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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
The number of shares outstanding of each of the Registrant's classes of common
stock:
29,289,768
----------
(Number of shares of Class A common stock outstanding as of May 5, 2004)
36,864,465
----------
(Number of shares of Class B common stock outstanding as of May 5, 2004)
1-800-FLOWERS.COM, Inc.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 28, 2004
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 28, 2004
(Unaudited) and June 29, 2003 1
Consolidated Statements of Income (Unaudited) - Three
and Nine Months Ended March 28, 2004 and March 30,
2003 2
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended March 28, 2004 and March 30, 2003 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
March 28, June 29,
2004 2003
------------- ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 70,447 $ 49,079
Short-term investments 6,395 12,139
Receivables, net 9,246 7,767
Inventories 23,131 20,370
Prepaid and other current assets 5,898 2,208
------------- ------------
Total current assets 115,117 91,563
Property, plant and equipment, net 41,351 46,500
Investments 10,591 19,471
Capitalized investment in leases 186 276
Goodwill 37,692 37,692
Other intangibles, net 2,734 3,211
Other assets 11,104 16,083
------------- ------------
Total assets $218,775 $214,796
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $55,907 $ 61,663
Current maturities of long-term debt and obligations under capital leases 2,792 3,025
------------- ------------
Total current liabilities 58,699 64,688
Long-term debt and obligations under capital leases 7,154 9,124
Other liabilities 3,770 3,696
------------- ------------
Total liabilities 69,623 77,508
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, 29,228,547
and 28,679,848 shares issued at March 28, 2004 and June 29, 2003, respectively 292 287
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,158,605
and 42,399,915 shares issued at March 28, 2004 and June 29, 2003, respectively 422 424
Additional paid-in capital 249,022 247,636
Retained deficit (97,476) (107,951)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 149,152 137,288
------------- ------------
Total liabilities and stockholders' equity $218,775 $214,796
============= ============
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
---------------- --------------- ---------------- ---------------
Net revenues $134,069 $124,121 $442,411 $410,775
Cost of revenues 79,429 73,095 253,072 232,977
---------------- --------------- ---------------- ---------------
Gross profit 54,640 51,026 189,339 177,798
Operating expenses:
Marketing and sales 37,693 35,710 133,301 129,641
Technology and development 3,576 3,323 10,510 10,316
General and administrative 7,872 7,343 23,228 22,212
Depreciation and amortization 3,572 3,594 11,332 11,691
---------------- ---------------- --------------- ----------------
Total operating expenses 52,713 49,970 178,371 173,860
---------------- ---------------- --------------- ----------------
Operating income 1,927 1,056 10,968 3,938
Other income (expense):
Interest income 269 245 684 880
Interest expense (182) (213) (601) (789)
Other (5) 95 (218) (53)
---------------- ---------------- --------------- ----------------
Total other income (expense), net 82 127 (135) 38
---------------- ---------------- --------------- ----------------
Income before income taxes 2,009 1,183 10,833 3,976
Income taxes (66) - (358) -
---------------- ---------------- --------------- ----------------
Net income $1,943 $1,183 $10,475 $3,976
================ ================ =============== ================
Net income per common share:
Basic $0.03 $0.02 $0.16 $0.06
================ ================ =============== ================
Diluted $0.03 $0.02 $0.15 $0.06
================ ================ =============== ================
Weighted average shares used in the calculation of
net income per common share:
Basic 66,016 65,583 65,891 65,528
================ ================ =============== ================
Diluted 68,984 67,117 68,876 67,581
================ ================ =============== ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
--------------------------------
March 28, March 30,
2004 2003
--------------- --------------
Operating activities:
Net income $10,475 $3,976
Reconciliation of net income to net cash provided by (used in)
operations:
Depreciation and amortization 11,332 11,691
Bad debt expense 401 452
Other non-cash items 170 65
Changes in operating items:
Receivables (1,880) (933)
Inventories (2,761) (8,770)
Prepaid and other (1,106) (683)
Accounts payable and accrued expenses (5,756) (2,702)
Other assets 2,207 (5,534)
Other liabilities 74 783
--------------- --------------
Net cash provided by (used in) operating activities 13,156 (1,655)
Investing activities:
Purchase of investments (34,072) (21,350)
Sale of investments 48,696 37,215
Capital expenditures, net of non-cash expenditures (5,866) (4,680)
Other 187 284
--------------- --------------
Net cash provided by investing activities 8,945 11,469
Financing activities:
Proceeds from employee stock options/stock purchase plan 1,389 571
Repayment of notes payable and bank borrowings (834) (721)
Payment of capital lease obligations (1,288) (1,703)
--------------- --------------
Net cash used in financing activities (733) (1,853)
--------------- --------------
Net change in cash and equivalents 21,368 7,961
Cash and equivalents:
Beginning of period 49,079 40,601
--------------- --------------
End of period $70,447 $48,562
=============== ==============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended March 28, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 27, 2004.
