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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2003
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 1-3117311
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 237-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes (X) No ( )
The aggregate market value of voting common stock held by non-affiliates of the
Registrant, based on the closing price of the Class A common stock on September
23, 2003 as reported on the Nasdaq National Market, was approximately
$222,013,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The Registrant does not have any
non-voting common equity outstanding.
28,784,671
(Number of shares of class A common stock outstanding as of September 23, 2003)
37,013,855
(Number of shares of class B common stock outstanding as of September 23, 2003)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders (the Definitive Proxy Statement), to be filed with the
SEC within 120 days of June 29, 2003, are incorporated by reference into Part
III of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended June 29, 2003
INDEX
PART I
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 22
Matters
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
Item 9A. Controls and Procedures 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accounting Fees and Services 36
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K 37
Signatures 40
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE COMPANY'S CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM,
INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
AS MORE FULLY DESCRIBED ELSEWHERE IN THIS REPORT. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
Item 1. BUSINESS
The Company
For more than 25 years, 1-800-FLOWERS.COM has helped millions of customers
connect with 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 includes flowers, plants, gourmet
foods, candies, gift baskets and other unique gifts 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. 1-800-FLOWERS.COM's collection of
thoughtful gifting brands includes home decor and garden merchandise from Plow &
Hearth(R) (phone: 1-800-627-1712 or web: www.plowandhearth.com), premium
popcorn, confections and other food gifts from The Popcorn Factory(R) (phone:
1-800-541-2676 or 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's
Class A common stock is listed on the NASDAQ National Market (ticker symbol
"FLWS").
References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" and the
"Company" refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's
principal offices are located at 1600 Stewart Avenue, Westbury, New York, 11590
and its telephone number at that location is (516) 237-6000.
The Origins of 1-800-FLOWERS.COM
The Company's operations began in 1976 when James F. McCann, its Chairman and
Chief Executive Officer, acquired a single retail florist in New York City,
which he subsequently expanded to a 14-store chain. Thereafter, the Company
modified its business strategy to take advantage of the rapid emergence of
toll-free calling. The Company acquired the right to use the toll-free telephone
number 1-800-FLOWERS, adopted it as its corporate identity and began to
aggressively build a national brand around it. The Company believes it was one
of the first companies to embrace this new way of conducting business.
To support the growth of its toll-free business and to provide superior customer
service, the Company developed an operating infrastructure that incorporated the
best available technologies. Over time, the Company implemented a sophisticated
transaction processing system that facilitated rapid order entry and
fulfillment, an advanced telecommunications system and multiple customer service
centers to handle increasing call volume.
To enable the Company to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, the
Company created BloomNet(R), a nationwide network of independent local florists
selected for their high-quality products, superior customer service and order
fulfillment and delivery capabilities.
In the early 1990s, the Company recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
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medium. By taking advantage of investments in its infrastructure, the Company
was able to quickly develop and implement an online presence. As a result, the
Company was one of the first companies to market products online through
CompuServe beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In
April 1995, the Company opened its fully functional, e-commerce Web site
(www.1800flowers.com) and subsequently entered into strategic relationships with
AOL, Yahoo! and Microsoft, among others, to build its online brand and customer
base.
The Company's online presence has enabled it to expand the number and types of
products it can effectively offer. As a result, the Company has developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption. Since 1995, the Company has
broadened its product offerings of flowers, gourmet foods and gifts and added
complementary home and garden merchandise through its April 1998 acquisition of
Plow & Hearth, as well as unique and educational children's toys and games when
it acquired the HearthSong and Magic Cabin product lines in June 2001. In order
to further expand its gourmet food line, the Company acquired GreatFood.com, in
November 1999, as well as purchased selected assets of The Popcorn Factory in
May 2002, adding premium popcorn and specialty snack foods to the Company's
product offerings.
The Company's Strategy
1-800-FLOWERS.COM objective is to become the leading provider of thoughtful
gifts, helping its customers connect with the important people in their lives.
The Company will continue to build on the trusted relationships with our
customers by providing them with ease of access, tasteful and appropriate gifts,
and superior service. The key elements of its strategy to achieve this objective
are:
Opportunistically Extend the Company's Brands. The Company believes that
1-800-FLOWERS.COM is one of the most recognized brands in the floral and gift
industry. The strength of its brand has enabled the Company to extend its
product offerings to complementary products, including giftware, gourmet foods,
home and garden merchandise, and children's toys and games. This extension of
product offerings through its brands has enabled the Company to increase the
number of purchases by existing customers who have come to trust the
1-800-FLOWERS.COM brand, as well as attract a significant number of new
customers.
The Company believes its brands are characterized by:
o Convenience. All of the Company's product offerings can be purchased
either via the Company's toll-free telephone numbers from their home
or office 24 hours a day, seven days a week, or via the web for those
customers who prefer a visual representation of their product selection.
The Company offers a variety of delivery options, including same-day
or next-day service throughout the world.
o Quality. High-quality products are critical to the Company's continued
brand strength and are integral to the brand loyalty that it has built
over the years. The Company offers its customers a 100% satisfaction
guarantee on all of its products.
o Delivery. The Company has developed a market-proven fulfillment
infrastructure that allows delivery on a same-day, next-day and any-day
basis. Key to the Company's fulfillment capability is an innovative
"hybrid" model which combines BloomNet(R) (comprised of independent
florists operating retail flower shops and Local Fulfillment Centers
("LFC's"), Company-owned stores and fulfillment centers, and franchise
stores), with Company-owned distribution centers in Madison, Virginia,
Vandalia, Ohio and Lake Forest, Illinois and brand-name vendors who
ship directly to the Company's customers. These fulfillment points
are connected by the Company's proprietary "BloomLink(R)" communication
system, an internet-based system through which orders and related
information are transmitted.
o Selection. Over the course of a year, the Company offers over 3,000
varieties of fresh-cut flowers, floral arrangements and plants, over
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3,700 SKUs of gifts and gourmet foods, approximately 8,600 different
products for the home and garden, including garden accessories and
casual lifestyle furnishings, and over 4,200 unique and educational toys
and games.
o Customer Service. The Company strives to ensure that customer service,
whether online, via the telephone, or in one of its retail stores is
of the highest caliber. The Company operates four customer service
facilities to provide helpful assistance on everything from advice on
product selection to the monitoring of the fulfillment and delivery
process.
The Company's goal is to make the 1-800-FLOWERS.COM brands synonymous with
thoughtful gifting. To do this, the Company intends to continue to invest in its
brands through the use of selective media, public relations and strategic
Internet portal relationships, while capitalizing on the Company's large and
loyal customer base through cost-effective customer retention programs.
As part of the Company's continuing effort to serve the thoughtful gifting needs
of its customers, the Company intends to market other high-quality brands in
addition to 1-800-FLOWERS.COM. The Company intends to accomplish this through
internal development, co-branding arrangements, strategic relationships and/or
acquisitions of complementary businesses. In keeping with this strategy, in May
2002, the Company acquired The Popcorn Factory, a manufacturer and direct
marketer of giftable premium popcorn and related food gift products, and in June
2001, the Company acquired The Children's Group, including its two brands of
unique and educational children's toys and games. In fiscal 2000 the Company
acquired GreatFood.com, an online retailer of gourmet foods, and in 1998, the
Company acquired Plow & Hearth, a direct marketer of home decor and garden
merchandise. As a complement to the Company's own brands and product lines, the
Company has formed strategic relationships with Lenox(R), Waterford(R),
Godiva(R), Hershey's(R), Gund(R), Crabtree and Evelyn(R), American Greetings
Corporation(R), Things Remembered(R) and Yankee Candle(R), among others, in
order to provide our customers with an even broader selection of products to
further its position as a destination for all of their gifting needs.
Expand its Product Offerings. The Company's wide selection of products creates
the opportunity to have a relationship with customers who purchase items not
only for gift-giving occasions but also for everyday consumption. The Company's
merchandising team works closely with manufacturers and suppliers to select and
design its floral, gourmet food, home and garden and children's toys, as well as
other gift-related products that accommodate our customers' needs to celebrate a
special occasion, convey a sentiment or cater to a casual lifestyle. As part of
this continuing effort, the Company intends to increase the number of, as well
as expand its relationships with its existing product manufacturers or, where
appropriate, acquire businesses with complementary product lines.
Enhance its Customer Relationships. The Company intends to deepen its
relationship with its customers and be their trusted resource to fulfill their
need for quality, tasteful gifts. The Company plans to encourage more frequent
and extensive use of its Web site, by continuing to provide product-related
content and interactive features. The Company will also continue to improve its
customers' shopping experience by personalizing the features of its Web site
and, in compliance with the Company's privacy policy, utilizing customer
information to target product promotions, identify individual and mass market
consumption trends, remind customers of upcoming occasions and convey other
marketing messages. As of June 29, 2003, the Company's total database of
customers numbered approximately 21.3 million (12.1 million of which have
transacted business with the Company within the past 36 months), 7.8 million of
which have transacted business with the Company online (6.2 million of which
have transacted business with the Company online within the past 36 months).
In addition, the Company believes it has a significant opportunity to expand its
corporate accounts and intends to focus greater resources on developing
customized plans for its corporate customers, such as its existing programs with
AT&T, IBM, JPMorgan Chase, Ford and General Electric to assist them with their
corporate gifting needs and those of their employees.
Increase the Number of Online Customers. To increase the number of customer
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orders placed through its cost-effective Web site, the Company intends to
continue to:
o actively promote its Web site through Web portals, online networks and
search engines;
o expand its online affiliate program, in which independent Web sites link
directly to the Company's Web site;
o aggressively market the Company's Web site in its advertising campaigns;
o facilitate access to the Company's Web site for its corporate customers
by implementing direct links from their internal corporate networks.
Capitalize upon the Company's Technology Infrastructure. The Company believes it
has been and continues to be a leader in implementing new technologies and
systems to give its customers the best possible shopping experience, whether
online or over the telephone.
The Company's online and telephonic orders are fed directly from the Company's
secure Web site, or with the assistance of a floral and gift counselor, into a
transaction processing system which captures the required customer and recipient
information. The system then routes the order to the appropriate Company
warehouse, or for florist fulfilled or drop-shipped items selects a vendor to
fulfill the customer's order and electronically transmits the necessary
information to assure timely delivery. In addition, the Company's customer
service representatives are electronically linked to this system, enabling them
to assist in order fulfillment and subsequently track other customer and/or
order information.
During the past several years, the Company has invested heavily in building a
scalable technology platform to support the Company's growing order volume.
During fiscal 2003, the Company completed the in-sourcing of its Web-hosting and
disaster recovery systems. In addition to cost savings, in-sourcing has also
provided improved operational flexibility, additional capacity and system
redundancy. Although the Company will continue to make significant investments,
and use available technologies in order to improve its operations, the Company
plans to leverage its existing information technology infrastructure
capabilities, thereby allowing for continued reduction in overall technology
spending as a percentage of revenues while providing resources to focus on
customer specific projects to ensure that our customers are provided an
enjoyable shopping experience.
Continue to Improve the Company's Fulfillment Capabilities. A majority of the
Company's customers' purchases of floral and floral-related gift products are
fulfilled by one of the Company's BloomNet(R) members. This allows the Company
to deliver its floral products on a same-day or next-day basis to ensure
freshness and to meet its customers' need for prompt delivery. In addition, the
Company is better able to ensure consistent product quality and presentation and
offer a greater variety of arrangements, which creates a better experience for
its customers and gift recipients. The Company selects BloomNet(R) members for
their high-quality products, superior customer service and order fulfillment and
delivery capabilities.
The Company fulfills most of its gift basket and gourmet food items, other than
its premium popcorn and related products (which are shipped from the Company's
148,000 square foot manufacturing and distribution center located in Lake
Forest, Illinois), primarily through members of BloomNet(R) or third-party gift
vendors that ship products directly to the customer by next-day or other
delivery options chosen by the customer. The Company selects its third-party
gift vendors based upon the quality of their products, their reliability and
ability to meet volume requirements. The Company primarily packages and ships
its home and garden products from its 300,000 square foot distribution center
located in Madison, Virginia, or through the Company's 200,000 square foot
distribution center in Vandalia, Ohio. Shipment of children's merchandise is
primarily facilitated through the Vandalia distribution center.
Beginning in fiscal 2001, the Company began entering into Order Fulfillment
Agreement(s) with selected BloomNet(R) members to operate LFC's to facilitate
the fulfillment of the Company's floral and gift orders, improving the economics
of florist fulfilled transactions, and improving the Company's ability to
control product quality and branding.
To ensure reliable and efficient communication of online and telephonic orders
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to its BloomNet(R) members and third party gift vendors, the Company created
BloomLink, a proprietary Internet-based communications system. All BloomNet(R)
members and third-party gift vendors have adopted BloomLink. The Company also
has the ability to arrange for international delivery of floral products through
independent wire services and direct relationships.
The Company intends to improve its fulfillment capabilities to make its
operations more efficient by:
o strengthening relationships and increasing the number of its vendors
and BloomNet(R) member florists, as appropriate, to ensure geographic
coverage and shorten delivery times;
o implementing alternative means of fulfillment, including centralized
production and strategic expansion and logistical positioning of
Company-owned fulfillment centers and LFC's;
o continuing to improve warehousing operations and reduce fulfillment
times in support of its gift, gourmet food, home and garden and
children's product lines.
The Company's Products
The Company offers a wide range of products, including fresh-cut flowers, floral
arrangements and plants, gifts, popcorn and gourmet foods, home and garden
merchandise and unique toys and games for children. In addition to selecting its
core products, the Company's merchandising team works closely with manufacturers
and suppliers to select and design products that meet the seasonal, holiday and
other special needs of its customers. For the years ended June 29, 2003, June
30, 2002, and July 1, 2001, the floral category represented 50.7% 54.2%, and
59.3%, of total net revenues, respectively.
Over the course of a year, the Company's product selection consists of:
Flowers. The Company offers more than 1,900 varieties of fresh-cut flowers and
floral arrangements for all occasions and holidays, available for same-day
delivery.
Plants. The Company also offers approximately 600 varieties of popular plants to
brighten the home and/or office, and accent the gardens and landscapes.
Gourmet Food. The Company offers more than 300 premium popcorn and specialty
snack products from The Popcorn Factory brand, as well as approximately 1,000
carefully selected gourmet food and sweet products from the GreatFood brand,
including candies, chocolates, nuts, cookies, fruit, imported cheeses and
giftable surf-and-turf dinners. The Company's most popular items are offered in
beautiful and innovative gift baskets, providing customers with an assortment of
baskets to choose from. In addition, The Popcorn Factory brand's premium popcorn
and related products can be packaged in seasonal, occasion specific, decorative
tins, fitting the "giftable" requirement of our individual customers, while also
adding the capability to customize the tins with corporate logos and other
personalized features for the Company's corporate customer's gifting needs.
Unique and Specialty Gifts. The Company offers 1,700 specially selected gift
items, including plush toys, balloons, bath and spa items, candles, wreaths,
ornaments, collectibles, home accessories, giftware and fine jewelry.
Home and Garden. Through its Plow & Hearth brand, the Company offers more than
6,700 SKUs for home, hearth and outdoor living, including casual lifestyle
furniture and home accessories, clothing, footwear, candles and lighting, vases,
kitchen items and accents and approximately 1,900 gardening items, including
tools and accessories, pottery, nature-related products, books and related
products.
Children's Gifts. Through the HearthSong and Magic Cabin brands, the Company
offers over 4,200 products, including environmentally friendly toys, plush
stuffed animals, crafts and books with educational, nature and art themes, as
well as, natural-fiber soft dolls, kits and accessories for children ages 3
through 12.
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Greetings. Through its relationships with American Greetings Corporation and
Cardstore.com, the Company provides its customers the ability to send
personalized electronic and printed greeting cards with hundreds of fun and
creative ways to express emotions, offer congratulations, or just keep in touch.
