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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
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 2004
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
- -------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(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
December 26, 2003 as reported on the Nasdaq National Market, was approximately
$298,872,000. 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.
29,403,363
(Number of shares of class A common stock outstanding as of September 7, 2004)
36,864,465
(Number of shares of class B common stock outstanding as of September 7, 2004)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2004
Annual Meeting of Stockholders (the Definitive Proxy Statement), to be
filed with the SEC within 120 days of June 27, 2004, are incorporated by
reference into Part III of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended June 27, 2004
INDEX
PART I
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 24
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
Item 9A. Controls and Procedures 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 40
Item 14. Principal Accounting Fees and Services 40
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Signatures 43
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, Inc. has been a leading innovator 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 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 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 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). 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
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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 including independent local
florists selected for their high-quality products, superior customer service and
order fulfillment and delivery capabilities.
In the early 1990s, the Company recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
medium. By taking advantage of investments in its infrastructure, the Company
was able to quickly develop and implement an online presence. As a result, the
Company was one of the first companies to market products online through
CompuServe beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In
April 1995, the Company opened its fully functional, e-commerce Web site
(www.1800flowers.com) and subsequently entered into strategic relationships with
AOL, Yahoo! and Microsoft, among others, to build its online brand and customer
base.
The Company's online presence has enabled it to expand the number and types of
products it can effectively offer. As a result, the Company has developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption. Since 1995, the Company has
broadened its product offerings of flowers, gourmet foods and gifts and added
complementary home and garden merchandise through its April 1998 acquisition of
Plow & Hearth, as well as unique and educational children's toys and games when
it acquired the HearthSong and Magic Cabin product lines in June 2001. In order
to further expand its gourmet food line, the Company acquired GreatFood.com in
November 1999, and 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's 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 continue to attract 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 web (www.1800flowers.com) from their home or office
24 hours a day, seven days a week, or via the Company's toll-free
telephone numbers for those customers who prefer a personal gift
advisor to assist them. 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
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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, a secure internet-based system
through which orders and related information are transmitted.
o Selection. Over the course of a year, the Company offers over 2,700
varieties of fresh-cut flowers, floral arrangements and plants, over
3,200 SKUs of gifts and gourmet foods, approximately 9,400 different
products for the home and garden, including garden accessories and
casual lifestyle furnishings, and over 6,300 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 its 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),
Swarovski(R), Godiva(R), Hershey's(R), Gund(R), Crabtree and Evelyn(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
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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 27, 2004, the Company's total database of
customers numbered approximately 23.9 million (12.0 million of which have
transacted business with the Company within the past 36 months), 9.7 million of
which have transacted business with the Company online (6.7 million of which
have transacted business with the Company online within the past 36 months).
In addition, the Company believes it has significant opportunity to expand its
corporate customer base and intends to leverage existing and/or develop
successful gifting programs with corporate customers, many of which are included
in the Fortune 1000, such as AT&T, Bank of America, General Electric, IBM, JP
Morgan Chase, and Verizon, to name a few. These programs focus on developing
and/or strengthening strategic partnerships with Fortune 1000 organizations to
develop customized and personalized gifts for their clients and employees.
Increase the Number of Online Customers. Online transactions are more cost
efficient to process. Although the Company expects its customers to choose the
most convenient channel available to them at the time of their purchase, the
Company expects its trend of online growth to continue. In fact, to further
increase the number of customer orders placed through its Web site, the Company
intends to continue to:
o actively promote its Web site through internet 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 gift advisor, 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 gift advisors
have electronic access to this system, enabling them to assist in order
fulfillment and subsequently track other customer and/or order information.
In prior years, the Company invested heavily in building a scalable technology
platform to support the Company's order volume growth, including in-sourcing of
its Web-hosting and disaster recovery systems. In addition to cost savings,
in-sourcing has 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.
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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 positioned 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. 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.
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, Ohio distribution center.
To ensure reliable and efficient communication of online and telephonic orders
to its BloomNet(R) members and third party gift vendors, the Company
internally-developed BloomLink(R), a proprietary and secure internet-based
communications system. All BloomNet(R) members and third-party gift vendors have
adopted BloomLink(R). 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, baked goods 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 27, 2004, June 29, 2003, and June 30, 2002, the sale of floral products
represented 52.2%, 50.5%, and 54.2% of total combined telephonic and online net
revenues, respectively.
Over the course of a year, the Company's product selection consists of:
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Flowers. The Company offers more than 2,000 varieties of fresh-cut flowers and
floral arrangements for all occasions and holidays, available for same-day
delivery. The Company provides its customers with a choice of florist designed
products, flowers delivered from the farm through its "Fresh From Our Growers"
program, and most recently, the Company launched its "celebrity" gift
collections, including the unique floral creations of Jane Carroll, and designs
to make every day a celebration from the Company's entertaining expert Donata
Maggipinto.
Plants. The Company also offers approximately 700 varieties of popular plants to
brighten the home and/or office, and accent gardens and landscapes.
Gourmet Food. The Company offers more than 800 premium popcorn and specialty
snack products from The Popcorn Factory brand, as well as approximately 700
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 introduction of its own brand of
bakeshop gifts, "Mama Moore's" is becoming one of the Company's best selling
food gift lines, and 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
7,500 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 6,300 products, including environmentally friendly toys, plush
stuffed animals, crafts and books with educational, nature and art themes, as
well as, natural-fiber soft dolls, kits and accessories for children ages 3
through 12.
Greetings. Through its relationships with American Greetings Corporation and
Cardstore.com, the Company provides its customers the ability to send
personalized electronic and printed greeting cards with hundreds of fun and
creative ways to express emotions, offer congratulations, or just keep in touch.
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 thousands of its online affiliate
program members. 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 27, 2004, approximately 9.6 million customers had made a
purchase through the Company's online sales channel. Approximately 70% of online
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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 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, express checkout services 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 Gift Advisors. 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
advisors 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
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
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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 most recent example of this was
this year's introduction of the Company's "Mama Moore's" brand of baked goods.
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
cross-promotes 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 27, 2004, the
Company mailed in excess of 100 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 internet portals, search engines
and online networks. The Company's relationships include, among others, AOL,
Yahoo!, Microsoft, Google and Overture.
The Company's Online Affiliate Program. In addition to securing alliances with
frequently visited Web sites, the Company developed an affiliate network that
includes thousands of 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 Ebates.com,
Looksmart.com and Shopathomeselect.com.
E-mails. The Company is able to capitalize on its customer database of
approximately 23.9 million customers (12.0 million of which have transacted
business with the Company within the past 36 months), 9.7 million of which have
transacted business with the Company on-line (6.7 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,
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
8
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, and 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 27, 2004, the Company had entered into approximately 60 Order Fulfillment
Agreements with selected BloomNet(R) members to operate LFC's, providing
coverage of all significant population centers across the United States.
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.
Additionally, the Company offers its customers an alternative to florist
designed products through its "Fresh From Our Growers" program. In this program,
the Company ships overnight via common carrier to its customers from growers and
through its fulfillment centers.
As of June 27, 2004, the Company operates 19 floral retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 8 fulfillment
centers. In addition, the Company has 73 franchised stores, located primarily in
California and Texas. 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.
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
9
option selected by the customer. In fiscal 2004, 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(R), 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'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(R) 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.
Seasonality
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.
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;
10
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 various providers of
floral products, none of which is dominant in the industry. The Company's
competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, unique gifts, children's toys
and home and garden categories are highly competitive. Each of these categories
encompasses a wide range of products, is highly fragmented and is served by a
large number of companies, none of which is dominant. Products in these
categories may be purchased from a number of outlets, including mass merchants,
telemarketers, retail specialty shops, online retailers and mail-order catalogs.
The Company believes the strength of its brands, product selection, customer
relationships, technology infrastructure and fulfillment capabilities position
it to compete effectively against its current and potential competitors in each
of its product categories. However, increased competition could result in:
o price reductions, decreased revenues and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors may adversely impact the Company's business
and results of operations.
Government Regulation and Legal Uncertainties
The Internet is rapidly evolving and there are laws and regulations directly
applicable to e-commerce. Legislatures are also considering an increasing number
of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
o user privacy;
o pricing;
o content;
o connectivity;
o intellectual property;
o distribution;
o taxation;
o liabilities;
o antitrust; and
o characteristics and quality of products and services.
Further, the growth and development of the market for online services may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of any additional laws
or regulations may impair the growth of the Internet or commercial online
services. This could decrease the demand for the Company's services and increase
11
its cost of doing business. Moreover, the applicability to the Internet of
existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on the
Company's business, financial condition and results of operations.
States or foreign countries might attempt to regulate the Company's business or
levy additional sales or other taxes relating to its activities. Because the
Company's products and services are available over the Internet anywhere in the
world, multiple jurisdictions may claim that the Company is required to do
business as a foreign corporation in one or more of those jurisdictions. Failure
to qualify as a foreign corporation in a jurisdiction where the Company is
required to do so could subject it to taxes and penalties. States or foreign
governments may charge the Company with violations of local laws.
Intellectual Property and Proprietary Rights
The Company regards its service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to its success. The Company has
applied for or received trademark and/or service mark registration for, among
others,"1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com",
"The Popcorn Factory", "TheGift.com", "HearthSong" and "Magic Cabin". 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
12
divert management resources away from running the Company's business.
Employees
As of June 27, 2004, the Company had a total of approximately 2,500 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service, manufacturing and retail and fulfillment
personnel. The Company's personnel are not represented under collective
bargaining agreements and the Company considers its relations with its employees
to be good.
Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only risks and
uncertainties the Company faces. Additional risks and uncertainties not
presently known to the Company or that are currently deemed immaterial may also
impair its business operations. If any of the following risks actually occur,
the Company's business, financial condition or results of operations may suffer.
The Company has incurred losses in recent years, and 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.
13
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 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 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 products. If the Company's customers do not
continue to find its product lines appealing, the Company may not generate
sufficient revenue to offset its related costs and its results of operations may
be negatively impacted.
If the Company fails to develop and maintain its brands, it may not increase or
maintain its customer base or its revenues. The Company must continue to develop
and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its
revenues. In addition, the Company has introduced and acquired other brands in
the past, and may continue to do so in the future. The Company believes that the
importance of brand recognition will increase as it expands its product
offerings. Many of the Company's customers may not be aware of the Company's
non-floral products. If the Company fails to advertise and market its products
effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
will also depend on its success in providing its customers high-quality products
and a high level of customer service. If the Company's customers do not perceive
its products and services to be of high quality, the value of the
1-800-FLOWERS.COM brands would be diminished and the Company may lose customers
and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate
a significant amount of traffic could limit the growth of the Company's
business. Although the Company expects a significant portion of its online
customers will continue to come to its Web site directly, it will also rely on
third party Web sites with which the Company has strategic relationships,
including AOL Time Warner, Yahoo!, 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 remain flat. 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, 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
14
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
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:
15
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
If the Company does not accurately predict customer demand for its products, it
may lose customers or experience increased costs. In the past, the Company did
not need to maintain a significant inventory of products. However, as the
Company expands the volume of non-floral products offered to its customers, the
Company will be required to increase inventory levels and the number of products
maintained in its warehouses. If the Company overestimates customer demand for
its products, excess inventory and outdated merchandise could accumulate, tying
up working capital and potentially resulting in reduced warehouse capacity and
inventory losses due to damage, theft and obsolescence. If the Company
underestimates customer demand, it may disappoint customers who may turn to its
competitors. Moreover, the strength of the 1-800-FLOWERS.COM brands could be
diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
rise or flowers may be unavailable and the Company's revenues and gross margins
could decline. A variety of factors affect the supply of flowers in the United
States and the price of the Company's floral products. If the supply of flowers
available for sale is limited due to weather conditions or other factors, prices
for flowers could rise and customer demand for the Company's floral products may
be reduced, causing revenues and gross margins to decline. Alternatively, the
Company may not be able to obtain high quality flowers in an amount sufficient
to meet customer demand. Even if available, flowers from alternative sources may
be of lesser quality and/or may be more expensive than those currently offered
by the Company.
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation against foreign
trade practices.
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
16
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
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).
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.
17
If AT&T and MCI do not adequately maintain the Company's telephone service, the
Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and MCI to provide telephone services to its
customer service centers. Although the Company maintains redundant
telecommunications systems, if AT&T and MCI experience system failures or fail
to adequately maintain the Company's systems, the Company may experience
interruptions and its customers might not continue to utilize its services. If
the Company loses its telephone service, it will be unable to generate revenue.
The Company's future success depends upon these third-party relationships
because it does not have the resources to maintain its telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms may disrupt the Company's operations or
require it to incur significant unanticipated costs.
Interruptions in FTD's Mercury system or 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. These systems have 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 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. 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 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
18
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by the Company. These regulations
may also include enforcement and redress provisions. Moreover, even in the
absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of other companies that collect
information on the Internet. One investigation resulted in a consent decree
under which an Internet company agreed to establish programs to implement the
principles noted above. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts, or those of other governmental bodies, may adversely affect its ability
to collect demographic and personal information from users, which could
adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may
damage its brands. Unauthorized use of the Company's intellectual property by
third parties may damage its brands and its reputation and may likely result in
a loss of customers. It may be possible for third parties to obtain and use the
Company's intellectual property without authorization. Third parties have in the
past infringed or misappropriated the Company's intellectual property or similar
proprietary rights. The Company believes infringements and misappropriations
will continue to occur in the future. Furthermore, the validity, enforceability
and scope of protection of intellectual property in Internet-related industries
is uncertain and still evolving. The Company may be unable to register its
intellectual property in some foreign countries and, furthermore, the laws of
some foreign countries are uncertain or do not protect intellectual property
rights to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be expensive
and, if the Company is not successful, could disrupt its ability to conduct
business. The Company cannot be certain that the products it sells, or services
it offers, do not or will not infringe valid patents, trademarks, copyrights or
other intellectual property rights held by third parties. The Company may be a
party to legal proceedings and claims relating to the intellectual property of
others from time to time in the ordinary course of its business. The Company may
incur substantial expense in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against the
Company may result in substantial monetary liability or may materially disrupt
its ability to conduct business.
The Company may lose sales or incur significant expenses should states be
successful in imposing broader guidelines to state sales and use tax. 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. 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.
19
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
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.
Additional Information
The Company's internet address is www.1800flowers.com. We make available,
through the investor relations tab on our 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.
20
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 customer
warehouse 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 267,000
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 7, 2004:
Name Age Position with the Company
- ------------------------------ ----- ------------------------------------------
James F. McCann............ 53 Chairman of the Board and Chief Executive
Officer
Christopher G. McCann...... 43 Director and President
T. Guy Minetti............. 53 Director and Vice Chairman
Peter G. Rice.............. 59 President of The Plow & Hearth, Inc.
William E. Shea............ 45 Senior Vice President of Finance and
Administration,Treasurer, Chief Financial
Officer
Gerard M. Gallagher........ 51 Senior Vice President, General Counsel,
Corporate Secretary
Thomas G. Hartnett......... 41 Senior Vice President of Retail and
Fulfillment
Vincent J. McVeigh......... 44 Senior Vice President
21
Enzo J. Micali............. 44 Senior Vice President, Chief Technology
Officer
Monica Woo................. 48 Senior Vice President, Chief Marketing
Officer
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 began a retail chain of flower shops in the New York
metropolitan area. Mr. McCann is a member of the board of directors of Gtech
Corporation, Willis Holdings Group and Boyd's Collection, 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 had served as 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 Misonix, Inc., a medical device and industrial product company.
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
22
since joining the Company in 1991, including Bloomnet Manager, Director of Call
Center Operations and as Vice President of Merchandising.
Enzo J. Micali has been our 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.
Monica L.Woo has been our Senior Vice President, Chief Marketing Officer, since
January 2004. Prior to joining the Company, Ms. Woo had founded a successful
consulting practice focusing on growth strategies for such multi-national
clients as Deutsche Bank, Northwest Airlines and Campbell's Soup. Prior to that,
Ms. Woo was the President of Bacardi Global Brands, Inc., of Bacardi Limited.
Before holding this position, Ms. Woo had assumed a number of senior executive
positions in the financial services and consumer packaged goods sectors,
including the Global Marketing Director of Citibank On-line and the Citibank
Private Bank, and the Sr. Vice President, European Marketing Director of Diageo
PLC.
23
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 27, 2004 and
June 29, 2003.
High Low
-------------- --------------
Year ended June 27, 2004
June 30, 2003 - September 28, 2003 $10.14 $ 7.55
September 29, 2003 - December 28, 2003 $12.14 $ 7.48
December 29, 2003 - March 28, 2004 $12.10 $ 8.90
March 29, 2004 - June 27, 2004 $11.15 $ 9.08
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
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 7, 2004, there were approximately 260 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 7, 2004,
there were approximately 14 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
24
chose, at some future date, to use some portion of its cash for the purpose of
cash dividends.
Resales of Securities
40,613,080 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 7, 2004, 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.
Purchases of Equity Securities by the Issuer
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 were made
during the fiscal year ended June 27, 2004.
25
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended June 27,
2004, June 29, 2003 and June 30, 2002, and the consolidated balance sheet data
as of June 27, 2004 and June 29, 2003, 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 income data for the
years ended July 1, 2001 and July 2, 2000, and the selected consolidated balance
sheet data as of June 30, 2002, July 1, 2001 and July 2, 2000, 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 income
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 27, June 29, June 30, July 1, July 2,
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net revenues:
Telephonic $ 263,039 $ 271,071 $ 248,931 $ 230,723 $ 227,380
Online 307,470 265,278 218,179 182,924 116,810
Retail/fulfillment 33,469 29,269 30,095 28,592 35,338
------------- ------------- ------------- ------------- -------------
Total net revenues 603,978 565,618 497,205 442,239 379,528
Cost of revenues 351,111 324,565 293,269 267,779 237,493
------------- ------------- ------------- ------------- -------------
Gross profit 252,867 241,053 203,936 174,460 142,035
Operating expenses:
Marketing and sales 172,251 170,013 150,638 154,321 155,353
Technology and development 13,799 13,937 13,723 16,853 16,809
General and administrative 30,415 29,593 28,179 27,043 28,975
Depreciation and amortization 14,992 15,389 15,061 21,716 16,479
------------- ------------- ------------- ------------- -------------
Total operating expenses 231,457 228,932 207,601 219,933 217,616
------------- ------------- ------------- ------------- -------------
Operating income (loss) 21,410 12,121 (3,665) (45,473) (75,581)
Other income, net 320 117 1,448 4,152 7,422
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and minority
interests 21,730 12,238 (2,217) (41,321) (68,159)
Income tax benefit 19,174 - 706 - 1,286
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interests 40,904 12,238 (1,511) (41,321) (66,873)
Minority interests - - - - 43
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 40,904 $ 12,238 $ (1,511) $(41,321) $(66,830)
============= ============= ============= ============= =============
Net income (loss) per common share:
Basic $.62 $0.19 $(0.02) $ (0.64) $(1.10)
============= ============= ============= ============= =============
Diluted $.60 $0.18 $(0.02) $ (0.64) $(1.10)
============= ============= ============= ============= =============
Shares used in the calculation of net income
(loss)per common share:
Basic 65,959 65,566 64,703 64,197 60,889
============= ============= ============= ============= =============
Diluted 68,165 67,670 64,703 64,197 60,889
============= ============= ============= ============= =============
26
As of
------------- ------------- ------------- ------------- -------------
June 27, 2004 June 29, 2003 June 30, 2002 July 1, 2001 July 2, 2000
------------- ------------- ------------- ------------- -------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short-term investments $ 103,374 $ 61,218 $ 63,399 $63,896 $111,624
Working capital 83,704 26,875 23,301 27,409 82,129
Investments-non current 8,260 19,471 9,591 16,284 1,918
Total assets 261,552 214,796 207,157 195,257 224,641
Long-term liabilities 8,874 12,820 15,939 16,029 12,947
Total stockholders' equity 186,390 137,288 123,908 117,816 158,918
27
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, Inc. (NASDAQ: FLWS) has been the
leading innovator 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 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 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 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).
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(R), 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
28
Forest, Illinois manufacturing facility.
As of June 27, 2004, the Company-owned retail fulfillment operations consisted
of 22 retail stores and 8 fulfillment centers. Retail fulfillment revenues also
includes fees paid to the Company by, and the sale of wholesale products by the
Company to, members of its BloomNet(R) network as well as royalties, fees and
sublease rent paid to the Company by its 73 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 2004, 2003 and 2002 which ended on June 27,
2004, June 29, 2003 and June 30, 2002, respectively, consisted of 52 weeks.
Net Revenues
Years Ended
----------------------------------------------------------------------
June 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
Telephonic $263,039 (3.0%) $271,071 8.9% $248,931
Online 307,470 15.9% 265,278 21.6% 218,179
Retail/fulfillment 33,469 14.3% 29,269 (2.7%) 30,095
------ ------ ------
$603,978 6.8% $565,618 13.8% $497,205
======== ======== ========
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 6.4% and 14.8% during the
fiscal years ended June 27, 2004 and June 29, 2003, respectively, was due to an
increase in order volume resulting from: (i) the Company's strong brand name
recognition, (ii) continued leveraging of its existing customer base, and (iii)
the success of our marketing and merchandising efforts to enhance revenue growth
in our floral gift category and in complimentary categories, including gourmet
food gifts, such as the Popcorn Factory line of products acquired in May 2002,
gift baskets, candy and children's gifts. This growth was offset, in part by,
slower sales in the home and garden gift product line as a result of internal
marketing and merchandising issues, as well as increasingly competitive market
conditions. The Company has completed a review of this product line and has
begun to implement a marketing plan to enhance product offerings, and the
creative look and feel of its catalogs and website.
The Company fulfilled approximately 9,322,000, 8,681,000 and 7,172,000 orders
through its combined telephonic and online sales channels during the fiscal
years ended June 27, 2004, June 29, 2003, and June 30, 2002, respectively,
representing increases of 7.4% and 21.0% over the respective prior fiscal years.
The growth resulted primarily from increases in online order volume, which
increased 15.6% and 24.1%, during the years ended June 27, 2004 and June 29,
2003, respectively, in comparison to prior years, driven by improved conversion
of qualified traffic through the Company's Web sites, and through third-party
portals, search engines and affiliates, and the continued migration of customers
from the Company's telephonic sales channel. During the fiscal year ended June
29, 2003, telephonic order volume increased 17.7% over the comparative prior
fiscal year, primarily as a result of the acquisition of the Company's gourmet
29
popcorn product line in May 2002. The Company's combined telephonic and online
sales channel average order value decreased 1.0% and 5.1% to $61.20 and $61.79
during the fiscal years ended June 27, 2004 and June 29, 2003, respectively,
primarily as a result of product sales mix, and, in fiscal 2003, the addition of
the gourmet popcorn product line which has a lower average order value. The
Company's online sales channel contributed 53.9%, 49.5% and 46.7% of the total
combined telephonic and online revenues during the fiscal years ended June 27,
2004, June 29, 2003 and June 30, 2002, respectively. 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 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 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 customers 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 within the Company's
available product offerings, during the fiscal year ended June 27, 2004, the
Company reallocated its marketing spending, reducing the circulation of certain
home and garden gift product catalogs and redirecting those funds to various
online and media programs featuring floral gifts. As a result, during the fiscal
year ended June 27, 2004, non-floral gift products accounted for 47.8% of total
combined telephonic and online net revenues, compared to 49.5% and 45.8% during
the years ended June 29, 2003 and June 30, 2002, respectively. The increase in
the percentage of non-floral gift products sold during the fiscal year ended
June 29, 2003 resulted from the expansion of candy, gift basket and gourmet
foods, including the Popcorn Factory line in May 2002. In the future, the
Company will continue to emphasize appropriate products and categories to match
consumer preferences and economic conditions.
Retail/fulfillment revenues for the fiscal year ended June 27, 2004 increased
compared to the prior year primarily as a result of enhancements to our
BloomNet(R) network of fulfilling florists and to our Bloomlink communication
system, as well as sales of wholesale products to its BloomNet(R) members.
During the fiscal year ended June 29, 2003, retail/fulfillment revenues
decreased as compared to the prior year primarily as a result of the sale,
closure, or conversion of certain company-owned retail stores into franchised
operations.
Gross Profit
Years Ended
---------------------------------------------------------------------
June 27, June 30, June 30,
2004 % Change 2002 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
Gross profit $252,867 4.9% $241,053 18.2% $203,936
Gross margin % 41.9% 42.6% 41.0%
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
30
franchisees. Gross profit increased during the fiscal years ended June 27, 2004
and June 29, 2003 as a result of increased order volume, and in fiscal 2003, as
a result of an improved gross margin percentage. During the fiscal year ended
June 27, 2004 gross margin percentage declined by 70 basis points over the prior
fiscal year, primarily as a result of product mix, specifically, lower sales of
home decor and garden merchandise which generate higher gross margins in
comparison to the Company's floral merchandise. Gross margin percentage during
the fiscal year ended June 29, 2003 increased over the comparative prior year
due to several factors including: (i) increased non-floral product sales, which
were further complemented by the acquisition of the Popcorn Factory product line
in May 2002 which earns higher gross margins, (ii) improvements in product
shipping costs, inventory management and product sourcing, (iii) increases in
the Company's service charge, to align 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 implements its plans to restore sustainable growth in its home
and garden gift line, the Company expects that over the longer term it will
continue to grow its higher margin, non-floral business. During fiscal 2005,
while varying by quarter due to seasonal changes in product mix, the Company
expects that its gross margin percentage will remain consistent with results
achieved during the fiscal year ended June 27, 2004.
Marketing and Sales Expense
Years Ended
---------------------------------------------------------------------
June 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
Marketing and sales $172,251 1.3% $170,013 12.9% $150,638
Percentage of sales 28.5% 30.1% 30.3%
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 as a result of volume related operating efficiencies and a reduction in
order processing costs. During fiscal 2004, marketing and sales expense, as a
percentage of net revenue, was further reduced as a result of 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 5.7 million customers who placed orders
during the fiscal year ended June 27, 2004, approximately 45.3% represented
repeat customers, compared to 42.4% in fiscal 2003 and 39.2% in fiscal 2002. 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 27, 2004, consistent with the
prior fiscal year.
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
31
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
Years Ended
---------------------------------------------------------------------
June 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
Technology and development $13,799 (1.0)% $13,937 1.6% $13,723
Percentage of sales 2.3% 2.5% 2.8%
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 decreased
as a percentage of net revenue during the years ended June 27, 2004 and June 23,
2003, and in absolute spending in fiscal 2004, due to 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 fiscal years ended June 27, 2004, June 29, 2003, and June 30, 2002, the
Company expended $22.8 million, $22.2 million and $24.5 million on technology
and development, of which $9.0 million, $8.3 million and $10.8 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 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
General and administrative $30,415 2.8% $29,593 5.0% $28,179
Percentage of sales 5.0% 5.2% 5.7%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. