7,462 7,065 14,869 13,979
Depreciation and amortization 4,068 3,767 8,097 7,361
-------------- ----------- ------------- ------------
Total operating expenses 79,923 69,309 123,890 110,138
-------------- ----------- ------------- ------------
Operating income (loss) 10,171 1,390 2,882 (8,147)
Other income (expense):
Interest income 284 735 635 1,659
Interest expense (262) (314) (576) (612)
Other, net (106) (1) (148) (36)
-------------- ----------- ------------- ------------
Total other income (expense) (84) 420 (89) 1,011
-------------- ----------- ------------- ------------
Net income (loss) $10,087 $1,810 $2,793 $(7,136)
============== =========== ============= ============
Basic and diluted net income (loss) per common share $0.15 $0.03 $0.04 $(0.11)
============== =========== ============= ============
Weighted average shares used in the calculation of net income
(loss) per common share:
Basic 65,522 64,401 65,500 64,357
============== =========== ============= ============
Diluted 67,804 67,753 67,704 64,357
============== =========== ============= ============
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
--------------------------------
December 29, December 30,
2002 2001
-------------- --------------
Operating activities:
Net income (loss) 2,793 ($7,136)
Reconciliation of net income (loss) to net cash provided by operations:
Depreciation and amortization 8,097 7,361
Bad debt expense 317 300
Other non-cash items 187 376
Changes in operating items:
Receivables (6,339) (3,565)
Inventories (4,761) (185)
Prepaid and other (617) (95)
Accounts payable and accrued expenses 13,315 8,752
Other assets 648 2,130
Other liabilities 1,553 78
-------------- --------------
Net cash provided by operating activities 15,193 8,016
Investing activities:
Purchase of investments (18,364) -
Sale of investments 38,434 990
Capital expenditures, net of non-cash expenditures (3,522) (6,704)
Other 132 137
-------------- --------------
Net cash provided by (used in) investing activities 16,680 (5,577)
Financing activities:
Proceeds from employee stock options/stock purchase plan 333 752
Repayment of notes payable and bank borrowings (466) (407)
Payment of capital lease obligations (1,192) (877)
-------------- --------------
Net cash used in financing activities (1,325) (532)
-------------- --------------
Net change in cash and equivalents 30,548 1,907
Cash and equivalents:
Beginning of period 40,601 63,896
-------------- --------------
End of period $71,149 $65,803
============== ==============
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 and six months ended December 29, 2002 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 29, 2003.
The balance sheet information 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 and six months ended December 29, 2002 and December 30, 2001, the
Company's comprehensive income (losses) were equal to the respective net income
(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.
Six Months Ended
-------------------------------------
December 29, December 30,
2002 2001
---------------- ------------------
(in thousands, except per share data)
Net revenues $286,654 $266,633
Operating income (loss) 2,882 (8,139)
Net income (loss) 2,793 (7,444)
Basic and diluted net income (loss) per common share $0.04 ($0.12)
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:
December 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 $2,630 $2,297 $4,927 $2,468 $2,459
Customer lists 3 years 910 202 708 910 51 859
Technology 3 years 1,659 1 ,659 - 1,659 1,428 231
Other 20 years 171 125 46 171 122 49
----------- ------------- ---------- ----------- --------------------------
7,667 4,616 3,051 7,667 4,069 3,598
Trademarks with
indefinite lives - 480 4 476 480 4 476
----------- ------------- ---------- ----------- --------------- ----------
Total identifiable
intangible assets $8,147 $4,620 $3,527 $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, and thereafter: $1.4 million.
Note 4 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
December June 30,
29, 2002 2002
----------- -----------
(in thousands)
Commercial notes and revolving credit lines $6,541 $7,380
Seller financed acquisition obligations 201 202
Obligations under capital leases 6,916 7,816
----------- -----------
13,658 15,398
Less current maturities of long-term debt and obligations under
capital leases 2,950 3,154
----------- -----------
$10,708 $12,244
=========== ===========
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 5 - Net Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
Three Months Ended Six Months Ended
-------------------------------- ------------------------------
December December December December
29, 2002 30, 2001 29, 2002 30, 2001
--------------- --------------- --------------- -------------
(in thousands, except per share data)
Numerator:
Net income (loss) $10,087 $1,810 $2,793 ($7,136)
=============== =============== =============== =============
Denominator:
Weighted average shares outstanding 65,522 64,401 65,500 64,357
Effect of dilutive securities:
Employee stock options 2,282 3,352 2,204 -
--------------- --------------- --------------- -------------
Adjusted weighted-average shares and assumed
conversations 67,804 67,753 67,704 64,357
=============== =============== =============== =============
Basic and diluted net income (loss) per common share $0.15 $0.03 $0.04 ($0.11)
=============== =============== =============== =============
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 helps millions of customers connect to the people they care
about with a broad range of thoughtful gifts, award-winning customer service and
its unique technology and fulfillment infrastructure. The Company's product line
- - including flowers, plants, gourmet foods, candies, gift baskets and other
unique gifts - is available to customers around the world via: the Internet
(www.1800flowers.com); by calling 1-800-FLOWERS(R) (1-800-356-9377) 24 hours a
day; or by visiting one of the Company-operated or franchised stores. The
Company's collection of thoughtful gifting brands includes home decor and garden
merchandise from Plow & Hearth(R) (phone: 1-800-627-1712 and web:
www.plowandhearth.com), premium popcorn and other food gifts from The Popcorn
Factory(R)(phone: 1-800-541-2676 and web: www.thepopcornfactory.com), gourmet
food products from GreatFood.com(R) (www.greatfood.com), and children's gifts
from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com).
The Company achieved profitability during the three and six months ended
December 29, 2002 and expects to be profitable for the full year of fiscal 2003.
However, the Company's prospects for maintaining profitability must be
considered in light of risks, uncertainties, expenses and the current
challenging retail and geo-political environment, as well as those more fully
described under the caption "Risk Factors that May Affect Future Results" within
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2002.
Results of Operations
Net Revenues
Three Months Ended Six Months Ended
------------------------------------------------ ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
--------------- ---------------- --------------- -------------- ------------- --------------
(in thousands)
Net revenues:
Telephonic $113,999 $93,550 21.9% $156,530 $134,517 16.4%
Online 75,750 60,497 25.2% 116,550 92,837 25.5%
Retail/fulfillment 7,680 8,278 (7.2%) 13,574 14,140 (4.0%)
--------------- ---------------- -------------- -------------
Total net revenues $197,429 $162,325 21.6% $286,654 $241,494 18.7%
=============== ================ ============== =============
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 and six months
ended December 29, 2002 was due primarily to an increase in order volume,
resulting from increased effectiveness of the Company's marketing efforts,
strong brand name recognition and the continued expansion of its non-floral
product offerings such as plants, candies and gourmet foods, including the
Popcorn Factory line of products which was acquired in May 2002, as well as
items for the home and garden, children's toys and other specialty gifts.
Non-floral gift products accounted for 67.0% and 58.6% of total combined
telephonic and online net revenues during the three and six months ended
December 29, 2002, respectively, as compared to 62.1% and 54.4% during the same
periods of the prior year.
7
During the three and six months ended December 29, 2002 the Company fulfilled
approximately 3,159,000 and 4,467,000 orders through its combined telephonic and
online sales channels, an increase of 37.8% and 30.3% over the respective prior
year periods. This growth resulted from increases in both online order volume,
which increased 34.9% and 31.5% during the three and six months ended December
29, 2002, respectively, in comparison to the prior year periods, driven by
traffic increases through the Company's websites as well as through third party
portals, and telephonic order volume, which during the three and six months
ended December 29, 2002 increased 40.1% and 29.4% over the respective prior year
periods, resulting primarily from the acquisition of the Company's gourmet
popcorn product line in May 2002. The Company's combined telephonic and online
sales channels average order value decreased 10.6% to $60.09 and 7.8% to $61.13
during the three and six months ended December 29, 2002, respectively, due to
the seasonal impact of the Popcorn Factory product line which has a lower
average order value. 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 interact with them in an
electronic dialog via cost efficient e-mail marketing programs.
Retail/fulfillment revenues for the three and six months ended December 29, 2002
decreased in comparison to the same periods of the prior year, primarily as a
result of converting certain company owned retail stores into franchised
operations.
Gross Profit
Three Months Ended Six Months Ended
------------------------------------------ ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
-------------- ------------- ------------- ------------- ------------- ---------------
(in thousands)
Gross profit $90,094 $70,699 27.4% $126,772 $101,991 24.3%
Gross margin % 45.6% 43.6% 44.2% 42.2%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (fees paid to florists directly and
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 properties that are sublet to the Company's
franchisees. Gross profit increased during the three and six months ended
December 29, 2002, in comparison to the same periods of the prior year,
primarily as a result of increased order volume and an improved gross margin
percentage. Gross margin percentage increased by 200 basis points during both
the three and six months ended December 29, 2002, due to the continued growth of
non-floral product sales, which was further complemented by the acquisition of
the Popcorn Factory line of products in May 2002, which generate higher gross
margins, improvements in product shipping costs, inventory management and
product sourcing, and an increase in the Company's service charge, aligning it
with industry norms. In addition, the Company's continued focus on customer
service further enhanced the gross margin percentage through stricter quality
control standards and enforcement methods, implemented in fiscal 2002, that
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.
8
Marketing and Sales Expense
Three Months Ended Six Months Ended
---------------------------------------------- ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
-------------- --------------- ------------- ------------- ------------- ---------------
(in thousands)
Marketing and sales $64,978 $54,945 18.3% $93,931 $81,576 15.1%
Percentage of net revenues 32.9% 33.8% 32.8% 33.8%
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 as a percentage of net
revenues during the three and six months ended December 29, 2002, compared to
the same periods of the prior fiscal year as a result of targeted cost-effective
online advertising, coupled with the Company's strong brand name and order
processing cost reduction initiatives. As a result of the Company's
cost-efficient customer retention programs, of the 2,240,000 and 3,141,000
customers who placed orders during the three and six months ended December 29,
2002, respectively, approximately 46.9% and 47.7% represented repeat customers
as compared to 46.4% and 47.2% in the respective prior year periods. In
addition, as a result of the strength of the Company's brands, combined with its
cost-efficient marketing programs, the Company added approximately 1,191,000 and
1,684,000 new customers during the three and six months ended December 29, 2002,
respectively.
In order to continue to execute its business plan, the Company expects to
continue to prudently 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. Although the Company believes that increased
spending in the area of marketing and sales will be necessary for the Company to
continue to grow its revenues, the Company expects that marketing and sales
expense will continue to decline as a percentage of net revenues.
Technology and Development Expense
Three Months Ended Six Months Ended
---------------------------------------------- ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
------------- --------------- ------------- ------------- ------------- ---------------
(in thousands)
Technology and development $3,415 $3,532 (3.3%) $6,993 $7,222 (3.2%)
Percentage of net revenues 1.7% 2.2% 2.4% 3.0%
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 and six months ended December 29, 2002 in comparison to the
same periods 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 and
six months ended December 29, 2002, the Company expended $5.4 million and $10.5
million, respectively, on technology and development, of which $2.0 million and
$3.5 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 will continue to
decrease as a percentage of net revenues as the expected benefits from previous
9
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 Six Months Ended
--------------------------------------------- ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
------------- --------------- ------------- ------------- ------------- ---------------
(in thousands)
General and administrative $7,462 $7,065 5.6% $14,869 $13,979 6.4%
Percentage of net revenues 3.8% 4.4% 5.2% 5.8%
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 and six months ended December 29, 2002, in comparison
to the same periods 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 Six Months Ended
------------------------------------------- ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
------------ --------------- ------------- ------------- ------------- ---------------
(in thousands)
Depreciation and amortization $4,068 $3,767 8.0% $8,097 $7,361 10.0%
Percentage of net revenues 2.1% 2.3% 2.8% 3.0%
The increase in depreciation and amortization expense during the three and six
months ended December 29, 2002, in comparison to the same periods 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.
Other Income (Expense)
Three Months Ended Six Months Ended
------------------------------------------- ---------------------------------------------
December December December December
29, 2002 30, 2001 % Change 29, 2002 30, 2001 % Change
------------ ------------- ------------- ------------- ------------- ---------------
(in thousands)
Interest income $284 $735 (61.4%) $635 $1,659 (61.7%)
Interest expense (262) (314) (16.6%) (576) (612) (5.9%)
Other (106) (1) - (148) (36) 311.1%
------------ ------------- ------------- -------------
$(84) $420 (120.0%) $(89) $1,011 (108.8%)
============ ============= ============= =============
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 and six months ended
December 29, 2002 was primarily due to the decline in invested cash and
10
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 due to market conditions.
Income Taxes
During the three and six months ended December 29, 2002 and the three months
ended December 30, 2001, the Company provided no income tax provision due to the
availability of net operating loss carryforwards. Additionally, for the six
months ended December 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 against the remaining portion of its deferred tax
asset, consisting primarily of net operating losses, because of uncertainty
regarding its future realization.
Liquidity and Capital Resources
At December 29, 2002, the Company had working capital of $40.3 million,
including cash and equivalents and short-term investments of $82.1 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 increase in
working capital resulted primarily from earnings, adjusted for non-cash items
primarily consisting of depreciation and amortization, as well as maturities of
long-term investments, offset in part by capital expenditures and repayment of
long-term debt and capital lease obligations. In addition to its cash and
short-term investments, the Company maintained approximately $1.4 million and
$9.6 million of long-term investments, consisting primarily of investment grade
corporate and U.S. government securities.
Net cash provided by operating activities of $15.2 million for the six months
ended December 29, 2002 was primarily attributable to net income, adjusted for
non-cash charges of depreciation and amortization, and seasonal changes in
working capital.
Net cash provided by investing activities of $16.7 million for the six months
ended December 29, 2002 was principally comprised of the maturities of
longer-term investments, reduced by capital expenditures related to the
Company's technology infrastructure.
Net cash used in financing activities was $1.3 million for the six months ended
December 29, 2002, resulting primarily from repayments of amounts outstanding
under the Company's credit facilities and long-term 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: $6.8 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 ($9.2 million); and
o inventory commitments ($10.2 million).
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 February 5, 2003, 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.
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
11
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.
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 and pursuant
to 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.
12
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
The Company's Annual Meeting of Stockholders was held on December 4,
2002.
The following nominees were elected as directors, each to serve until
the 2005 annual meeting or until their respective successors shall have
been duly elected and qualified, by the vote set forth below:
Nominee For Withheld
---------------------------- ----------------------------------- ------------------------------------------
James F. McCann 379,178,211 4,350,936
Christopher G. McCann 378,787,486 4,741,661
T. Guy Minetti 378,789,961 4,739,186
The following Directors who were not nominees for election at
this Annual Meeting will continue to serve on the Board of Directors of
the Company: Jeffrey C. Walker, Kevin J. O'Connor, Lawrence V. Calcano,
John J. Conefry, Mary Lou Quinlan and Leonard J. Elmore.
The proposal to ratify the selection of Ernst & Young LLP,
independent public accountants, as auditors of the Company for the
fiscal year ending June 29, 2003 was approved by the vote set forth
below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
383,137,433 388,226 3,488
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 report on 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.
On November 18, 2002, the Company filed a report on Form 8-K
announcing that Leonard J. Elmore, President and CEO of Test
University, a leading provider of web-based test and educational
solutions, was added to the Company's board of directors.
13
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: February 12, 2003 /s/ James F. McCann
- ------------------------ -----------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: February 12, 2003 /s/ William E. Shea
- ------------------------ -----------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
14
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: February 12, 2003 /s/ James F. McCann
- ------------------------- ------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
15
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: February 12, 2003 /s/ William E. Shea
- ------------------------- ------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
16