In addition to giving its customers the ability to send electronic greetings
through AmericanGreetings.com, the online greetings division of American
Greetings Corporation, the revenue sharing relationship provides that the
Company will be a floral provider on AmericanGreetings.com, BlueMountain.com and
Egreetings.com.
The Company's Web Sites
The Company offers floral, plant, gourmet food and specialty gift products
through its 1-800-FLOWERS.COM Web site (www.1800flowers.com). Customers can come
to the Web site directly or be linked by one of the Company's portal providers
or search engine relationships. These include AOL (keyword:flowers), Yahoo!,
Microsoft, Google and Overture, as well as approximately 40,000 members of its
online affiliate program. The Company also offers home and garden products
through the Plow & Hearth Web site (www.plowandhearth.com), gourmet food
products through GreatFood.com (www.greatfood.com), premium popcorn and
specialty food products through The Popcorn Factory (www.thepopcornfactory.com)
and children's gifts through its HearthSong (www.hearthsong.com) and Magic Cabin
(www.magiccabin.com) Web sites. As of June 29, 2003, approximately 7.8 million
customers had made a purchase through the Company's online sales channel.
Greater than 70% of online revenues are derived from traffic coming directly to
one of the Company's Universal Resource Locators ("URL's").
The Company's Web sites allow customers to easily browse and purchase its
products, promote brand loyalty and encourage repeat purchases by providing an
inviting customer experience. The Company's Web sites offer customers detailed
product information, complete with photographs, personalized shopping services,
contests, home decorating and how-to tips, information on floral trends,
gift-giving suggestions and information about special events and offers. The
Company has designed its Web sites to be fast, secure and easy to use and allows
customers to order products with minimal effort. The Company's 1-800-FLOWERS.COM
and Popcorn Factory Web sites include the following key features in addition to
the variety of delivery and shipping options (same day/next day) and 24 hour/7
day customer service that are available to all its customers:
Product Search and Order Tracking. The Company has implemented sophisticated
search capabilities, which enable customers to search for products by occasion,
category/department, price point, flower type, brand or keyword. The Company's
Web site also features a "more shopping" section, containing an easy-to-view
drop-down list and quick-links to some of the most popular categories. The
Company's online order tracking capabilities allow customers to quickly and
easily view the delivery status of their purchase, while its "Delivery Wizard"
provides customers with expected delivery dates for each product selection.
Personalization. The Company utilizes its Web site to enhance the direct
relationship with its customers, including greeting customers by name and
personalized Web pages tailored to its registered customers. The "Member
Benefits" provide customers with an online address book for names and
addresses of their gift recipients, access to their purchasing history and
e-mail notification of special promotions, product previews and events. The
Company's registered customers can also utilize its "Gift Reminder
Program," which sends e-mail reminders prior to any pre-selected occasion
and offers suggestions to specific flower and/or gift products.
Multiple Channel Access to Gifting Consultants. The Company's Web site offers
customers the ability to use e-mail, real-time online keyboard-to-keyboard chat
messaging and "click-to-talk" capability to reach one of the Company's gift
consultants who can answer product questions, provide gifting suggestions or
resolve order issues. The Company also offers its customers answers to
frequently asked questions directly on the Web site.
Security. The Company provides a safe and secure shopping experience within its
Web site through the use of secure server software, which encrypts the
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customer's credit card number to protect against interception as the information
is transmitted over the Internet.
Privacy. The Company recognizes the importance of maintaining the privacy of its
customers. The Company uses the information gathered on its Web site from time
to time to send promotional materials and to enhance the customer's shopping
experience. The Company periodically makes certain information available to
selected third parties for direct marketing purposes. However, customers may
elect not to receive promotional information and/or instruct the Company not to
make their information available to third parties. The Company's current online
privacy policy, which is updated to continuously reflect current industry
guidelines, is set forth on its Web site.
Marketing and Promotion
The Company's marketing and promotion strategy is designed to strengthen the
1-800-FLOWERS.COM brands, build customer loyalty, increase the number of
customers, encourage repeat purchases and develop additional product revenue
opportunities. The Company also intends to develop and market other high-quality
brands in addition to its current 1-800-FLOWERS.COM, Plow & Hearth, GreatFood,
The Popcorn Factory, HearthSong and Magic Cabin brands through internal
development, co-branding arrangements, strategic relationships and/or
acquisitions of complementary businesses. The Company markets and promotes its
brands and products as follows:
Direct Mail and Catalogs. The Company uses its direct mail promotions and
catalogs to increase the number of new customers and to introduce additional
products to its existing customers. Through the use of the Plow & Hearth,
HearthSong, The Popcorn Factory and Magic Cabin catalogs the Company has
cross-promoted its floral and gift products to its non-floral customers and the
Company similarly cross-promotes its non-floral products to its floral and gift
customers in the 1-800-FLOWERS gift catalog. In addition to providing a direct
sale mechanism, the Company believes that these catalogs will attract additional
customers to the Company's Web sites. For the year ended June 29, 2003, the
Company mailed in excess of 110 million branded catalogs.
Traditional Media. The Company utilizes traditional media, including television,
radio, print and outdoor advertising, to market its brand and products.
Traditional media allows the Company to reach a large number of customers and to
target particular market segments.
The Company's Strategic Online Relationships. The Company promotes its products
through strategic relationships with leading Web portals, search engines and
online networks. The Company's relationships include, among others, AOL, Yahoo!,
Microsoft, Google, Overture and AmericanGreetings.com.
The Company's Online Affiliate Program. In addition to securing alliances with
frequently visited Web sites, the Company developed an affiliate network that
has grown to approximately 40,000 Web sites operated by third parties.
Affiliates may join this program through the Company's Web site and their
participation may be terminated by them or by the Company at any time. These Web
sites earn commissions on purchases made by customers referred from their sites
to the Company's Web site. The affiliates include such Web sites as
Looksmart.com, IGive.com, MyPoints.com, BizRate.com, ATT.net, Ebates.com and
SchoolPop.com.
E-mails. The Company is able to capitalize on its customer database of
approximately 21.3 million customers (12.1 million of which have transacted
business with the Company within the past 36 months), 7.8 million of which have
transacted business with the Company on-line (6.2 million of which have
transacted business with the Company online within the past 36 months), by
utilizing cost-effective, targeted e-mails to notify customers of product
promotions, remind them of upcoming gifting occasions and convey other marketing
messages.
Co-Marketing and Promotions. The Company has established a number of
co-marketing relationships and promotions to advertise its products. For
example, the Company has established co-marketing arrangements with American,
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United and Delta Airlines, as well as Upromise, Capital One, American Express,
VISA and MasterCard, among others.
Fulfillment Operations
The Company's customers primarily place their orders either online or over the
telephone. The Company's development of a hybrid fulfillment system which
enables the Company to offer same-day, next-day and any-day delivery, combines
the use of BloomNet(R) (independent florists operating retail flower shops and
LFC's, Company-owned stores and fulfillment centers, and franchise stores), with
the Company-owned distribution centers and brand-name vendors who ship directly
to the Company's customers. While providing a significant competitive advantage
in terms of delivery options, the Company's fulfillment system also has the
added benefit of reducing the Company's capital investments in inventory and
infrastructure. Fulfillment of products is as follows:
Flowers. A majority of the Company's floral orders are fulfilled through
BloomNet(R). The Company selects retail florists for BloomNet(R) based upon the
historical volume of floral deliveries in a particular geographic area, the
number of BloomNet(R) florists currently serving the area and the florist's
design staff, facilities, quality of floral processing, ability to fulfill
orders in sufficient volume and delivery capabilities. The Company regularly
monitors BloomNet(R) florists' performance and adherence to the Company's
quality standards to ensure proper product branding and packaging.
By fulfilling floral orders through BloomNet(R), the Company is able to deliver
floral products on a same-day, next-day or any day basis to ensure freshness and
to meet the customers' need for prompt delivery. Because the Company selects
these florists and receives customer feedback on their performance in fulfilling
orders, it is able to ensure consistent product quality and presentation and
offer a greater variety of arrangements, which the Company believes creates a
better experience for its customers and gift recipients.
The Company's relationships with its BloomNet(R) members are non-exclusive. Many
florists, including many BloomNet(R) florists, also are members of other floral
fulfillment organizations. The BloomNet(R) agreements generally are cancelable
by either party with ten days notification and do not guarantee any orders,
dollar amounts or exclusive territories from the Company to the florist. As of
June 29, 2003, the Company had entered into more than 60 Order Fulfillment
Agreements with selected BloomNet(R) members to operate LFC's. Generally, these
agreements provide for a three-year term, terminable upon 30 days notice upon
breach and immediately by the Company in the event of certain specified defaults
by the operator of the LFC. In consideration of the operator's satisfactory
performance, the Company agrees to use reasonable efforts to forward orders with
a specified minimum merchandise value during each year of the agreement. The
Company has not granted an exclusive territory to any operator.
In certain instances, the Company is required to fulfill orders through
non-BloomNet(R) members, and transmits these orders to the fulfilling florist
using the communication system of an independent wire service or via telephone.
In addition to orders fulfilled by BloomNet(R) and non-BloomNet(R) member
florists, the Company ships overnight via common carrier to its customers
directly from growers and through its fulfillment centers.
As of June 29, 2003, the Company operates 21 floral retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 6 fulfillment
centers. In addition, the Company has 80 franchised stores, located primarily in
California. Company-owned stores serve as local points of fulfillment and enable
the Company to test new products and marketing programs.
Plants, Gift Baskets, Gourmet Food, Premium Popcorn and Unique Gifts. The
Company's plants, gift baskets, gourmet food, premium popcorn and unique gifts
are shipped directly to the customer by members of BloomNet(R), third-party
product suppliers or through its Madison, Virginia, Vandalia, Ohio and Lake
Forest, Illinois fulfillment centers using next-day or other delivery option
selected by the customer. The Company's business is not dependent on any single
third-party supplier.
8
Home and Garden and Children's Toys. The Company fulfills purchases of home and
garden merchandise from its Madison, Virginia and Vandalia, Ohio fulfillment
center or by third-party product suppliers using next-day or other delivery
option selected by the customer. In fiscal 2003, the Company shipped
approximately 2.3 million packages from these facilities which employ advanced
technology for receiving, packaging, shipping and inventory control.
Technology Infrastructure
The Company believes it has an advanced technology platform. Its technology
infrastructure, primarily consisting of the Company's Web site, transaction
processing, customer databases and telecommunications systems, is built and
maintained for reliability, security, scalability and flexibility. To minimize
the risk of service interruptions from unexpected component or
telecommunications failure, maintenance and upgrades, the Company has built full
back-up and system redundancies into those components of its systems that have
been identified as critical. In recent years the Company installed an
Oracle-based order processing and database management system, developed
BloomLink, upgraded its telecommunications network, including its call
management system and internalized its Web-hosting and development capabilities.
The Company plans to continue to invest in technologies that will improve and
expand its e-commerce and telecommunication capabilities.
The Company's transaction processing system captures customer profile and
history in a customized Oracle database and selects the florist, third-party
vendor, or Company-owned warehouse to fulfill the order. Through the use of
customized software applications, the Company is able to retrieve, sort and
analyze customer information to enable it to better serve its customers and
target its product offerings. The Company has acquired technology applications
that have significantly expanded its ability to analyze and use this
information.
The Company's customer service centers and third-party outsourcers are connected
electronically to its transaction processing system to permit the rapid
transmission of, and access to, critical order and customer information. In
addition, BloomLink electronically connects the Company to its BloomNet(R)
members and non-floral vendors.
The Company's operations center is located in its headquarters in Westbury, New
York. The Company provides comprehensive facility management services, including
human and technical monitoring of all production servers, 24 hours per day,
seven days per week.
Competition
The growing popularity and convenience of e-commerce has continued to give rise
to established businesses on the Internet. In addition to selling their products
over the Internet, many of these retailers sell their products through a
combination of channels by maintaining a Web site, a toll-free phone number and
physical locations. Additionally, several of these merchants offer an expanding
variety of products and some are attracting an increasing number of customers.
Certain mass merchants have expanded their offerings to include competing
products and may continue to do so in the future. These mass merchants, as well
as other potential competitors, may be able to:
o undertake more extensive marketing campaigns for their brands and
services;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees, distributors and
retailers.
In addition, the Company faces intense competition in each of its individual
product categories. In the floral industry, there are many other providers of
floral products, none of which is dominant in the industry. The Company's
competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers;
o online floral retailers;
9
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, unique gifts, children's toys
and home and garden categories are highly competitive. Each of these categories
encompasses a wide range of products, is highly fragmented and is served by a
large number of companies, none of which is dominant. Products in these
categories may be purchased from a number of outlets, including mass merchants,
telemarketers, retail specialty shops, online retailers and mail-order catalogs.
The Company believes the strength of its brands, product selection, customer
relationships, technology infrastructure and fulfillment capabilities position
it to compete effectively against its current and potential competitors in each
of its product categories. However, increased competition could result in:
o price reductions, decreased revenues and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors may adversely impact the Company's business
and results of operations.
Government Regulation and Legal Uncertainties
The Internet is rapidly evolving and there are laws and regulations directly
applicable to e-commerce. Legislatures are also considering an increasing number
of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
o user privacy;
o pricing;
o content;
o connectivity;
o intellectual property;
o distribution;
o taxation;
o liabilities;
o antitrust; and
o characteristics and quality of products and services.
Further, the growth and development of the market for online services may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of any additional laws
or regulations may impair the growth of the Internet or commercial online
services. This could decrease the demand for the Company's services and increase
its cost of doing business. Moreover, the applicability to the Internet of
existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on the
Company's business, financial condition and results of operations.
States or foreign countries might attempt to regulate the Company's business or
levy additional sales or other taxes relating to its activities. Because the
Company's products and services are available over the Internet anywhere in the
world, multiple jurisdictions may claim that the Company is required to do
business as a foreign corporation in one or more of those jurisdictions. Failure
to qualify as a foreign corporation in a jurisdiction where the Company is
required to do so could subject it to taxes and penalties. States or foreign
governments may charge the Company with violations of local laws.
10
Intellectual Property and Proprietary Rights
The Company regards its service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to its success. The Company has
applied for or received trademark and/or service mark registration for, among
others,"1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com",
"The Popcorn Factory", "TheGift.com", "HearthSong" and "Magic Cabin". The
Company also has rights to numerous domain names, including www.1800flowers.com,
www.800flowers.com, www.flowers.com, www.plowandhearth.com, www.greatfood.com,
www.thepopcornfactory.com, www.hearthsong.com and www.magiccabin.com. In
addition, the Company has developed transaction processing and operating systems
as well as marketing data, and customer and recipient information databases.
The Company relies on trademark, unfair competition and copyright law, trade
secret protection and contracts such as confidentiality and license agreements
with its employees, customers, vendors and others to protect its proprietary
rights. Despite the Company's precautions, it may be possible for competitors to
obtain and/or use the Company's proprietary information without authorization or
to develop technologies similar to the Company's and independently create a
similarly functioning infrastructure. Furthermore, the protection of proprietary
rights in Internet-related industries is uncertain and still evolving. The laws
of some foreign countries do not protect proprietary rights to the same extent
as do the laws of the United States. The Company's means of protecting its
proprietary rights in the United States or abroad may not be adequate.
The Company intends to continue to license technology from third parties,
including Oracle, Microsoft, MCI and AT&T, for its communications technology and
the software that underlies its business systems. The market is evolving and the
Company may need to license additional technologies to remain competitive. The
Company may not be able to license these technologies on commercially reasonable
terms or at all.
Third parties have in the past infringed or misappropriated the Company's
intellectual property or similar proprietary rights. The Company believes
infringements and misappropriations will continue to occur in the future. The
Company intends to police against infringement or misappropriation. However, the
Company cannot guarantee it will be able to enforce its rights and enjoin the
alleged infringers from their use of confusingly similar trademarks, service
marks, telephone numbers and domain names.
In addition, third parties may assert infringement claims against the Company.
The Company cannot be certain that its technologies or its products and services
do not infringe valid patents, trademarks, copyrights or other proprietary
rights held by third parties. The Company may be subject to legal proceedings
and claims from time to time relating to its intellectual property and the
intellectual property of others in the ordinary course of its business.
Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running the Company's business.
Employees
As of June 29, 2003, the Company had a total of approximately 2,500 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service, manufacturing and retail and fulfillment
personnel. The Company's personnel are not represented under collective
bargaining agreements and the Company considers its relations with its employees
to be good.
Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only risks and
uncertainties the Company faces. Additional risks and uncertainties not
presently known to the Company or that are currently deemed immaterial may also
impair its business operations. If any of the following risks actually occur,
the Company's business, financial condition or results of operations may suffer.
11
The Company has incurred losses in recent years, and although the Company
returned to profitability during fiscal 2003, no assurances can be made that
positive net income will continue to be achieved in the future. In order to
maintain profitability, the Company will need to continue to generate sufficient
revenues and maintain and/or reduce operating expenditures. Management cannot
assure you that the Company will generate revenues or reduce operating expenses
sufficiently to maintain profitability. Even if the Company does continue to be
profitable, it may not sustain or increase profitability on a quarterly or
annual basis in the future.
The Company's quarterly operating results may significantly fluctuate and you
should not rely on them as an indication of its future results. The Company's
future revenues and results of operations may significantly fluctuate due to a
combination of factors, many of which are outside of management's control. The
most important of these factors include:
o seasonality;
o the retail economy;
o the timing and effectiveness of marketing programs;
o the timing of the introduction of new products and services;
o the timing and effectiveness of capital expenditures;
o the Company's ability to enter into or renew online marketing
agreements; and
o competition.
The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue
without a corresponding reduction to its expenses, operating results may suffer.
The Company's operating results for any particular quarter may not be indicative
of future operating results. You should not rely on quarter-to-quarter
comparisons of results of operations as an indication of the Company's future
performance. It is possible that results of operations may be below the
expectations of public market analysts and investors, which could cause the
trading price of the Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the Company may
vary with general economic conditions. If general economic conditions
deteriorate further and the Company's customers have less disposable income,
consumers may spend less on its products and its quarterly operating results may
suffer.
The Company's operating results may suffer if revenues during the Company's peak
seasons do not meet its expectations. Sales of the Company's products are
seasonal, concentrated in the fourth calendar quarter, due to the Thanksgiving
and Christmas-time holidays, and the second calendar quarter, due to Mother's
Day and Administrative and Professionals' Week. In anticipation of increased
sales activity during these periods, the Company hires a significant number of
temporary employees to supplement its permanent staff and the Company increases
its inventory levels. If revenues during these periods do not meet the Company's
expectations, it may not generate sufficient revenue to offset these increased
costs and its operating results may suffer.
If the Company's customers do not find its expanded product lines appealing,
revenues may not grow and net income may decrease. The Company's business
historically has focused on offering floral and floral-related gift products.
Although the Company has been successful in the introduction of its expanded
product lines including plants, gift baskets, popcorn, gourmet food, unique or
specialty gifts, home and garden accessories and children's gifts, it expects to
continue to incur significant costs in marketing these new products. If the
Company's customers do not find its expanded product lines appealing, the
Company may not generate sufficient revenue to offset its related costs and its
results of operations may be negatively impacted.
If the Company fails to develop and maintain its brands, it may not increase or
12
maintain its customer base or its revenues. The Company must continue to develop
and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its
revenues. In addition, the Company has introduced and acquired other brands in
the past, and may continue to do so in the future. The Company believes that the
importance of brand recognition will increase as it expands its product
offerings. Many of the Company's customers may not be aware of the Company's
non-floral products. If the Company fails to advertise and market its products
effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
will also depend on its success in providing its customers high-quality products
and a high level of customer service. If the Company's customers do not perceive
its products and services to be of high quality, the value of the
1-800-FLOWERS.COM brands would be diminished and the Company may lose customers
and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate
a significant amount of traffic could limit the growth of the Company's
business. Although the Company expects a significant portion of its online
customers will continue to come to its Web site directly, it will also rely on
third party Web sites with which the Company has strategic relationships,
including AOL Time Warner, Yahoo!, Overture, Google and Microsoft Corporation,
for traffic. If these third-parties do not attract a significant number of
visitors, the Company may not receive a significant number of online customers
from these relationships and its revenues from these relationships may decrease
or not grow. There continues to be strong competition to establish or maintain
relationships with leading Internet companies, and the Company may not
successfully enter into additional relationships, or renew existing ones beyond
their current terms. The Company may also be required to pay significant fees to
maintain and expand existing relationships. The Company's online revenues may
suffer if it fails to enter into new relationships or maintain existing
relationships or if these relationships do not result in traffic sufficient to
justify their costs.
If local florists and other third-party vendors do not fulfill orders to the
Company's customers' satisfaction, its customers may not shop with the Company
again. In many cases, floral orders placed by the Company's customers are
fulfilled by local independent florists, a majority of which are a member of
BloomNet(R). The Company does not directly control any of these florists. In
addition, many of the non-floral products sold by the Company are manufactured
and delivered to its customers by independent third-party vendors. If customers
are dissatisfied with the performance of the local florist or other third-party
vendors, they may not utilize the Company's services when placing future orders
and its revenues may decrease.
If a florist discontinues its relationship with the Company, the Company's
customers may experience delays in service or declines in quality and may not
shop with the Company again. Many of the Company's arrangements with local
florists for order fulfillment may be terminated with 10 days notice. If a
florist discontinues its relationship with the Company, the Company will be
required to obtain a suitable replacement located in the same geographic area,
which may cause delays in delivery or a decline in quality, leading to customer
dissatisfaction and loss of customers.
If a significant amount of customers are not satisfied with their purchase, the
Company will be required to incur substantial costs to issue refunds, credits or
replacement products. The Company offers its customers a 100% satisfaction
guarantee on its products. If customers are not satisfied with the products they
receive, the Company will either replace the product for the customer or issue
the customer a refund or credit. The Company's net income would decrease if a
significant number of customers request replacement products, refunds or credits
and the Company is unable to pass such costs onto the supplier.
Increased shipping costs and labor stoppages may adversely affect sales of the
Company's non-floral products. Non-floral products are delivered to customers
either directly from the manufacturer or from the Company's fulfillment centers
located in New York, Virginia, Ohio and Illinois. The Company has established
relationships with the United States Postal Service, Federal Express, United
Parcel Service and other common carriers for the delivery of these products. If
these carriers were to raise the prices they charge to ship the Company's goods,
and the Company passes these increases on to its customers, its customers might
13
choose to buy comparable products locally to avoid shipping charges. In
addition, these carriers may experience labor stoppages, which could impact the
Company's ability to deliver products on a timely basis to our customers and
adversely affect its customer relationships.
If the Company fails to continuously improve its Web site, it may not attract or
retain customers. If potential or existing customers do not find the Company's
Web site a convenient place to shop, the Company may not attract or retain
customers and its sales may suffer. To encourage the use of the Company's Web
site, it must continuously improve its accessibility, content and ease of use.
Customer traffic and the Company's business would be adversely affected if
competitors' Web sites are perceived as easier to use or better able to satisfy
customer needs.
Competition in the floral, plant, gift basket, gourmet treat, specialty gift,
children's toys and games and home and garden industries is intense and a
failure to respond to competitive pressure could result in lost revenues. There
are many companies that offer products in these categories. In the floral
category, the Company's competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty gift retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, specialty gift, children's toys
and home and garden categories are highly competitive. Each of these categories
encompasses a wide range of products and is highly fragmented. Products in these
categories may be purchased from a number of outlets, including mass merchants,
retail specialty shops, online retailers and mail-order catalogs.
Competition is intense and the Company expects it to increase. Increased
competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
If the Company does not accurately predict customer demand for its products, it
may lose customers or experience increased costs. In the past, the Company did
not need to maintain a significant inventory of products. However, as the
Company expands the volume of non-floral products offered to its customers, the
Company will be required to increase inventory levels and the number of products
maintained in its warehouses. If the Company overestimates customer demand for
its products, excess inventory and outdated merchandise could accumulate, tying
up working capital and potentially resulting in reduced warehouse capacity and
inventory losses due to damage, theft and obsolescence. If the Company
underestimates customer demand, it may disappoint customers who may turn to its
competitors. Moreover, the strength of the 1-800-FLOWERS.COM brands could be
diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
rise or flowers may be unavailable and the Company's revenues and gross margins
could decline. A variety of factors affect the supply of flowers in the United
States and the price of the Company's floral products. If the supply of flowers
available for sale is limited due to weather conditions or other factors, prices
for flowers could rise and customer demand for the Company's floral products may
be reduced, causing revenues and gross margins to decline. Alternatively, the
Company may not be able to obtain high quality flowers in an amount sufficient
to meet customer demand. Even if available, flowers from alternative sources may
be of lesser quality and/or may be more expensive than those currently offered
by the Company.
14
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation against foreign
trade practices.
A failure to manage its internal operating and financial systems could lead to
inefficiencies in conducting the Company's business and subject it to increased
expenses. The Company's expansion efforts may strain its operational and
financial systems. To accommodate the Company's growth, the Company continues to
improve its operating infrastructure through technology initiatives and any
failure to integrate these initiatives in an efficient manner could adversely
affect its business. In addition, the Company's systems, procedures and controls
may prove to be inadequate to support its future operations.
A failure to integrate the systems and operations of any acquired business with
the Company's operations may disrupt its business. The Company has acquired
complementary businesses and selected assets and may continue to do so in the
future. If the Company is unable to fully integrate future acquisitions into its
operations, its business and operations could suffer, management may be
distracted and its expenses may increase. Moreover, the expected benefits from
any acquisition may not be realized, resulting in lost opportunities and loss of
capital.
The Company's franchisees may damage its brands or increase its costs by failing
to comply with its franchise agreements or its operating standards. The
Company's franchise business is governed by its Uniform Franchise Offering
Circulars, franchise agreements and applicable franchise law. If the Company's
franchisees do not comply with its established operating standards or the terms
of the franchise agreements, the 1-800-FLOWERS.COM brands may be damaged. The
Company may incur significant additional costs, including time-consuming and
expensive litigation, to enforce its rights under the franchise agreements.
Additionally, the Company is the primary tenant on certain leases, which the
franchisees sublease from the Company. If a franchisee fails to meet its
obligations as subtenant, the Company could incur significant costs to avoid
default under the primary lease. Furthermore, as a franchiser, the Company has
obligations to its franchisees. Franchisees may challenge the performance of the
Company's obligations under the franchise agreements and subject it to costs in
defending these claims and, if the claims are successful, costs in connection
with their compliance.
If third parties acquire rights to use similar domain names or phone numbers or
if the Company loses the right to use its phone numbers, its brands may be
damaged and it may lose sales. The Company's Internet domain names are an
important aspect of its brand recognition. The Company cannot practically
acquire rights to all domain names similar to www.1800flowers.com, or its other
brands, whether under existing top level domains or those issued in the future.
If third parties obtain rights to similar domain names, these third parties may
confuse the Company's customers and cause its customers to inadvertently place
orders with these third parties, which could result in lost sales and could
damage its brands.
Likewise, the phone number that spells 1-800-FLOWERS is important to the
15
Company's brand and its business. While the Company has obtained the right to
use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as
common toll-free "FLOWERS" misdials, it may not be able to obtain rights to use
the FLOWERS phone number as new toll-free prefixes are issued, or the rights to
all similar and potentially confusing numbers. If third parties obtain the phone
number which spells "FLOWERS" with a different prefix or a toll-free number
similar to FLOWERS, these parties may also confuse the Company's customers and
cause lost sales and potential damage to its brands. In addition, under
applicable FCC rules, ownership rights to phone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS (1-800-356-9377).
The Company's net sales and gross margins would decrease if it experiences
significant credit card fraud. A failure to adequately control fraudulent credit
card transactions would reduce its net sales and gross margins because it does
not carry insurance against this risk. The Company has developed technology to
help detect the fraudulent use of credit card information. Nonetheless, to date,
the Company has suffered losses as a result of orders placed with fraudulent
credit card data even though the associated financial institution approved
payment of the orders. Under current credit card practices, the Company is
liable for fraudulent credit card transactions if it does not obtain a
cardholder's signature.
A lack of security over the Internet may cause Internet usage to decline and
cause the Company to expend capital and resources to protect against security
breaches. A significant barrier to electronic commerce over the Internet has
been the need for secure transmission of confidential information and
transaction information. Internet usage could decline if any well-publicized
compromise of security occurred. Additionally, computer "viruses" may cause the
Company's systems to incur delays or experience other service interruptions.
Such interruptions may materially impact the Company's ability to operate its
business. If a computer virus affecting the Internet in general is highly
publicized or particularly damaging, the Company's customers may not use the
Internet or may be prevented from using the Internet, which would have an
adverse effect on its revenues. As a result, the Company may be required to
expend capital and resources to protect against or to alleviate these problems.
Unexpected system interruptions caused by system failures may result in reduced
revenues and harm to the Company's brand. In the past, particularly during peak
holiday periods, the Company has experienced significant increases in traffic on
its Web site and in its toll-free customer service centers. The Company's
operations are dependent on its ability to maintain its computer and
telecommunications systems in effective working order and to protect its systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. The Company's systems have in the past, and may in
the future, experience:
o system interruptions;
o long response times; and
o degradation in service.
The Company's business depends on customers making purchases on its systems, its
revenues may decrease and its reputation could be harmed if it experiences
frequent or long system delays or interruptions or if a disruption occurs during
a peak holiday season.
If AT&T and MCI do not adequately maintain the Company's telephone service, the
Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and MCI to provide telephone services to its
customer service centers. Although the Company maintains redundant
telecommunications systems, if AT&T and MCI experience system failures or fail
to adequately maintain the Company's systems, the Company may experience
interruptions and its customers might not continue to utilize its services. If
the Company loses its telephone service, it will be unable to generate revenue.
The Company's future success depends upon these third-party relationships
because it does not have the resources to maintain its telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms may disrupt the Company's operations or
require it to incur significant unanticipated costs.
16
Interruptions in FTD's Mercury system or Teleflora's Dove System or a reduction
in the Company's access to these systems may disrupt order fulfillment and
create customer dissatisfaction. A portion of the Company's customers' orders
are communicated to the fulfilling florist through these third party systems.
These systems are order processing and messaging networks used to facilitate the
transmission of floral orders between florists. The Mercury system has in the
past experienced interruptions in service. If these systems experience
interruptions in the future, the Company could experience difficulties in
fulfilling some of its customers' orders and those customers might not continue
to shop with the Company.
The Company's operating results may suffer due to economic, political and social
unrest or disturbances. Like other American businesses, the Company is unable to
predict what long-term effect, acts of terrorism, war, or similar unforeseen
events, may have on its business. The Company's results of operations and
financial condition could be adversely impacted if such events cause an economic
slowdown in the United States, or other negative effects that cannot now be
anticipated.
If the Company is unable to hire and retain key personnel, its business and
growth may suffer. The Company's success is dependent on its ability to hire,
retain and motivate highly qualified personnel. In particular, the Company's
success depends on the continued efforts of its Chairman and Chief Executive
Officer, James F. McCann, and its President, Christopher G. McCann, as well as
its senior management team which help manage its business and growth. The loss
of the services of any of the Company's executive management or key personnel or
its inability to attract qualified additional personnel could cause its business
and growth to suffer and force it to expend time and resources in locating and
training additional personnel.
Many governmental regulations may impact the Internet, which could affect the
Company's ability to conduct business. Any new law or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet or the Company's Web site. The Company expects there will be
an increasing number of laws and regulations pertaining to the Internet in the
United States and throughout the world. These laws or regulations may relate to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services
sold over the Internet. Moreover, the applicability to the Internet of existing
laws governing intellectual property ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing. This could decrease the demand for the
Company's products, increase its costs or otherwise adversely affect its
business.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of the Company's Internet business or its marketing efforts. The Federal
Trade Commission has proposed regulations regarding the collection and use of
personal identifying information obtained from individuals when accessing Web
sites, with particular emphasis on access by minors. These regulations may
include requirements that the Company establish procedures to disclose and
notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by the Company. These regulations
may also include enforcement and redress provisions. Moreover, even in the
absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of other companies that collect
information on the Internet. One investigation resulted in a consent decree
under which an Internet company agreed to establish programs to implement the
principles noted above. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts, or those of other governmental bodies, may adversely affect its ability
to collect demographic and personal information from users, which could
adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may
damage its brands. Unauthorized use of the Company's intellectual property by
third parties may damage its brands and its reputation and may likely result in
a loss of customers. It may be possible for third parties to obtain and use the
Company's intellectual property without authorization. Third parties have in the
17
past infringed or misappropriated the Company's intellectual property or similar
proprietary rights. The Company believes infringements and misappropriations
will continue to occur in the future. Furthermore, the validity, enforceability
and scope of protection of intellectual property in Internet-related industries
is uncertain and still evolving. The Company may be unable to register its
intellectual property in some foreign countries and, furthermore, the laws of
some foreign countries are uncertain or do not protect intellectual property
rights to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be expensive
and, if the Company is not successful, could disrupt its ability to conduct
business. The Company cannot be certain that the products it sells, or services
it offers, do not or will not infringe valid patents, trademarks, copyrights or
other intellectual property rights held by third parties. The Company may be a
party to legal proceedings and claims relating to the intellectual property of
others from time to time in the ordinary course of its business. The Company may
incur substantial expense in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against the
Company may result in substantial monetary liability or may materially disrupt
its ability to conduct business.
If states begin imposing broader guidelines to state sales and use taxes, the
Company may lose sales or incur significant expenses in satisfaction of these
obligations. In addition to the Company's retail store operations, the Company
collects sales or other similar taxes in states where the Company's online and
telephonic sales channels have applicable nexus. Our customer service and
fulfillment networks, and any further expansion of those networks, along with
other aspects of our evolving business, may result in additional sales and use
tax obligations. One or more states may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies which engage in
e-commerce. A successful assertion by one or more states that we should collect
sales or other taxes on the sale of merchandise could result in substantial tax
liabilities for past sales, decrease our ability to compete with traditional
retailers, and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales
made over the Internet. However, a number of states, as well as the U.S.
Congress, have been considering various initiatives that could limit or
supersede the Supreme Court's position regarding sales and use taxes on Internet
sales. If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect additional sales and use taxes. The imposition by state and
local governments of various taxes upon Internet commerce could create
administrative burdens for us and could decrease our future sales.
Product liability claims may subject the Company to increased costs. Several of
the products the Company sells, including perishable food products, home and
garden products, or children's toys may expose it to product liability claims in
the event that the use or consumption of these products results in personal
injury. Although the Company has not experienced any material losses due to
product liability claims to date, it may be a party to product liability claims
in the future and incur significant costs in their defense. Product liability
claims often create negative publicity, which could materially damage the
Company's reputation and its brands. Although the Company maintains insurance
against product liability claims, its coverage may be inadequate to cover any
liabilities it may incur.
The Company's stock price may be highly volatile and could drop unexpectedly,
particularly because it has Internet operations. The price at which the
Company's Class A common stock will trade may be highly volatile and may
fluctuate substantially. The stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
of securities, particularly securities of companies with Internet operations. As
a result, investors may experience a material decline in the market price of the
Company's Class A common stock, regardless of the Company's operating
performance. In the past, following periods of volatility in the market price of
a particular company's securities, securities class action litigation has often
been brought against that company. The Company may become involved in this type
of litigation in the future. Litigation of this type is often expensive and
diverts management's attention and resources.
18
Additional Information
The Company's internet address is www.1800flowers.com. We make available, via a
link to the Securities and Exchange Commission's website, through our investor
relations website located at www.1800flowers.com, access to our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after they are electronically filed with or furnished to the Securities and
Exchange Commission. All such filings on our investor relations website are
available free of charge. The Company assumes no obligation to update or revise
any forward-looking statements in this annual report on Form 10-K, whether as a
result of new information, future events or otherwise, unless we are required to
do so by law. A copy of this annual report on Form 10-K is available without
charge upon written request to: Investor Relations, 1-800-FLOWERS.COM, Inc.,
1600 Stewart Avenue, Westbury, NY 11590.
19
Item 2. PROPERTIES
Square
Location Type Principal Use Footage Ownership
---------------------- -------------------- ---------------------------------------- ------------------ --------------------
Westbury, NY Office Headquarters and customer service 77,000 leased
Alamogordo, NM Office Customer service 23,000 owned
Ardmore, OK Office Customer service 24,000 leased
Madison, VA Office and Distribution, administrative and
warehouse customer service 300,000 owned
Lake Forest, IL Office, plant and Manufacturing, distribution and
warehouse administrative 148,000 leased
Vandalia, OH Warehouse Distribution 200,000 owned
In addition to the above properties, the Company leases approximately 315,000
square feet for owned or franchised retail stores and local fulfillment centers
with lease terms typically ranging from 5 to 20 years. Some of its leases
provide for a minimum rent plus a percentage rent based upon sales after certain
minimum thresholds are achieved. The leases generally require the Company to pay
insurance, utilities, real estate taxes and repair and maintenance expenses.
Item 3. LEGAL PROCEEDINGS
There are various claims, lawsuits, and pending actions against the Company
incident to the operations of its businesses. It is the opinion of management,
after consultation with counsel, that the ultimate resolution of such claims,
lawsuits and pending actions will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals were serving as executive officers of the Company and
certain of its subsidiaries on September 23, 2003:
Name Age Position with the Company
- -------------------------------------------------------------------------------
James F. McCann......... 52 Chairman of the Board and Chief Executive Officer
Christopher G. McCann... 42 Director and President
T. Guy Minetti.......... 52 Director and Vice Chairman
Peter G. Rice........... 58 President of The Plow & Hearth, Inc.
William E. Shea......... 44 Senior Vice President of Finance and
Administration, Treasurer, Chief Financial Officer
Gerard M. Gallagher..... 50 Senior Vice President, General Counsel, Corporate
Secretary
Thomas G. Hartnett...... 40 Senior Vice President of Retail and Fulfillment
Vincent J. McVeigh...... 43 Senior Vice President
Enzo J. Micali.......... 43 Senior Vice President of Information Technology
20
James F. McCann has served as the Company's Chairman of the Board and Chief
Executive Officer since inception. Mr. McCann has been in the floral industry
since 1976 when he opened his retail chain of flower shops in the New York
metropolitan area. Mr. McCann is a member of the board of directors of Gateway,
Boyd's Bears and Very Special Arts, as well as the board of Hofstra University
and Winthrop-University Hospital. James F. McCann is the brother of Christopher
G. McCann, a Director and the President of the Company.
Christopher G. McCann has been the Company's President since September 2000 and
prior to that was the Company's Senior Vice President. Mr. McCann has been a
Director of the Company since inception. Mr. McCann serves on the board of
directors of Neoware, Inc. and is a member of the Board of Trustees of Marist
College. Christopher G. McCann is the brother of James F. McCann, the Company's
Chairman of the Board and Chief Executive Officer.
T. Guy Minetti has been a Director of the Company since December 1993 and became
the Company's Vice Chairman in September 2000. Mr. Minetti serves on the board
of directors of American Sports Products Group Inc., a sporting goods
manufacturer that he co-founded in 1993. In March 1989, Mr. Minetti founded
Bayberry Advisors, an investment banking firm, and prior thereto, Mr. Minetti
was a Managing Director at Kidder, Peabody & Company.
Peter G. Rice, President of The Plow & Hearth, Inc., was co-founder of The Plow
& Hearth, Inc. and served as its President and Chairman of the Board since its
inception in November 1980. Mr. Rice was founder of Blue Ridge Mountain Sports,
a chain of retail backpacking/outdoor stores, and co-founder of Phoenix
Products, a manufacturer of kayaks. He is a member of the Catalog Advisory
Committee of the Direct Marketing Association and a past director of the New
England Mail Order Association and of the U.S. Senate Productivity and Quality
Award Board for Virginia.
William E. Shea has been our Senior Vice President of Finance and Administration
and Chief Financial Officer since September 2000. Before holding his current
position, Mr. Shea was our Vice President of Finance and Corporate Controller
after joining us in April 1996. From 1980 until joining us, Mr. Shea was a
certified public accountant with Ernst & Young LLP.
Gerard M. Gallagher has been our Senior Vice President, General Counsel and
Corporate Secretary since August 1999 and has been providing legal services to
the Company since its inception. Mr. Gallagher is the founder and a managing
partner in the law firm Gallagher, Walker, Bianco and Plastaras, based in
Mineola, New York, specializing in corporate, litigation and intellectual
property matters since 1993. Mr. Gallagher is duly admitted to practice before
the New York State Courts and the United States District Courts of both the
Eastern District and Southern District of New York.
Thomas G. Hartnett has been our Senior Vice President of Retail and Fulfillment
since September 2000. Before holding this position, Mr. Hartnett held various
positions within the Company since joining the Company in 1991, including
Controller, Director of Store Operations, Vice President of Retail Operations
and most recently as Vice President of Strategic Development.
Vincent J. McVeigh has been our Senior Vice President since October 2000. Before
holding this position, Mr. McVeigh held various positions within the Company
since joining the Company in 1991, including Bloomnet Manager, Director of Call
Center Operations and, most recently, as Vice President of Merchandising.
Enzo J. Micali has been our Senior Vice President of Information Technology and
Chief Technology Officer since December 2000. Prior to joining the Company, Mr.
Micali served as Chief Technology Officer for InsLogic. Prior to joining
InsLogic, Mr. Micali spent 12 years in various technology management positions
with J.P. Morgan Chase & Co., formerly Chase Manhattan Bank.
21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
1-800-FLOWERS.COM's Class A common stock trades on The Nasdaq National Stock
Market under the ticker symbol "FLWS." There is no established public trading
market for the Company's Class B common stock. The following table sets forth
the reported high and low sales prices for the Company's Class A common stock
for each of the fiscal quarters during the fiscal years ended June 29, 2003 and
June 30, 2002.
High Low
------------ ------------
Year ended June 29, 2003
July 1, 2002 - September 29, 2002 $11.25 $ 4.75
September 30, 2002 - December 29, 2002 $10.90 $ 5.75
December 30, 2002 - March 30, 2003 $ 7.50 $ 5.61
March 31, 2003 - June 29, 2003 $ 8.91 $ 6.45
Year ended June 30, 2002
July 2, 2001 - September 30, 2001 $14.78 $ 9.90
October 1, 2001 - December 30, 2001 $16.50 $ 8.20
December 31, 2001 - March 31, 2002 $17.86 $10.72
April 1, 2002 - June 30, 2002 $14.68 $ 9.85
Rights of Common Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
Holders
As of September 23, 2003, there were approximately 117 shareholders of record of
the Company's Class A common stock, although the Company believes that there is
a significantly larger number of beneficial owners. As of September 23, 2003,
there were approximately 17 shareholders of record of the Company's Class B
common stock.
Dividend Policy
Although the Company has never declared or paid any cash dividends on its Class
A or Class B common stock, the Company anticipates that it will generate
increasing free cash flow in excess of its capital investment requirements. As
such, although the Company has no current intent to do so, the Company may
22
chose, at some future date, to use some portion of its cash for the purpose of
stock repurchases or cash dividends.
Resales of Securities
41,372,993 shares of Class A and Class B common stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market from time to time only if
registered or if they qualify for an exemption from registration under Rule 144
or 701 under the Securities Act. As of September 23, 2003, all of such shares of
the Company's common stock could be sold in the public market pursuant to and
subject to the limits set forth in Rule 144. Sales of a large number of these
shares could have an adverse effect on the market price of the Company's Class A
common stock by increasing the number of shares available on the public market.
Stock Repurchase Plan
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. No repurchases have been made
as of September 23, 2003.
Equity Compensation Plan Information
The following table gives information about the Company's common stock that may
be issued upon the exercise of options under all of the Company's equity
compensation plans as of June 29, 2003. The table includes the 1-800-FLOWERS.COM
1997 Stock Option Plan and the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive
Plan.
Number of securities
remaining available
for future issuance
under equity
Number of compensation plans
securities to be Weighted-average (excluding
issued upon exercise price securities reflected
exercise of of outstanding in column (a))
outstanding options
Plan Category options
---------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------ --------------------- -----------------------
Equity compensation plans
approved by security holders 10,001,345 $8.28 7,639,930
Equity compensation plans not
approved by security holders
- - -
------------------ --------------------- -----------------------
Total 10,001,345 $8.28 7,639,930
================== ===================== =======================
23
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended June
29, 2003, June 30, 2002 and July 1, 2001, and the consolidated balance sheet
data as of June 29, 2003 and June 30, 2002, have been derived from the Company's
audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. The selected consolidated statement of operations data for
the years ended July 2, 2000 and June 27, 1999, and the selected consolidated
balance sheet data as of July 1, 2001, July 2, 2000 and June 27, 1999, are
derived from the Company's audited consolidated financial statements which are
not included in this Annual Report on Form 10-K.
The following tables summarize the Company's consolidated statement of
operations and balance sheet data. The Company acquired The Popcorn Factory in
May 2002, The Children's Group in June 2001, disposed of Floral Works in January
2000, and acquired GreatFood.com and TheGift.com in November 1999. The following
financial data reflects the results of operations of these subsidiaries since
their respective dates of acquisition and up through the date of disposition.
This information should be read together with the discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes to those statements
included elsewhere in this Annual Report on Form 10-K.
Years ended
------------------------------------------------------------------
June 29, June 30, July 1, July 2, June 27,
2003 2002 2001 2000 1999
------------ ------------- ------------- ------------ ----------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Telephonic $ 271,071 $ 248,931 $ 230,723 $ 227,380 $ 201,467
Online 265,278 218,179 182,924 116,810 52,668
Retail/fulfillment 29,269 30,095 28,592 35,338 38,717
------------ ------------- ------------- ------------ ----------
Total net revenues 565,618 497,205 442,239 379,528 292,852
Cost of revenues 324,565 293,269 267,779 237,493 179,697
------------ ------------- ------------- ------------ ----------
Gross profit 241,053 203,936 174,460 142,035 113,155
Operating expenses:
Marketing and sales 170,013 150,638 154,321 155,353 89,126
Technology and development 13,937 13,723 16,853 16,809 8,067
General and administrative 29,593 28,179 27,043 28,975 15,748
Depreciation and amortization 15,389 15,061 21,716 16,479 8,385
------------ ------------- ------------- ------------ ----------
Total operating expenses 228,932 207,601 219,933 217,616 121,326
------------ ------------- ------------- ------------ ----------
Operating income (loss) 12,121 (3,665) (45,473) (75,581) (8,171)
Other income (expense), net 117 1,448 4,152 7,422 (1,183)
------------ ------------- ------------- ------------ ----------
Income (loss) before income taxes and minority
interests 12,238 (2,217) (41,321) (68,159) (9,354)
Benefit from income taxes - 706 - 1,286 2,715
------------ ------------- ------------- ------------ ----------
Income (loss) before minority interests 12,238 (1,511) (41,321) (66,873) (6,639)
Minority interests - - - 43 (207)
------------ ------------- ------------- ------------ ----------
Net income (loss) 12,238 (1,511) (41,321) (66,830) (6,846)
Redeemable Class C common stock dividends - - - - (5,215)
------------ ------------- ------------- ------------ ----------
Net income (loss) applicable to common
stockholders $ 12,238 $(1,511) $ (41,321) $(66,830) $(12,061)
============ ============= ============= ============ ==========
Net income (loss) per common share applicable
to common stockholders:
Basic $0.19 $(0.02) $ (0.64) $(1.10) $(0.27)
============ ============= ============= ============ ==========
Diluted $0.18 $(0.02) $ (0.64) $(1.10) $(0.27)
============ ============= ============= ============ ==========
Shares used in the calculation of net income
(loss) per common share:
Basic 65,566 64,703 64,197 60,889 44,035
============ ============= ============= ============ ==========
Diluted 67,670 64,703 64,197 60,889 44,035
============ ============= ============= ============ ==========
24
As of
------------------------------------------------------------------
June 29, June 30, July 1, July 2, June 27,
2003 2002 2001 2000 1999
------------- ------------ ------------- --------------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short-term investments $ 61,218 $ 63,399 $ 63,896 $111,624 $ 99,183
Working capital 26,875 23,301 27,409 82,129 85,619
Investments 19,471 9,591 16,284 1,918 984
Total assets 214,796 207,157 195,257 224,641 182,355
Long-term liabilities 12,820 15,939 16,029 12,947 37,766
Total stockholders' equity 137,288 123,908 117,816 158,918 109,003
25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
Certain of the matters and subject areas discussed in this Annual Report on Form
10-K contain "forward-looking statements" within the meaning of 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 "Business - Risk Factors that May Affect Future Results" and
elsewhere in this Annual Report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Annual Report on Form 10-K relate only
to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM has helped millions of customers
connect to the people they care about through a broad range of thoughtful gifts,
award-winning customer service and its unique technology and fulfillment
infrastructure. The Company's product offering reflects a carefully selected
assortment of high quality merchandise chosen to accommodate customer needs in
celebrating a special occasion or conveying a personal sentiment. Most products
are available for same-day or overnight delivery and all come with the Company's
100% satisfaction guarantee.
The Company's product line includes flowers, plants, gourmet foods, candies,
gift baskets and other unique gifts 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, confections 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).
Most of the Company's floral orders are fulfilled through BloomNet(R) (comprised
of independent florists operating retail flower shops and Local Fulfillment
Centers ("LFC's"), Company-owned stores and fulfillment centers and franchise
stores). The Company transmits its orders either through BloomLink, its
proprietary Internet-based electronic communication system, or the communication
system of a third-party. A portion of the Company's floral and gift merchandise
as well as its home and garden merchandise, non-floral gift products and gourmet
food merchandise are shipped by the Company, members of BloomNet(R) or third
parties directly to the customer using common carriers. Most of the Company's
home and garden products are fulfilled from its Madison, Virginia fulfillment
center or its Vandalia, Ohio distribution facility, while the Company's
children's merchandise is fulfilled from its Vandalia facility. The Company's
gourmet popcorn and related merchandise is fulfilled primarily from its Lake
Forest, Illinois manufacturing facility.
26
As of June 29, 2003 the Company-owned retail fulfillment operations consisted of
25 retail stores and 6 fulfillment centers. Retail fulfillment revenues also
include fees paid to the Company by members of its BloomNet(R) network and
royalties, fees and sublease rent paid to the Company by its 80 franchise
stores. Company-owned stores serve as local points of fulfillment and enable the
Company to test new products and marketing programs. As such, a significant
percentage of the revenues derived from Company-owned stores and fulfillment
centers represent fulfillment of its telephonic and online sales channel floral
orders and are eliminated as inter-company revenues.
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal years 2003, 2002 and 2001 which ended on June 29,
2003, June 30, 2002 and July 1, 2001, respectively, consisted of 52 weeks.
Net Revenues
Years Ended
----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
------------ ------------- ------------ ------------- -------------
(in thousands)
Net revenues:
Telephonic $271,071 8.9% $248,931 7.9% $230,723
Online 265,278 21.6% 218,179 19.3% 182,924
Retail/fulfillment 29,269 (2.7%) 30,095 5.3% 28,592
------ ------ ------
$565,618 13.8% $497,205 12.4% $442,239
======== ======== ========
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined telephonic and online revenue growth during the fiscal years ended June
29, 2003 and June 30, 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 Company's continued expansion of its
non-floral product lines. The Company's non-floral offerings include a broad
range of items such as home decor and garden merchandise, plants, candies,
specialty gifts, gourmet foods, including the Popcorn Factory line of products
which was acquired in May 2002, and children's gifts, offered through the
HearthSong and Magic Cabin brands, which were acquired in June 2001. Non-floral
gift products accounted for 49.3%, 45.8% and 40.7% of total combined telephonic
and online net revenues during the fiscal years ended June 29, 2003, June 30,
2002 and July 1, 2001, respectively.
The Company fulfilled approximately 8,681,000, 7,172,000 and 6,520,000 orders
through its combined telephonic and online sales channels during the fiscal
years ended June 29, 2003, June 30, 2002, and July 1, 2001, respectively,
representing increases of 21.0% and 10.0% over the respective prior fiscal
years. This growth resulted from increases in both online order volume, which
increased 24.1% and 14.8%, during the years ended June 29, 2003 and June 30,
2002, respectively, in comparison to prior years, driven by traffic increases
through the Company's Web sites as well as through third-party portals and Web
sites, and telephonic order volume, which during the years ended June 29, 2003
and June 30, 2002 increased 17.7% and 5.2% over the respective prior years,
resulting from the acquisitions of the Company's gourmet popcorn product line in
May 2002, and the Company's children's gift product line in June 2001. The
Company's combined telephonic and online sales channel average order value
decreased 5.1% to $61.79 during the fiscal year ended June 29, 2003, primarily
27
as a result of the impact of the Popcorn Factory product line which has a lower
average order value ($65.01 excluding The Popcorn Factory). During the fiscal
year ended June 30, 2002 the average order increased 2.5% to $65.02. The
Company's online sales channel contributed 49.5%, 46.7% and 44.2% of the total
combined telephonic and online revenues during the fiscal years ended June 29,
2003, June 30, 2002 and July 1, 2001, respectively. The Company intends to
continue to drive revenue growth through its online business, and continue the
migration of its customers from the telephone to the Web for several important
reasons: (i) online orders are less expensive to process than telephonic orders,
(ii) online customers can view the Company's full range of gift offerings -
including non-floral gifts, which yield higher gross margin opportunities, (iii)
online customers can utilize all of the Company's services, such as the various
gift search functions, order status check and reminder service, thereby
deepening its relationship with them and leading to increased order rates, and
(iv) when customers visit the Company online, it provides an opportunity to
engage them in an electronic dialog via cost efficient e-mail marketing
programs.
Retail/fulfillment revenues for the fiscal year ended June 29, 2003 decreased as
compared to the prior year period primarily as a result of the sale, closure, or
conversion of certain company-owned retail stores into franchised operations.
The increase in retail/fulfillment revenues for the fiscal year ended June 30,
2002, in comparison to the prior fiscal year, was primarily due to the November
2001 opening of a new home and garden outlet store in Williamsburg, VA, and an
increase in same store sales, offset in part by the reduction in retail stores
late in the fiscal year.
Gross Profit
Years Ended
-----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
------------- ------------- ------------- -------------- -------------
(in thousands)
Gross profit $241,053 18.2% $203,936 16.9% $174,460
Gross margin % 42.6% 41.0% 39.4%
Gross profit consists of net revenues less cost of revenues which is comprised
primarily of florist fulfillment costs (fees paid directly to florists and fees
paid to wire service entities that serve as clearinghouses for floral orders,
net of wire service rebates), the cost of floral and non-floral merchandise sold
from inventory or through third parties, and associated costs including inbound
and outbound shipping charges. Additionally, cost of revenues include labor and
facility costs related to direct-to-consumer merchandise production operations,
as well as facility costs on properties that are sublet to the Company's
franchisees. Gross profit increased during the fiscal years ended June 29, 2003
and June 30, 2002 as a result of increased order volume, and an improved gross
margin percentage. Gross margin percentage increased by 160 basis points during
each of the fiscal years ended June 29, 2003 and June 30, 2002 due to several
factors including: (i) increased non-floral product sales, which were further
complemented by the acquisitions of The Popcorn Factory line of products in May
2002, and the HearthSong and Magic Cabin product lines in June 2001, all of
which generate higher gross margins, (ii) improvements in product shipping
costs, inventory management and product sourcing, (iii) increases in the
Company's service charge, aligning it with industry norms, and (iv) the
Company's continued focus on customer service, whereby stricter control
standards and enforcement methods reduced the rate of product credits/returns
and replacements.
As the Company continues to grow 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.
28
Marketing and Sales Expense
Years Ended
-----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
------------- -------------------------- -------------- -------------
(in thousands)
Marketing and sales $170,013 12.9% $150,638 (2.4)% $154,321
Percentage of sales 30.1% 30.3% 34.9%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expenses decreased to 30.1% and 30.3% of net
revenues during the fiscal years ended June 29, 2003 and June 30, 2002,
respectively, as a result of volume related operating efficiencies and targeted
cost-effective advertising, coupled with the Company's strong brand name and
order processing cost reduction initiatives. The decrease in marketing and sales
expenses in fiscal 2002, from 34.9% (33.3%, exclusive of the non-recurring
charge discussed below) of net revenues in fiscal 2001 to 30.3% in fiscal 2002,
was also due to a non-recurring charge of $7.3 million ($0.11 per share), as a
result of the modification of an interactive marketing agreement with one of the
Company's portal providers. As a result of the Company's cost efficient customer
retention programs, of the 5.4 million customers who placed orders during the
fiscal year ended June 29, 2003, approximately 42.4% represented repeat
customers compared to 39.2% in the prior fiscal year. In addition, as a result
of the strength of the Company's brands, combined with its cost-efficient
marketing programs, the Company added approximately 3.1 million new customers
during the fiscal year ended June 29, 2003, as compared to 3.0 million during
the fiscal year ended June 30, 2002.
In order to further 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. 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 on an annual basis,
marketing and sales expense will decline as a percentage of net revenues.
Technology and Development Expense
Years Ended
-----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
-------------- ------------- ----------- ------------- -------------
(in thousands)
Technology and development $13,937 1.6% $13,723 (18.6)% $16,853
Percentage of sales 2.5% 2.8% 3.8%
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 increased
during the year ended June 29, 2003, in comparison to the prior year, as a
29
result the incremental costs associated with the addition of The Popcorn
Factory, acquired in May 2002, but decreased as a percentage of net revenues due
to the continuing benefit realized by in-sourcing technology applications and by
bringing the Company's disaster recovery Web-hosting platform in-house. The
decrease in technology and development expenses during fiscal 2002, in
comparison to fiscal 2001, was primarily due to cost efficiencies realized by
bringing both the Company's primary Web-hosting and application development
capabilities in-house during the latter half of fiscal 2001. Internalizing the
Company's hosting and development functions has enabled the Company to cost
effectively enhance the content and functionality of its Web sites and improve
the performance of the Company's fulfillment and database systems, while adding
improved operational flexibility and supplemental back-up and system redundancy.
During the fiscal years ended June 29, 2003, June 30, 2002, and July 1, 2001,
the Company expended $22.2 million, $24.5 million and $30.7 million on
technology and development, of which $8.3 million, $10.8 million and $13.8
million, respectively, has been capitalized.
Although the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending in comparison to prior fiscal years will continue to
decrease as a percentage of net revenues due to the expected benefits from
previous investments in the Company's current technology platform.
General and Administrative Expenses
Years Ended
-----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
-------------- ------------- ----------- ------------- -------------
(in thousands)
General and administrative $29,593 5.0% $28,179 4.2% $27,043
Percentage of sales 5.2% 5.7% 6.1%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. The increase in general and administrative
expenses during the fiscal years ended June 29, 2003 and June 30, 2002, in
comparison to their respective prior years, was primarily attributable to the
incremental costs associated with the acquisitions of The Popcorn Factory in May
2002 and The Children's Group in June 2001, 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, general and administrative expenses on an annual basis are
expected to remain consistent as a percentage of net revenues.
Depreciation and Amortization
Years Ended
-----------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
-------------- ------------- ----------- ------------- -------------
(in thousands)
Depreciation and amortization $15,389 2.2% $15,061 (30.6%) $21,716
Percentage of sales 2.7% 3.0% 4.9%
Depreciation and amortization expense increased during the fiscal year ended
June 29, 2003, in comparison to the prior year, primarily as a result of
30
incremental depreciation and amortization associated with The Popcorn Factory,
acquired in May 2002, offset in part by the impact of the Company's declining
rate of capital additions, and the fact that certain software components of the
Company's order entry, customer service, fulfillment and database systems,
implemented in fiscal 2000, are now fully depreciated. The decrease in
depreciation and amortization expense during the fiscal year ended June 30,
2002, in comparison to the prior fiscal year, was primarily the result of the
Company's early adoption of SFAS No. 142, Goodwill and Other Intangible Assets,
which requires the discontinuance of amortization of goodwill and other
intangible assets with indefinite useful lives. As a result, depreciation and
amortization expense for the year ended July 1, 2001 includes $7.5 million
($0.12 per share) of goodwill amortization which is not included in fiscal 2002.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, is critical to attaining
its strategic objectives, the Company expects that depreciation and amortization
will continue to decrease as a percentage of net revenues in comparison to prior
years.
Other Income (Expense)
Years Ended
--------------------------------------------------------------------
June 29, June 30, July 1,
2003 % Change 2002 % Change 2001
-------------- ------------- ----------- ------------- -------------
(in thousands)
Interest income $1,157 (57.0%) $2,688 (55.0%) $5,971
Interest expense (982) 21.1% (1,245) 1.5% (1,264)
Other, net (58) (126.0%) 5 100.9% (555)
-------------- ----------- -------------
$117 (91.9%) $1,448 (65.1%) $4,152
============== =========== =============
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt.
The decrease in interest income for the years ended June 29, 2003 and June 30,
2002 was primarily due to the decline in cash and investment balances in order
to fund capital expenditures and the acquisitions of The Popcorn Factory in May
2002, and the HearthSong and Magic Cabin brands in June 2001, as well as for
fiscal 2002 a decline of the Company's average rate of return on its investments
due to prevailing market conditions. The reduction in interest expense was
primarily due to the decline of interest rates associated with the Company's
variable rate long-term debt. During fiscal 2001, the Company recorded a
non-recurring charge of $1.0 million (included above in "Other, net") associated
with the write-down of the Company's minority investment in a technology
partner, purchased in fiscal 2000. Offsetting this write-down was a gain of $0.3
million, recognized by the Company in November 2000, on the sale of its
investment in American Floral Services, Inc. ("AFS").
Income Taxes
During the fiscal year ended June 29, 2003, the Company provided no income tax
provision due to the availability of net operating loss carryforwards. However,
during the fiscal year ended June 30, 2002, the Company recovered previously
paid income taxes of approximately $0.7 million as a result of tax law changes
which extended the period for which companies were allowed to carry-back losses.
The Company has provided a full valuation allowance against the remaining
portion of its net deferred tax assets, consisting primarily of net operating
losses, because of uncertainty regarding its future realization.
31
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2003 and 2002. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited consolidated financial statements and all necessary
adjustments, consisting of only normal recurring adjustments, have been included
in the amounts stated below to present fairly the Company's results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
Three months ended
--------------------------------------------------------------------------------
Jun. 29, Mar. 30, Dec. 29, Sep. 29, Jun. 30, Mar. 31, Dec. 30, Sep. 30,
2003 2003 2002 2002 2002 2002 2001 2001
--------- --------- --------- --------- --------- --------- --------- ----------
(in thousands)
Net revenues:
Telephonic $62,254 $52,287 $113,999 $42,531 $63,699 $50,715 $93,550 $40,967
Online 84,133 64,595 75,750 40,800 68,468 56,874 60,497 32,340
Retail fulfillment 8,456 7,239 7,680 5,894 8,120 7,835 8,278 5,862
--------- --------- --------- --------- --------- --------- --------- ----------
Total net revenues 154,843 124,121 197,429 89,225 140,287 115,424 162,325 79,169
Cost of revenues 91,588 73,095 107,335 52,547 83,076 70,690 91,626 47,877
--------- --------- --------- --------- --------- --------- --------- ----------
Gross profit 63,255 51,026 90,094 36,678 57,211 44,734 70,699 31,292
Operating expenses:
Marketing and sales 40,372 35,710 64,978 28,953 37,529 31,533 54,945 26,631
Technology and development 3,621 3,323 3,415 3,578 3,279 3,222 3,532 3,690
General and administrative 7,381 7,343 7,462 7,407 7,353 6,847 7,065 6,914
Depreciation and amortization 3,698 3,594 4,068 4,029 3,912 3,788 3,767 3,594
--------- --------- --------- --------- --------- --------- --------- ----------
Total operating expenses 55,072 49,970 79,923 43,967 52,073 45,390 69,309 40,829
--------- --------- --------- --------- --------- --------- --------- ----------
Operating income (loss) 8,183 1,056 10,171 (7,289) 5,138 (656) 1,390 (9,537)
Other income (expense), net 79 127 (84) (5) 322 115 420 591
Income tax benefit - - - - - 706 - -
--------- --------- --------- --------- --------- --------- --------- ----------
Net income (loss) $8,262 $1,183 $10,087 $(7,294) $5,460 $165 $1,810 $(8,946)
========= ========= ========= ========= ========= ========= ========= ==========
Net income (loss) per share:
Basic $0.13 $0.02 $0.15 $(0.11) $0.08 $0.00 $0.03 $(0.14)
========= ========= ========= ========= ========= ========= ========= ==========
Diluted $0.12 $0.02 $0.15 $(0.11) $0.08 $0.00 $0.03 $(0.14)
========= ========= ========= ========= ========= ========= ========= ==========
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into gift, home, gourmet and other related products, the
Thanksgiving through Christmas holiday season, which falls within the Company's
second fiscal quarter, generates the highest proportion of the Company's annual
revenues. Additionally, as the result of a number of major floral gifting
occasions, including Mother's Day, Administrative Professionals Week and Easter,
revenues also rise during the Company's fiscal fourth quarter, in relation to
its fiscal first and third quarters.
Liquidity and Capital Resources
At June 29, 2003, the Company had working capital of $26.9 million, including
cash and equivalents and short-term investments of $61.2 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
32
resulted primarily from earnings, adjusted for non-cash items primarily
consisting of depreciation and amortization, offset in part by capital
expenditures, repayment of long-term debt and capital lease obligations and the
final payment on a long-term online marketing contract. In addition to its cash
and short-term investments, at June 29, 2003 and June 30, 2002, the Company
maintained approximately $19.5 million and $9.6 million of long-term
investments, respectively, consisting primarily of investment grade corporate
and U.S. government securities.
Net cash provided by operating activities of $19.5 million for the fiscal year
ended June 29, 2003 was primarily attributable to earnings, adjusted for
depreciation and amortization and other non-cash charges which in total amounted
to $28.1 million, partially offset by changes in working capital, primarily due
to seasonal increases in inventory, a contractual payment on a long-term online
marketing agreement and a reduction in accounts payable and accrued expenses.
Net cash used in investing activities of $9.1 million for the fiscal year ended
June 29, 2003 was principally comprised of capital expenditures related to the
Company's technology infrastructure and purchases of short-term investment grade
government and corporate securities, offset in part by net maturities and sales
of long-term investments.
Net cash used in financing activities was $1.9 million for the fiscal year ended
June 29, 2003, resulting primarily from the repayment 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 and purchases of stock under the Company's Employee Stock Purchase Plan.
At June 29, 2003, the Company's material capital commitments consist of:
o obligations outstanding under capital and operating leases (including
guarantees of $0.4 million) as well as a commercial note relating to
obligations arising from, and collateralized by, the underlying
assets of the Company's warehousing/fulfillment facility in Madison,
Virginia ($11.0 million - 2004, $9.2 million - 2005, $6.1 million -
2006, $3.9 million - 2007, $2.5 million - 2008, $8.1 million -
thereafter);
o inventory commitments principally related to the upcoming Thanksgiving
through Christmas holiday season ($18.0 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 September 23, 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 position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., 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
33
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a 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.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company
records a valuation allowance on the deferred income tax assets to reduce the
total to an amount management believes is more likely than not to be realized.
Valuation allowances were principally to offset certain deferred income tax
assets for operating loss carryforwards.
34
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
35
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Annual Financial Statements: See Part IV, Item 15 of this
Annual Report on Form 10-K.
Selected Quarterly Financial Data: See Part II, Item 7 of this
Annual Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14(c) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls
and procedures are effective. There were no changes in our internal
control over financial reporting during the quarter ended June 29,
2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth in the Proxy Statement for the 2003
annual meeting of stockholders is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
The information set forth in the Proxy Statement for the 2003
annual meeting of stockholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth in the Proxy Statement for the 2003
annual meeting of stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in the Proxy Statement for the 2003
annual meeting of stockholders is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information set forth in the Proxy Statement for the 2003
annual meeting of stockholders is incorporated herein by reference.
36
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Upon written request, the Company will provide, without charge, a copy of this
Annual Report on Form 10-K, including the consolidated financial statements,
financial statement schedule and any exhibits for the Company's most recent
fiscal year. All requests should be sent to:
1-800-FLOWERS.COM, Inc.
Investor Relations
1600 Stewart Avenue
Westbury, New York 11590
(516) 237-6000
(a) List of Documents Filed as a Part of this Annual Report on Form 10-K:
(1) Index to Consolidated Financial Statements:
Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheets as of June 29, 2003 and June 30, 2002 F-2
Consolidated Statements of Operations for the years ended June 29,
2003, June 30, 2002 and July 1, 2001 F-3
Consolidated Statements of Stockholders' Equity for the years ended
June 29, 2003, June 30, 2002 and July 1, 2001 F-4
Consolidated Statements of Cash Flows for the years ended June 29,
2003, June 30, 2002 and July 1, 2001 F-5
Notes to Consolidated Financial Statements F-6
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S-1
All other information and financial statement schedules are omitted because
they are not applicable, or not required, or because the required
information is included in the financial statements or notes thereto.
(3) Index to Exhibits
The following exhibits are required to be filed with this Report by
Item 15(a)(3). Other than exhibits 21.1, 23.1, 24.1, 31.1 and 32.1 which
are filed herewith, the following exhibits are incorporated by reference
to the exhibits of same number contained in the Company's registration
statement on Form S-1 (No. 333-78985), dated August 2, 1999, except for
exhibit 10.23, which is incorporated by reference to the exhibit of the
same number contained in the Company's registration statement on Form S-8
(No. 333-54590), dated January 30, 2001.
37
Exhibit Description
- ------- -----------
3.1 Third Amended and Restated Certificate of Incorporation.
3.2 Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation.
3.3 Amended and Restated By-laws.
4.1 Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate
of Incorporation and By-laws of the Registrant defining the
rights of holders of Common Stock of the Registrant.
10.1 Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C.
and 800-FLOWERS, Inc.
10.2 Investment Agreement, dated as of January 16, 1995, among Chemical
Venture Capital Associates, Teleway, Inc. and James F. McCann
10.3 Consent and Amendment No. 1 to Investment Agreement, dated as of
May 20, 1999, among Chase Capital Partners, 1-800-FLOWERS.COM,
Inc. and James F. McCann.
10.10 1997 Stock Option Plan, as amended.
10.16 Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and
the persons designated as Investors on the signature pages thereto.
10.17 Stock Purchase Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc., James F. McCann, Christopher G. McCann
and the Investors listed on Schedule A thereto.
10.18 1999 Stock Incentive Plan.
10.19 Employment Agreement, effective as of July 1, 1999, between James F.
McCann and 1-800-FLOWERS.COM, Inc.
10.20 Employment Agreement, effective as of July 1, 1999, between
Christopher G. McCann and 1-800-FLOWERS.COM, Inc.
10.22 #Amended and Restated Interactive Marketing Agreement, made and
entered into on September 1, 2000, by and between America Online,
Inc. and 1-800-FLOWERS.COM, Inc.
10.23 Employee Stock Purchase Plan
21.1 Subsidiaries of the Registrant.
23.1 Consent of independent auditors.
24.1 Powers of Attorney (included in the signature page).
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley of 2002
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley of 2002
- ----------------------------------------------
* Confidential treatment granted for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
# Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 24b-2 promulgated under the Exchange Act.
(b) Reports on Form 8-K:
On April 7, 2003, the Company received notice from J.P. Morgan
Partners (SBIC), LLC, that it had terminated its Rule 10b5-1 Sales
Plan (the "Plan"). The effective date of the Plan's termination was
the close of business on Tuesday April 8, 2003.
On April 25, 2003, the Company filed a report on Form 8-K which
referenced its April 22, 2003 press release of the Company's results
of operations and financial condition for its fiscal third quarter
ended March 30, 2003.
On May 15, 2003, the Company issued a press release reporting its
order volume for its fiscal 2003 Mother's Day Holiday.
38
On June 13, 2003, the Company reported that on May 28, 2003, Pamela
Knox, Senior Vice President of Marketing tendered her resignation to
the Company.
On August 6, 2003, the Company issued a press release of the Company's
results of operations and financial condition for its fiscal fourth
quarter ended June 29, 2003.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
1-800-FLOWERS.COM, INC.
Dated: September 26, 2003 By: /s/ James F. McCann
---------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc. (the
"Company"), hereby severally constitute and appoint James F. McCann and William
E. Shea, and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full powers to them and each
of them to sign for us, in our names and in the capacities indicated below, to
sign any and all amendments to this Annual Report, and other documents in
connection therewith, and to file or cause to be filed the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below:
Dated: September 26, 2003 By: /s/ James F. McCann
---------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 26, 2003 By: /s/ William E. Shea
---------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
40
Dated: September 26, 2003 By: /s/ Christopher G. McCann
--------------------------------
Christopher G. McCann
Director, President
Dated: September 26, 2003 By: /s/ Lawrence Calcano
---------------------------
Lawrence Calcano
Director
Dated: September 26, 2003 By: /s/ John J. Conefry, Jr.
---------------------------
John J. Conefry, Jr.
Director
Dated: September 26, 2003 By: /s/ Leonard J. Elmore
---------------------------
Leonard J. Elmore
Director
Dated: September 26, 2003 By: /s/ T. Guy Minetti
---------------------------
T. Guy Minetti
Director, Vice Chairman
Dated: September 26, 2003 By: /s/ Kevin J. O'Connor
---------------------------
Kevin J. O'Connor
Director
Dated: September 26, 2003 By: /s/ Mary Lou Quinlan
---------------------------
Mary Lou Quinlan
Director
Dated: September 26, 2003 By: /s/ Jeffrey C. Walker
---------------------------
Jeffrey C. Walker
Director
41
F-3
Report of Independent Auditors
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of June 29, 2003 and
June 30, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 29, 2003. Our audits also included the financial statement schedule
listed in the index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 1-800-FLOWERS.COM,
Inc. and Subsidiaries at June 29, 2003 and June 30, 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 29, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other indefinite-lived
intangible assets effective July 2, 2001 to conform with the provisions of
Financial Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets."
/s/ Ernst & Young LLP
Melville, New York
July 31, 2003
F-1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 29, June 30,
2003 2002
------------- ------------
Assets
Current assets:
Cash and equivalents $ 49,079 $ 40,601
Short-term investments 12,139 22,798
Receivables, net 7,767 9,345
Inventories 20,370 15,647
Prepaid and other 2,208 2,220
------------- ------------
Total current assets 91,563 90,611
Property, plant and equipment, net 46,500 51,002
Investments 19,471 9,591
Capitalized investment in leases 276 465
Goodwill 37,692 37,772
Other intangibles, net 3,211 4,074
Other assets 16,083 13,642
------------- ------------
Total assets $214,796 $207,157
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 61,663 $ 64,156
Current maturities of long-term debt and obligations under capital leases 3,025 3,154
------------- ------------
Total current liabilities 64,688 67,310
Long-term debt and obligations under capital leases 9,124 12,244
Other liabilities 3,696 3,695
------------- ------------
Total liabilities 77,508 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, 28,679,848
and 28,319,677 shares issued in 2003 and 2002, respectively 287 283
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,399,915
and 42,480,925 shares issued in 2003 and 2002, respectively 424 425
Additional paid-in capital 247,636 246,497
Retained deficit (107,951) (120,189)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 137,288 123,908
------------- ------------
Total liabilities and stockholders' equity $ 214,796 $207,157
============= ============
See accompanying notes.
F-2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Years ended
--------------------------------------------
June 29, June 30, July 1,
2003 2002 2001
-------------- -------------- -------------
Net revenues $565,618 $497,205 $442,239
Cost of revenues 324,565 293,269 267,779
-------------- -------------- -------------
Gross profit 241,053 203,936 174,460
Operating expenses:
Marketing and sales 170,013 150,638 154,321
Technology and development 13,937 13,723 16,853
General and administrative 29,593 28,179 27,043
Depreciation and amortization 15,389 15,061 21,716
-------------- -------------- -------------
Total operating expenses 228,932 207,601 219,933
-------------- -------------- -------------
Operating income (loss) 12,121 (3,665) (45,473)
Other income (expense):
Interest income 1,157 2,688 5,971
Interest expense (982) (1,245) (1,264)
Other, net (58) 5 (555)
-------------- -------------- -------------
Total other income, net 117 1,448 4,152
-------------- -------------- -------------
Income (loss) before income taxes 12,238 (2,217) (41,321)
Benefit from income taxes - 706 -
-------------- -------------- -------------
Net income (loss) $12,238 $(1,511) $(41,321)
============== ============== =============
Net income (loss) per common share:
Basic $0.19 $(0.02) $(0.64)
============== ============== =============
Diluted $0.18 $(0.02) $(0.64)
============== ============== =============
Shares used in the calculation of net income (loss)
per common share:
Basic 65,566 64,703 64,197
============== ============== =============
Diluted 67,670 64,703 64,197
============== ============== =============
See accompanying notes.
F-3
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 29, 2003, June 30, 2002 and July 1, 2001
(in thousands, except share data)
Common Stock
--------------------------------- Additional
Class A Class B Paid-in Treasury Stock Total
----------------- --------------- Retained Deferred --------------- Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Shares Amount Equity
---------- ------- ---------- -------- -------- ---------- ------------ ---------- ------- -----------
Balance at July 2, 2000 26,362,068 $264 43,141,645 $431 $239,476 $(77,357) $(788) 5,332,800 $(3,108) $158,918
Exercise of stock options 97,175 1 - - 299 - - - - 300
Employee stock purchase plan 14,512 - - - 75 - - - - 75
Amortization of deferred
compensation - - - - - - (156) - - (156)
Forfeiture of employee stock
options - - - - (944) - 944 - - -
Conversion of Class B common
stock into Class A common
stock 113,120 1 (113,120) (1) - - - - - -
Total comprehensive loss - - - - - (41,321) - - - (41,321)
---------- ------- ---------- -------- ---------- ---------- ----------- --------- -------- -----------
Balance at July 1, 2001 26,586,875 266 43,028,525 430 238,906 (118,678) - 5,332,800 (3,108) 117,816
Exercise of stock options 788,008 8 - - 2,228 - - - - 2,236
Employee stock purchase plan 44,191 - - - 382 - - - - 382
Issuance of shares of common
stock in connection with the
acquisition of The Popcorn
Factory 353,003 4 - - 4,981 - - - - 4,985
Conversion of Class B common
stock into Class A common
stock 547,600 5 (547,600) (5) - - - - - -
Total comprehensive loss - - - - - (1,511) - - - (1,511)
---------- ------- ---------- -------- ---------- ---------- ----------- --------- -------- -----------
Balance at June 30, 2002 28,319,677 283 42,480,925 425 246,497 (120,189) - 5,332,800 (3,108) 123,908
Exercise of stock options 228,666 2 - - 842 - - - - 844
Employee stock purchase plan 50,495 1 - - 297 - - - - 298
Conversion of Class B common
stock into Class A common
stock 81,010 1 (81,010) (1) - - - - - -
Total comprehensive income - - - - - 12,238 - - - 12,238
---------- ------- ---------- -------- ---------- ---------- ----------- --------- -------- -----------
Balance at June 29, 2003 28,679,848 $287 42,399,915 $424 $247,636 $(107,951) $ - 5,332,800 $(3,108) $137,288
========== ======= ========== ======== ========== ========== =========== ========= ======== ===========
See accompanying notes.
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
June 29, 2003 June 30, 2002 July 1, 2001
--------------- --------------- ---------------
Operating activities:
Net income (loss) $12,238 $ (1,511) $(41,321)
Reconciliation of net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 15,389 15,061 21,716
Bad debt expense 426 107 377
Credit to/amortization of deferred compensation - - (156)
Other non-cash items 72 425 743
Changes in operating items, excluding the effects of
acquisitions:
Receivables 1,152 (1,031) (204)
Inventories (4,723) (7) (1,622)
Prepaid and other 12 (215) 2,499
Accounts payable and accrued expenses (2,493) 2,264 7,226
Other assets (2,555) (3,544) (1,875)
Other liabilities 1 59 (13)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 19,519 11,608 (12,630)
Investing activities:
Acquisitions, net of cash acquired - (7,037) (4,892)
Capital expenditures, net of non-cash expenditures-$0,
$2,894 and $4,176 in 2003, 2002 and 2001, respectively (10,269) (11,994) (15,791)
Purchases of investments (56,412) (22,798) (16,284)
Proceeds from sales of investments 57,191 6,693 1,194
Other 390 495 76
--------------- --------------- ---------------
Net cash used in investing activities (9,100) (34,641) (35,697)
Financing activities:
Proceeds from employee stock options/stock purchase plan 1,142 2,618 375
Proceeds from bank borrowings - - 16,510
Repayment of notes payable and bank borrowings (1,492) (826) (14,827)
Payments of capital lease obligations (1,591) (2,054) (1,459)
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (1,941) (262) 599
--------------- --------------- ---------------
Net change in cash and equivalents 8,478 (23,295) (47,728)
Cash and equivalents:
Beginning of year 40,601 63,896 111,624
--------------- --------------- ---------------
End of year $ 49,079 $ 40,601 $ 63,896
=============== =============== ===============
Supplemental Cash Flow Information:
- -Interest paid amounted to $982, $1,245 and $1,264 for the years ended
June 29, 2003, June 30, 2002 and July 1, 2001, respectively.
- -The Company received tax refunds, net of income taxes paid of approximately
$0, $706 and $1,613 for the years ended June 29, 2003, June 30, 2002 and July
1, 2001, respectively.
See accompanying notes.
F-5
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 29, 2003
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading gift retailer,
providing a broad range of thoughtful gift products including flowers, plants,
gourmet foods, candies, gift baskets, and other unique gifts to our customers
around the world. The Company has extended its product offerings through several
of its subsidiaries, including The Plow & Hearth, Inc. ("Plow & Hearth"), a
direct marketer of home decor and garden merchandise, GreatFood.com, Inc.
("Greatfood.com"), a source for gourmet products, The Popcorn Factory, Inc.,
("The Popcorn Factory") a manufacturer and direct marketer of premium popcorn
and specialty food gifts, and the Children's Group, Inc., a direct marketer of
unique children's toys and games operating under the HearthSong and Magic Cabin
Dolls brand names. The Company operates in one business segment, providing its
customers with convenient, multi-channel access via the Internet, telephone,
catalogs and retail stores.
Note 2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30th. Fiscal years 2003, 2002 and 2001, which ended June 29,
2003, June 30, 2002 and July 1, 2001, respectively, consisted of 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash and Equivalents
Cash and equivalents consist of demand deposits with banks, highly liquid money
market funds, United States government securities, overnight repurchase
agreements and commercial paper with maturities of three months or less when
purchased.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated
depreciation. Depreciation expense is recognized over the assets' estimated
useful lives using the straight-line method. Estimated useful lives are based on
Company averages ranging from 3 to 10 years for furniture, fixtures and
equipment and 40 years for buildings. Amortization of leasehold improvements,
which range from 5 to 20 years, is calculated using the straight-line method
over the shorter of the lease terms, including renewal options expected to be
exercised, or estimated useful lives of the improvements. Estimated useful lives
are periodically reviewed, and where appropriate, changes are made
prospectively.
F-6
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated
annually in the Company's fiscal fourth quarter for impairment. To date, there
has been no impairment of these assets. Prior to fiscal 2002, goodwill was
amortized over periods not exceeding 20 years.
The cost of intangible assets with determinable lives is amortized to reflect
the pattern of economic benefits consumed, on a straight-line basis, over the
estimated periods benefited, ranging from 3 to 16 years.
Deferred Catalog Costs
The Company capitalizes the costs of producing and distributing its catalogs.
These costs are amortized in direct proportion with actual sales from the
corresponding catalog over a period not to exceed 26-weeks. Included within
other assets was $2.6 million and $2.7 million at June 29, 2003 and June 30,
2002, respectively, relating to prepaid catalog costs.
Investments
The Company considers all of its debt and equity securities, for which there is
a determinable fair market value and no restrictions on the Company's ability to
sell within the next 12 months, as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. For the years ended June 29,
2003, June 30, 2002 and July 1, 2001, there were no significant unrealized gains
or losses. Realized gains and losses are included in other income. The cost
basis for realized gains and losses on available-for-sale securities is
determined on a specific identification basis.
Fair Values of Financial Instruments
The recorded amounts of the Company's cash and equivalents, short-term
investments, receivables, accounts payable, and accrued liabilities approximate
their fair values principally because of the short-term nature of these items.
The fair value of investments, including available-for-sale securities, is based
on quoted market prices where available. The fair value of the Company's
long-term obligations are estimated based on the current rates offered to the
Company for obligations of similar terms and maturities. Under this method, the
Company's fair value of long-term obligations was not significantly different
than the carrying values at June 29, 2003 and June 30, 2002.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and equivalents,
investments and accounts receivable. The Company maintains cash and equivalents
and investments with high credit, quality financial institutions. Concentration
of credit risk with respect to accounts receivable are limited due to the
Company's large number of customers and their dispersion throughout the United
States, and the fact that a substantial portion of receivables are related to
balances owed by major credit card companies. Allowances relating to accounts
receivable ($1.3 million and $1.0 million at June 29, 2003 and June 30, 2002,
respectively) have been recorded based upon previous experience and management's
evaluation.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Cost of Revenues
Cost of revenues consists primarily of florist fulfillment costs (fees paid
directly to florists and to wire services that serve as clearinghouses for
F-7
floral orders, net of wire service rebates), the cost of floral and non-floral
merchandise sold from inventory or through third parties, and associated costs
including inbound and outbound shipping charges. Additionally, cost of revenues
includes labor and facility costs related to direct-to-consumer merchandise
production operations, as well as facility costs on properties that are sublet
to the Company's franchisees.
Marketing and Sales
Marketing and sales 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.
The Company expenses all advertising costs at the time the advertisement is
first shown. Advertising expense (including the amortization of catalog costs of
$53.7 million, $37.8 million and $26.9 million for the years ended June 29,
2003, June 30, 2002 and July 1, 2001, respectively) was $88.9 million, $69.6
million and $71.0 million for the years ended June 29, 2003, June 30, 2002 and
July 1, 2001, respectively.
Technology and Development
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Costs associated with the acquisition or
development of software for internal use are capitalized if the software is
expected to have a useful life beyond one year and amortized over the software's
useful life, typically three years. Costs associated with repair, maintenance or
the development of Web site content are expensed as incurred as the useful lives
of such software modifications are less than one year.
Stock-Based Compensation
The Company accounts for its employee stock option and stock purchase plans
under the recognition and measurement principles of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. Under APB No.
25, no stock-based compensation is reflected in net income, as all options
granted under the plans had an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant and the related
number of shares granted is fixed at that point in time. The following table
illustrates the effect on net income (loss) per share as if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure (see Note 9, "Stock Option Plans"):
Years ended
-----------------------------------------
June 29, June 30, July 1,
2003 2002 2001
------------- ------------- ------------
(in thousands, except per share data)
Net income (loss) $12,238 $(1,511) $(41,321)
Less: Stock based compensation 7,803 5,447 4,951
------------- ------------- ------------
Pro forma net income (loss) $4,435 $(6,958) $(46,272)
============= ============= ============
Net income (loss) per share:
Basic - As reported $0.19 $(0.02) $(0.64)
Basic - Pro forma $0.07 $(0.11) $(0.72)
Diluted - As reported $0.18 $(0.02) $(0.64)
Diluted - Pro forma $0.07 $(0.11) $(0.72)
F-8
Comprehensive Income (Loss)
For the years ended June 29, 2003, June 30, 2002 and July 1, 2001, the Company's
comprehensive income (losses) were equal to the respective net income (losses)
for each of the periods presented.
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed using the weighted-average
number of commons shares outstanding during the period. Diluted net income per
share is computed using the weighted-average number of common and dilutive
common equivalent shares (consisting of employee stock options) outstanding
during the period. Diluted net loss per common share is computed using the
weighted-average number of common shares and excludes dilutive potential common
shares outstanding, as their effect is antidilutive.
Note 3. Acquisitions and Disposition
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, a manufacturer and direct marketer of
premium popcorn and specialty food gifts. The purchase price of approximately
$12.6 million, including $0.3 million of transaction costs, was comprised of
$7.3 million used to retire The Popcorn Factory's outstanding debt and the
issuance of 353,003 shares of the Company's Class A common stock, valued at
approximately $5.0 million, based upon the average closing price of the
Company's common stock on the date of and the two days preceding and following
the closing of the transaction. The acquisition was accounted for as a purchase
and, accordingly, acquired assets and liabilities are recorded at their fair
values, and the operating results of The Popcorn Factory have been included in
the Company's consolidated results of operations since the date of acquisition.
The excess of the purchase price over the fair market value net assets acquired
of $12.0 million was allocated to goodwill.
The purchase price allocation of The Popcorn Factory business resulted in the
following condensed balance sheet of assets acquired and liabilities assumed.
The Popcorn Factory
Purchase Price Allocation
-----------------------------------------
(in thousands)
Current assets $1,704
Property, plant and equipment 1,061
Intangible assets 1,120
Goodwill (*) 12,001
------------
Total assets acquired 15,886
------------
Current liabilities 3,120
Non-current liabilities 142
------------
Total liabilities assumed 3,262
------------
Net assets acquired $12,624
============
(*) Approximately $12.0 million is expected to be deductible for tax purposes.
The Popcorn Factory acquisition resulted in $1.1 million in total intangible
assets acquired, other than goodwill, with $0.2 million allocated to trademarks
with indefinite lives. The remaining $0.9 million of acquired intangibles were
allocated to customer list, and is being amortized over the asset's determinable
useful life of 3 years.
Acquisition of Selected Assets of The Children's Group
On June 8, 2001, the Company completed its acquisition of selected assets from
F-9
subsidiaries of Foster & Gallagher, Inc., adding unique and educational
children's toys and games to the Company's product offering, sold under the
HearthSong and Magic Cabin Dolls brand names. The purchase price of
approximately $4.9 million, paid in cash, included the acquisition of a
fulfillment center located in Vandalia, Ohio, inventory, and certain other
assets, as well as, the assumption of certain related liabilities. The
acquisition was accounted for as a purchase and, accordingly, acquired assets
and liabilities are recorded at their fair values, which approximated the
purchase price, and the operating results of The Children's Group have been
included in the Company's consolidated results of operations since the date of
acquisition.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of The Popcorn Factory and The Children's Group
had taken place at the beginning of fiscal year 2001. The following unaudited
pro forma information is not necessarily indicative of the results of operations
in future periods or results that would have been achieved had the acquisitions
of The Popcorn Factory and The Children's Group taken place at the beginning of
the periods presented.
Years Ended
---------------------------------------------
June 29, June 30, July 1,
2003 2002 2001
(as reported) (pro forma) (pro forma)
-------------- -------------- --------------
(in thousands, except per share data)
Net revenues (*) $ 565,618 $ 528,103 $ 509,214
Income (loss) from operations $ 12,121 $ (6,407) $ (50,392)
Net income (loss) $ 12,238 $ (4,688) $ (46,671)
Net income (loss) per common share
Basic $ 0.19 $ (0.07) $ (0.73)
Diluted $ 0.18 $ (0.07) $ (0.73)
(*) Pre-acquisition operations related to the Children's Group include
revenues derived from six retail stores which were discontinued by the
previous owners at various times during fiscal 2001. Operating results
associated with these retail stores were not material to the consolidated
operations of the Company during such time.
Disposition of Minority Interest in American Floral Services, Inc.
On November 21, 2000, the Company sold its minority investment in American
Floral Services, Inc., a floral wire service, to Teleflora, Inc. The Company
received cash proceeds of $1.2 million and recorded a gain on sale of $0.3
million as a result of this transaction.
Note 4. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
June 29, June 30,
2003 2002
-------------- -------------
(in thousands)
Goodwill - beginning of year $37,772 $25,632
Acquisition of The Popcorn Factory (80) 12,081
Other - 59
-------------- -------------
Goodwill - end of year $37,692 $37,772
============== =============
F-10
The Company's intangible assets consist of the following:
June 29, 2003 June 30, 2002
---------------------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ------------- ---------------- --------- ------------- ------------------- ------------
(in thousands)
Intangible assets with
determinable lives:
Investment in licenses 14 - 16 years $4,927 $2,792 $2,135 $4,927 $2,468 $2,459
Customer lists 3 years 910 354 556 910 51 859
Technology 3 years 1,659 1,659 - 1,659 1,428 231
Other 20 years 171 127 44 171 122 49
------------ --------------------------------------------------------------------------
7,667 4,932 2,735 7,667 4,069 3,598
Trademarks
with indefinite lives - 480 4 476 480 4 476
------------ --------------------------------------------------------------------------
Total intangible assets $8,147 $4,936 $3,211 $8,147 $4,073 $4,074
============ ==========================================================================
The amortization of intangible assets for the years ended June 29, 2003, June
30, 2002 and July 1, 2001 was $0.9 million, $0.7 million and $0.9 million,
respectively. Future estimated amortization expense is as follows: 2004 - $0.6
million, 2005 - $0.6 million, 2006 - $0.3 million, 2007 - $0.3 million, 2008 -
$0.3 million, and thereafter - $0.6 million.
The following table provides pro forma disclosure of net loss and net loss per
share for the years ended July 1, 2001, as if goodwill and indefinite-lived
intangibles had not been amortized:
July 1,
2001
------------
(in thousands, except
per share data)
Reported net loss $(41,321)
Amortization 7,458
------------
Adjusted net loss $(33,863)
============
Reported net loss per common share $(0.64)
Amortization per common share 0.11
------------
Adjusted net loss per common share $(0.53)
============
F-11
Note 5. Property, Plant and Equipment
June 29, June 30,
2003 2002
-------------- -------------
(in thousands)
Computer equipment $37,429 $33,989
Software development costs 31,712 27,451
Telecommunication equipment 6,411 6,059
Leasehold improvements 12,267 11,588
Building and building improvements 11,454 11,489
Equipment 7,160 6,253
Furniture and fixtures 3,712 3,576
Land 666 666
-------------- -------------
110,811 101,071
Accumulated depreciation and amortization 64,311 50,069
-------------- -------------
$ 46,500 $ 51,002
============== =============
Note 6. Long-Term Debt
June 29, June 30,
2003 2002
-------------- --------------
(in thousands)
Commercial notes and revolving credit line (1-2) $6,612 $7,380
Seller financed acquisition obligations (3-4) 145 202
Obligations under capital leases (see Note 12) 5,392 7,816
-------------- --------------
12,149 15,398
Less current maturities of long-term debt and obligations under
capital leases 3,025 3,154
-------------- --------------
$9,124 $12,244
============== ==============
___________
The following notes and credit lines relate to obligations arising from, and
collateralized by, the underlying assets of the Company's Plow & Hearth facility
in Madison, Virginia.
(1) $5,000,000 revolving credit line dated December 12, 2002, renewable on
November 30, 2003 (none outstanding at June 29, 2003) bearing interest
equal to the monthly LIBOR Index plus 1.75% per annum (3.07% at June 29,
2003).
(2) $6,612,000 note dated June 27, 2003 bearing interest at 5.44% per annum.
The note, which resulted from the consolidation and refinancing of a series
of fixed and variable rate mortgage and equipment notes in June 2003,
is payable in 60 equal monthly installments of principal and interest
commencing August 1, 2003.
The following notes relate to seller-financed acquisition obligations, all of
which have been collateralized by either the stock or assets of various
subsidiaries of the Company:
(3) $275,000 promissory note dated November 1, 1994 ($54,000 outstanding at
June 29, 2003), bearing interest at 8% per annum. The note is payable in
120 equal monthly installments of principal and interest commencing
December 1, 1994.
F-12
(4) $160,000 non-interest bearing promissory note dated September 30, 1999
($91,000 outstanding at June 29, 2003). The note is payable in 84 monthly
installments commencing January 1, 2001.
As of June 29, 2003, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
Debt
Year Maturities
---- --------------
(in thousands)
2004 1,136
2005 1,289
2006 1,336
2007 1,411
2008 1,466
Thereafter 119
--------------
$6,757
==============
Note 7. Income Taxes
Significant components of the benefit for income taxes are as follows:
Years ended
------------------------------------------------
June 29, June 30, July 1,
2003 2002 2001
------------- -------------- ---------------
(in thousands)
Current:
Federal (*) $ - $706 $ -
State and local - - -
------------- -------------- ---------------
- 706 -
Deferred - - -
------------- -------------- ---------------
$ - $706 $ -
============= ============== ===============
*As a result of tax law changes enacted in fiscal 2002, which extended the
period for which companies are allowed to carry-back losses, the Company
was able to recover previously paid income taxes, thereby resulting in an
income tax benefit of $0.7 million.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit is as follows:
Years ended
--------------------------------------------
June 29, June 30, July 1,
2003 2002 2001
------------- -------------- --------------
Tax at U.S. statutory rates 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 5.9 3.6 4.9
Goodwill amortization 1.0 (13.8) (6.8)
Change in deferred tax asset valuation (39.7) 8.6 (33.0)
Other (1.2) (0.6) 0.9
------------- -------------- --------------
0.0% 31.8% 0.0%
============= ============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
F-13
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets (liabilities) are as follows:
Years ended
----------------------------------------------
June 29, June 30, July 1,
2003 2002 2001
-------------- --------------- --------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 34,247 $ 37,946 $ 37,097
Accrued expenses and reserves 3,624 3,031 2,946
Valuation allowance (36,523) (38,242) (37,447)
Deferred tax liabilities:
Installment sales (53) (54) (61)
Tax in excess of book depreciation (1,295) (2,681) (2,535)
-------------- --------------- --------------
Net deferred tax assets $ - $ - $ -
============== =============== ==============
At June 29, 2003, the Company's U.S. federal and state net operating loss
carryforwards for income tax purposes were approximately $85.6 million. If not
utilized, these net operating loss carryforwards will begin to expire in fiscal
year 2020. To the extent that net operating losses, when realized, relate to
stock option deductions of approximately $13.5 million, the resulting benefits
will be credited to additional paid-in capital.
Note 8. Capital Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. No repurchases have been made
as of June 29, 2003.
Note 9. Stock Option Plans
The 1-800-FLOWERS.COM stock option and incentive plan, which has been approved
by the Company's Board of Directors and shareholders, is a broad-based,
long-term retention program that is intended to attract and retain qualified
employees, and align stockholder and employee interests. The components of the
plan include a discretionary option grant program, an automatic option grant
program, a stock issuance program, and a salary investment option grant program.
Options granted under the plans may be either incentive stock options or
non-qualified stock options. The exercise price of an option shall be determined
by the Company's board of directors or compensation committee of the board at
the time of grant, provided, however, that in the case of an incentive stock
option the exercise price may not be less than 100% of the fair market value of
such stock at the time of the grant, or less than 110% of such fair market value
in the case of options granted to a 10% owner of the Company's stock. The
vesting and expiration periods of options issued under the stock option plans
are determined by the Company's board of directors or compensation committee as
F-14
set forth in the applicable option agreement, provided that the expiration date
shall not be later than ten years from the date of grant.
At June 29, 2003, the Company has reserved approximately 17,641,000 shares of
common stock for issuance under common stock option plans. The shares authorized
automatically increase on the first trading day in January of each calendar
year, by an amount equal to 3% of the total number of shares of common stock
outstanding on the last trading day in December in the preceding calendar year,
but in no event will this annual increase exceed 2,000,000 shares.
In January 1999, the Company issued stock options to employees to purchase
200,000 shares of common stock at $2.00 per share, which was considered to be
the fair value of the common stock at that time. Such options vested at the rate
of 25% per year on the anniversary of the grant date. Soon thereafter, the
Company entered into discussions with an investor to purchase shares of common
stock at $10.43 per share. Accordingly, for accounting purposes, the Company
used such per share value to record a deferred compensation charge of $1.7
million associated with the January 1999 option grants. During the year ended
July 1, 2001, the Company reversed $0.2 million of amortization, representing
previously amortized deferred compensation expense associated with unvested
stock options which were forfeited upon the employee's separation from the
Company.
The following table summarizes activity in stock options:
Years ended
--------------------------------------------------------------------------
June 29, 2003 June 30, 2002 July 1, 2001
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Shares Average Shares Average
Shares Exercise Under Exercise Under Exercise
Under Price Option Price Option Price
Option
------------ ---------- ------------ ---------- ------------- ------------
Balance, beginning of year 8,113,144 $8.95 6,455,262 $6.64 5,788,171 $8.53
Grants 3,036,705 $6.55 2,897,950 $12.43 2,143,925 $3.91
Exercises (228,666) $3.69 (788,008) $2.72 (97,175) $3.83
Forfeitures (919,838) $9.43 (452,060) $9.94 (1,379,659) $10.52
------------ ------------ -------------
Balance, end of year 10,001,345 $8.28 8,113,144 $8.95 6,455,262 $6.64
============ ============ =============
The following table summarizes information about stock options outstanding at
June 29, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- ------------------- -------------- ------------------ --------------- --------------- ---------------
$1.61 - 3.65 1,973,164 7.0 years $3.32 1,106,911 $3.07
$4.02 - 6.70 4,331,585 8.4 years $5.78 851,640 $4.55
$6.75 - 12.95 2,850,510 8.0 years $12.14 824,041 $12.19
$13.00 - 17.38 174,099 6.4 years $13.93 88,462 $13.94
$21.00 - 23.10 671,987 5.9 years $21.08 535,323 $21.07
-------------- ---------------
10,001,345 7.8 years $8.28 3,406,377 $8.76
============== ===============
Fair Value Disclosures
The exercise price of employee stock option grants is set at the closing price
of the Company's common stock on the date of grant and the related number of
shares granted is fixed at that point in time. Therefore, under the principles
of APB No. 25, the Company does not recognize compensation expense associated
with the grant of employee stock options. SFAS No. 123 requires the use of
option valuation models to provide supplemental information regarding options
granted after 1994. The fair value of these options was estimated at the date of
grant using the minimum value option pricing model prior to the Company's
initial public offering in August 1999, and the Black-Scholes option pricing
F-15
model thereafter, with the following assumptions: risk free interest rate of
3.95%, 4.50% and 5.35% in 2003, 2002 and 2001, respectively; no dividend yield;
70%, 66% and 60% volatility in 2003, 2002 and 2001 respectively, and a
weighted-average expected life of the options of 5 years at date of grant. These
assumptions resulted in weighted average fair values of $3.95, $7.32 and $2.21
per share for employee options granted in 2003, 2002 and 2001, respectively.
Note 10. Employee Stock Purchase Plan
In December 2000, the Company's board of director's approved the
1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a
non-compensatory employee stock purchase plan under Section 423 of the Internal
Revenue Code, to provide substantially all employees who have completed six
months of service, an opportunity to purchase shares of the Company's Class A
common stock. Employees may contribute a maximum of 15% of eligible
compensation, but in no event can an employee purchase more than 500 shares on
any purchase date. Offering periods have a duration of six months, and the
purchase price per share will be the lower of: (i) 85% of the fair market value
of a share of Class A common stock on the last trading day of the applicable
offering period, or (ii) 85% of the fair market value of a share of Class A
common stock on the last trading day before the commencement of the offering
period. At June 29, 2003, the Company has reserved approximately 2,491,000
shares of common stock for issuance under its ESPP. The share pool shall be
increased on the first trading day of each calendar year, by a number equal to
the lesser of (i) 1% of the total number of shares of common stock then
outstanding, or (ii) 750,000 shares of Class A common stock.
Note 11. Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all of its
eligible employees. All full-time employees who have attained the age of 21 are
eligible to participate upon completion of one year of service. Participants may
elect to make voluntary contributions to the 401(k) plan in amounts not
exceeding federal guidelines. On an annual basis the Company, as determined by
its board of directors, may make certain discretionary contributions. Employees
are vested in the Company's contributions based upon years of service. The
Company made contributions of $0.4 million, $0.3 million and $0.2 million, for
the years ended June 29, 2003, June 30 2002 and July 1, 2001, respectively.
Note 12. Commitments and Contingencies
Leases
The Company currently leases office, store facilities, and equipment under
various operating leases through fiscal 2019. As these leases expire, it can be
expected that in the normal course of business they will be renewed or replaced.
Most lease agreements contain renewal options and rent escalation clauses and
require the Company to pay real estate taxes, insurance, common area maintenance
and operating expenses applicable to the leased properties. The Company has also
entered into leases that are on a month-to-month basis.
The Company leases certain computer, telecommunication and related equipment
under capital leases, which are included in property and equipment with a
capitalized cost of approximately $18.4 million at June 29, 2003 and June 30,
2002, and accumulated amortization of $14.1 million and $12.4 million,
respectively. In addition, the Company subleases land and buildings (which are
leased from third parties) to certain of its franchisees. Certain of the leases,
other than land leases which have been classified as operating leases, are
classified as capital leases and have initial lease terms of approximately 20
years (including option periods in some cases).
The Company has a $5.0 million equipment lease line of credit with a bank.
Interest under this line, which is renewable annually, is determined on the date
of each commitment to borrow and is based on the bank's base rate on such date.
At June 29, 2003, the Company had financed $7.1 million of equipment purchases
through such lease line. The borrowings, which bear interest at rates ranging
F-16
from 5.39% to 6.36% annually, are payable in 60 monthly installments of
principal and interest commencing in February 2001. Borrowings under the line
are collateralized by the underlying equipment purchased and an equal amount of
pledged investments.
As of June 29, 2003, future minimum payments under non-cancelable capital lease
obligations, lease receipts due from franchisees (shown as Capitalized
Investment in Leases) and operating leases with initial terms of one year or
more consist of the following:
Obligations
Under Capitalized
Capital Investment Operating
Leases In Leases Leases
------------ ------------ ------------
(in thousands)
2004 $ 2,170 $ 166 $ 4,295
2005 1,933 100 4,037
2006 1,439 42 1,853
2007 368 12 1,313
2008 12 12 756
Thereafter 20 20 2,601
------------ ------------ ------------
Total minimum lease payments 5,942 352 $ 14,855
============
Less amounts representing interest (550) (76)
------------ ------------
Present value of net minimum lease payments $5,392 $276
============ ============
At June 29, 2003, the aggregate future sublease rental income under long-term
operating sub-leases for land and buildings and corresponding rental expense
under long-term operating leases were as follows:
Sublease Sublease
Income Expense
-------------- --------------
(in thousands)
2004 $ 2,783 $ 2,769
2005 2,208 2,199
2006 1,884 1,877
2007 1,393 1,387
2008 987 981
Thereafter 1,698 1,680
-------------- --------------
$ 10,953 $ 10,893
============== ==============
In addition to the above, the Company has agreed to provide rent guarantees for
leases entered into by certain franchisees with third party landlords. At June
29, 2003, the aggregate minimum rent payable by franchisees guaranteed by the
Company was approximately $0.4 million. Rent expense was approximately $9.0
million, $8.7 million and $8.4 million for the years ended June 29, 2003, June
30, 2002 and July 1, 2001 respectively.
Online Marketing Agreements
The Company has commitments under online marketing agreements with various
portal providers. Such online marketing costs are capitalized and amortized on a
straight-line basis over the term of the agreements. On September 1, 2000, the
Company entered into a five-year $22.1 million online marketing agreement with
an Internet company commencing October 1, 2001 and ending August 31, 2005. As a
result of the modification of the previous agreement, the Company recorded a
one-time charge of approximately $7.3 million during fiscal 2001.
F-17
Litigation
There are various claims, lawsuits, and pending actions against the Company and
its subsidiaries incident to the operations of its businesses. It is the opinion
of management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
1-800-FLOWERS.COM, INC.
Schedule II - Valuation and Qualifying Accounts
Additions
---------------------------------
Charged to
Description Balance at Costs Charged to Balance at
Beginning and Other Accounts- Deductions- End of
of Period Expenses Describe Describe Period
-------------- ------------- ------------------ ------------------ ---------------
Year ended June 29, 2003:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $1,016,000 $426,000 $ - $(165,000)(a) $1,277,000
Valuation allowance on deferred tax
assets 38,242,000 - (1,719,000)(b) - 36,523,000
-------------- ------------- ------------------ ------------------ ---------------
$ 39,258,000 $426,000 $(1,719,000) $(165,000) $37,800,000
============== ============= ================== ================== ===============
Year ended June 30, 2002:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $1,144,000 $107,000 $ - $(235,000)(a) $1,016,000
Valuation allowance on deferred tax
assets 37,447,000 - 1,501,000(b) (706,000) 38,242,000
-------------- ------------- ------------------ ------------------ ---------------
$ 38,591,000 $107,000 $1,501,000 $(941,000) $39,258,000
============== ============= ================== ================== ===============
Year ended July 1, 2001:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $ 926,000 $377,000 $ - $(159,000)(a) $ 1,144,000
Valuation allowance on deferred tax
assets 22,098,000 - 15,349,000(b) - 37,447,000
-------------- ------------- ------------------ ------------------ ---------------
$ 23,024,000 $377,000 $15,349,000 $(159,000) $38,591,000
============== ============= ================== ================== ===============
___________________________________
(a) Reduction in allowance due to write-off of accounts/notes receivable balances.
(b) Record a valuation allowance for deferred tax assets.
(c) Reduction in valuation allowance due to receipt of income tax refund resulting from tax law change which
extended allowable carry-back period.
S-1
F-18