The balance sheet information at June 29, 2003 has been derived from the audited
financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 29, 2003.
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.
Employee Stock Incentive Plans
The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no stock-based compensation is reflected
in net income, as all options granted had an exercise price equal to 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 and net income 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."
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
--------------- --------------- -------------- --------------
(in thousands, except per share data)
Net income - As reported $1,943 $1,183 $10,475 $3,976
Less: Stock based compensation 1,759 2,045 5,598 5,896
--------------- --------------- -------------- --------------
Net income (loss) - Pro forma $ 184 ($862) $4,877 ($1,920)
=============== =============== ============== ==============
Net income (loss) per share:
Basic - As reported $0.03 $0.02 $0.16 $0.06
Basic - Pro forma $0.00 ($0.01) $0.07 ($0.03)
Diluted - As reported $0.03 $0.02 $0.15 $0.06
Diluted - Pro forma $0.00 ($0.01) $0.07 ($0.03)
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
Comprehensive Income
For the three months and nine months ended March 28, 2004 and March 30, 2003,
the Company's comprehensive income was equal to the respective net income for
each of the periods presented.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Other Intangibles
The Company's other intangible assets consist of the following:
March 28, 2004 June 29, 2003
---------------------------------------- ----------------------------------------
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 $3,034 $1,893 $4,927 $2,792 $2,135
Customer lists 3 years 910 581 329 910 354 556
Other 5 years 171 135 36 171 127 44
------------ --------------- ----------- ----------- ---------------- ------------
6,008 3,750 2,258 6,008 3,273 2,735
Trademarks with
indefinite lives - 480 4 476 480 4 476
------------ --------------- ----------- ----------- --------------- -------------
Total identifiable
intangible assets $6,488 $3,754 $2,734 $6,488 $3,277 $3,211
============ =============== =========== =========== =============================
Estimated amortization expense is as follows: remainder of fiscal 2004 - $0.2
million, fiscal 2005 - $0.6 million, fiscal 2006 - $0.3 million, fiscal 2007 -
$0.3 million, fiscal 2008 - $0.3 million, and thereafter - $0.6 million.
Note 3 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
March 28, June 29,
2004 2003
---------------- -----------
(in thousands)
Commercial notes and revolving credit lines $5,836 $6,612
Seller financed acquisition obligations 94 145
Obligations under capital leases 4,016 5,392
----------- -----------
9,946 12,149
Less current maturities of long-term debt and obligations under
capital leases 2,792 3,025
----------- -----------
$7,154 $9,124
=========== ===========
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 4 - Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income
per common share:
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
----------------- --------------- ---------------- ----------------
(in thousands, except per share data)
Numerator:
Net income $1,943 $1,183 $10,475 $3,976
================= =============== ================ ================
Denominator:
Weighted average shares outstanding 66,016 65,583 65,891 65,528
Effect of dilutive securities:
Employee stock options 2,968 1,534 2,985 2,053
----------------- --------------- ---------------- ----------------
Adjusted weighted-average shares and assumed
conversions 68,984 67,117 68,876 67,581
================= =============== ================ ================
Net income per common share:
Basic $0.03 $0.02 $0.16 $0.06
Diluted $0.03 $0.02 $0.15 $0.06
Note 5 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM, Inc. has been a leader in the floral
industry, taking the extra step to help people connect and express themselves
quickly and easily with exquisite floral gifts crafted with care by renowned
artisans and some of the nation's leading florists, as well as distinctive non-
floral gifts appropriate for any occasion or sentiment. The Company provides
gift solutions same day, any day, offering an unparalleled selection of flowers,
plants, gourmet foods and confections, gift baskets and other impressive unique
gifts. As always, satisfaction is guaranteed, and customer service is paramount
with quick, convenient ordering options, fast and reliable delivery, and gift
advisors always available. Customers can shop 1-800-FLOWERS.COM(R) 24-hours a
day, seven-days a week via the Internet (http://www.1800flowers.com); by
calling 1-800-FLOWERS(R)(1-800-356-9377); or by visiting a Company-operated
or franchised store. The 1-800-FLOWERS.COM(R) family of brands also includes
home decor and garden merchandise from Plow & Hearth(R) (1- 800-627-1712
or http://www.plowandhearth.com); premium popcorn and specialty treats from
The Popcorn Factory(R) (1-800-541-2676 or http://www.thepopcornfactory.com);
gourmet foods from GreatFood.com(R) (http://www.greatfood.com); and children's
gifts from HearthSong(R) (http://www.hearthsong.com) and Magic Cabin(R)
(http://www.magiccabin.com).
Results of Operations
Net Revenues
Three Months Ended Nine Months Ended
----------------------------------------------- ---------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
--------------- ---------------- -------------- --------------- --------------- -------------
(in thousands)
Net revenues:
Telephonic $50,851 $52,287 (2.7%) $204,596 $208,817 (2.0%)
Online 74,521 64,595 15.4% 214,335 181,145 18.3%
Retail/fulfillment 8,697 7,239 20.1% 23,480 20,813 12.8%
--------------- ---------------- --------------- ---------------
Total net revenues $134,069 $124,121 8.0% $442,411 $410,775 7.7%
=============== ================ =============== ===============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined telephonic and online revenue growth of 7.3% and 7.4%, respectively,
during the three and nine months ended March 28, 2004, was due to an increase in
order volume resulting from the Company's effective marketing efforts, continued
leverage of its existing customer base and strong brand name recognition.
The Company fulfilled approximately 2,052,000 and 6,853,000 orders through its
combined telephonic and online sales channels during the three and nine months
ended March 28, 2004, an increase of 9.7% and 8.1% over the prior year periods.
This growth was driven by the Company's online sales channel, which experienced
a 16.3% and 17.6% increase in order volume during the three and nine months
ended March 28, 2004, respectively, driven by improved conversion of qualified
traffic through the Company's websites and third party portals, search engines
and affiliates, and the continued migration of customers from the Company's
telephonic sales channel. During the three months ended March 28, 2004,
7
telephonic order volume was consistent with the same period of the prior year,
while order volume during the nine months ended March 28, 2004 decreased 1.3% in
comparison to the prior year period. The Company's combined telephonic and
online average order value of $61.11 and $61.14 during the three and nine months
ended March 28, 2004, decreased 2.2% and 0.6% in comparison to the respective
periods of the prior year.
The online sales channel contributed 59.4% and 51.2% of total combined
telephonic and online revenues during the three and nine months ended March 28,
2004, respectively, compared to 55.3% and 46.5% during the same periods of the
prior year. The Company intends to continue to drive revenue growth through its
online sales channel, and continue the migration of its customers from the
telephone to the Web for several important reasons: (i) online orders are less
expensive to process than telephonic orders, (ii) online customers can view the
Company's full array of gift offerings including non-floral gifts, which yield
higher gross margin opportunities, (iii) online customers can utilize all of the
Company's services, such as the various gift search functions, order status
check and reminder service, thereby deepening the relationship with its
customers and leading to increased order rates, and (iv) when customers visit
the Company online, it provides an opportunity to interact with them in an
electronic dialog via cost efficient marketing programs.
In order to improve overall demand, in response to forecasted economic
conditions and analysis of consumer buying patterns, during the three and nine
months ended March 28, 2004, the Company reallocated its marketing spending,
reducing the circulation of certain non-floral product catalogs and redirecting
those funds to various online and media programs featuring floral gifts. As a
result, during the three and nine months ended March 28, 2004, non-floral gift
products accounted for 35.3% and 50.4% of total combined telephonic and online
net revenues, respectively, in comparison to 38.1% and 52.5% during the same
periods of the prior year. In the future, while the Company may choose to
emphasize different products and categories to better match changes in consumer
preferences and economic conditions, the Company expects that on an annual
basis, an increasingly higher portion of revenue will continue to be derived
from the sale of non-floral products.
Retail/fulfillment revenues for the three and nine months ended March 28, 2004
increased in comparison to the same periods of the prior year, primarily as a
result of continued enhancements in our BloomNet(TM) distribution network.
Gross Profit
Three Months Ended Nine Months Ended
--------------------------------------------- ----------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
-------------- --------------- ------------- --------------- --------------- -------------
(in thousands)
Gross profit $54,640 $51,026 7.1% $189,339 $177,798 6.5%
Gross margin % 40.8% 41.1% 42.8% 43.3%
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 three and nine months ended March
28, 2004, in comparison to the same periods of the prior year, primarily as a
result of increased order volume on the Company's online sales channel. Gross
margin percentage during the three and nine months ended March 28, 2004
decreased in comparison to the prior year, primarily as a result of the
aforementioned shift in product mix towards floral products which yield a lower
gross margin, but require lower marketing support, thereby contributing to the
Company's overall improvement in operating margins in comparison to the prior
year. Gross margin percentage was also impacted by a slight increase in
promotional offers, as the Company used targeted discount programs to incent
certain customer behavior, such as new product introductory pricing, and early
delivery offers, which improve fulfillment logistics. The reduction in margin
percentage resulting from the above was offset by: i) improvements in inventory
management and product sourcing, ii) the November 2002 increase in the Company's
service charge, aligning it with industry norms, and iii) the Company's
continued focus on customer service, whereby stricter quality control
standards and enforcement methods reduced the rate of product credits/returns
and replacements.
As a result of these factors, the Company expects that its gross margin
percentage for its fiscal year ending June 27, 2004 will be consistent with the
prior year. However, over the longer term, the Company expects to continue to
8
grow its higher margin, non-floral business, and while varying by quarter due to
seasonal changes in product mix, expects that its gross margin percentage will
continue to increase on an annual basis.
Marketing and Sales Expense
Three Months Ended Nine Months Ended
---------------------------------------------- ----------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
--------------- --------------- ------------- -------------- --------------- --------------
(in thousands)
Marketing and sales $37,693 $35,710 5.6% $133,301 $129,641 2.8%
Percentage of net revenues 28.1% 28.8% 30.1% 31.6%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expenses decreased as a percentage of net
revenues during the three and nine months ended March 28, 2004, compared to the
same periods of the prior year as a result of: (i) volume related operating
efficiencies, (ii) a reduction in order processing costs, and (iii) a net
reduction in advertising cost per order, resulting from the aforementioned shift
in the mix of products being promoted by the Company, which enabled it to
proportionately reduce the circulation of higher cost per order catalogs in
favor of lower cost media and online advertising. As a result of the Company's
cost-efficient customer retention programs, of the 1,628,000 and 4,491,000
customers who placed orders during the three and nine months ended March 28,
2004, respectively, approximately 56.6% and 47.7% represented repeat customers,
compared to 55.0% and 46.2%, in the prior year periods. In addition, as a result
of the strength of the Company's brands, combined with its cost-efficient
marketing programs, the Company added approximately 707,000 and 2,351,000 new
customers during the three and nine months ended March 28, 2004, respectively.
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 the
impact of changing economic conditions and consumer preferences, 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
continue to decline as a percentage of net revenues.
Technology and Development Expense
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 28, March 30, 2003 March 28, March 30, 2003
2004 % Change 2004 % Change
-------------- --------------- -------------- -------------- --------------- -------------
(in thousands)
Technology and development $3,576 $3,323 7.6% $10,510 $10,316 1.9%
Percentage of net revenues 2.7% 2.7% 2.4% 2.5%
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. During the three and nine months ended March
28, 2004, technology and development expense increased in comparison to the same
periods of the prior year due to increased costs associated with software
licensing and computer maintenance agreements required to support the Company's
technology infrastructure, and added customer functionality on its websites.
These increases were largely offset by the Company's ability to internalize its
development functions, thereby cost effectively enhancing the content and
functionality of the Company's Web sites and improving the performance of the
fulfillment and database systems, while adding improved operational flexibility
and supplemental back-up and system redundancy. During the three and nine months
ended March 28, 2004, the Company expended $5.0 million and $14.9 million on
technology and development, of which $1.4 million and $4.4 million has been
capitalized.
9
Although the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending in comparison to prior fiscal periods will continue to
decrease as a percentage of net revenues due to the expected benefits from
previous investments in the Company's current technology platform.
General and Administrative Expense
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
---------------- -------------- ------------ -------------- --------------- ------------
(in thousands)
General and administrative $7,872 $7,343 7.2% $23,228 $22,212 4.6%
Percentage of net revenues 5.9% 5.9% 5.3% 5.4%
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. Although remaining consistent as a percentage
of net revenues, general and administrative expense during the three and nine
months ended March 28, 2004 increased in comparison to the same period of the
prior year, primarily as a result of higher health and business insurance costs
and payroll increases.
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 continue to decline as a percentage of net revenues.
Depreciation and Amortization Expense
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
---------------- -------------- ------------ -------------- --------------- ------------
(in thousands)
Depreciation and amortization $3,572 $3,594 (0.6%) $11,332 $11,691 (3.1%)
Percentage of net revenues 2.7% 2.9% 2.6% 2.8%
The decrease in depreciation and amortization expense during the three and nine
months ended March 28, 2004, in comparison to the same periods of the prior
year, reflects 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, are now fully depreciated.
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
fiscal periods.
Other Income (Expense)
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 28, March 30, March 28, March 30,
2004 2003 % Change 2004 2003 % Change
---------------- -------------- ------------ -------------- --------------- ------------
(in thousands)
Interest income $269 $245 9.8% $684 $880 (22.3%)
Interest expense (182) (213) 14.6% (601) (789) 23.8%
Other (5) 95 (105.3%) (218) (53) (311.3%)
---------------- -------------- -------------- ---------------
$82 $127 (35.4%) ($135) $38 (455.3%)
================ ============== ============== ===============
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.
10
The decrease in other income (expense) during the three months ended March 28,
2004 was primarily attributable to a gain recognized in the prior year upon the
sale of a retail store, offset by increased interest income due to higher
average cash balances and a reduction in interest expense associated with the
refinancing of a series of fixed and variable rate mortgage and equipment notes
in June 2003. The decrease in other income (expense) during the nine months
ended March 28, 2004 was primarily due to a decline in the average rate of
return on investments, a loss incurred upon the conversion/relocation of a
retail store into a local fulfillment center in the current year, and the
aforementioned gain recognized in the prior year upon the sale of a retail
store, offset in part by a reduction in interest expense associated with the
aforementioned long-term debt refinancing.
Income Taxes
During the three and nine months ended March 28, 2004 the Company recorded a
$0.1 million and $0.4 million income tax provision, respectively, for federal
alternative minimum tax (AMT) and various state taxes resulting from state tax
law changes that deferred the use of available net operating losses. The Company
has provided a full valuation allowance on that portion of its deferred tax
assets, consisting primarily of net operating loss carryforwards.
Liquidity and Capital Resources
At March 28, 2004, the Company had working capital of $56.4 million, including
cash and equivalents and short-term investments of $76.8 million, compared to
working capital of $26.9 million, including cash and equivalents and short-term
investments of $61.2 million, at June 29, 2003. In addition to its cash and
short-term investments, at March 28, 2004 and June 29, 2003, the Company
maintained approximately $10.6 million and $19.5 million, respectively, of
long-term investments, consisting primarily of investment grade corporate and
U.S. government securities.
Net cash provided by operating activities of $13.2 million for the nine months
ended March 28, 2004 was primarily attributable to net income and non-cash
charges of depreciation and amortization, offset in part by seasonal changes in
working capital consisting of reductions in accounts payable and accrued
expenses and increases in accounts receivable and inventories in preparation for
the spring selling season.
Net cash provided by investing activities of $8.9 million for the nine months
ended March 28, 2004 was principally comprised of net sales of investments,
reduced by capital expenditures primarily related to the Company's technology
infrastructure.
Net cash used in financing activities was $0.7 million for the nine months ended
March 28, 2004, 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 from the exercise of employee stock
option and employee stock purchase plan.
At March 28, 2004, the Company's contractual obligations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
----------- --------------- ------------ ------------- ----------------
Long-term debt $5,930 $1,125 $4,407 $398
Capital lease obligations 4,016 1,667 2,326 23
Operating lease obligations 11,634 4,102 4,742 933 $1,857
Sublease obligations 8,865 2,351 4,569 1,396 549
Other cash obligations (*) 262 262 - - -
Purchase commitments 14,794 14,794 - - -
----------- --------------- ------------ ------------- ----------------
Total $45,501 $24,301 $16,044 $2,750 $2,406
=========== =============== ============ ============= ================
(*) Other cash obligations include $0.3 million of franchise lease guarantees.
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 May 5, 2004, 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 funded utilizing available cash.
11
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements 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, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue
recognition, inventory and long-lived assets, including goodwill and other
intangible assets related to acquisitions. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affects the Company's more significant judgments and estimates
used in preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses are
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 provided principally to offset certain deferred income
tax assets for operating loss carryforwards.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
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 Rules 13a-15(e) and 15d-15(e) 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 March 28,
2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
13
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On January 12, 2004, the Company filed a report on Form 8-K,
attaching its press release dated January 6, 2004, disclosing
anticipated results for its fiscal 2004 second quarter ended
December 28, 2003.
On February 5, 2004, the Company filed a report on Form 8-K,
attaching its press release dated January 20, 2004, disclosing
financial results for its fiscal 2004 second quarter ended
December 28, 2003.
On March 3, 2004, the Company filed a report on Form 8-K,
attaching its press release dated February 19, 2004, disclosing
results of its fiscal 2004 Valentine's Day holiday.
On May 3, 2004, the Company filed a report on Form 8-K, attaching
its press release dated April 22, 2004, disclosing financial
results for its fiscal 2004 third quarter ended March 28, 2004.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
--------------------------
(Registrant)
Date: May 11, 2004 /s/ James F. McCann
- ---------------------- --------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 11, 2004 /s/ William E.Shea
- ---------------------- --------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
15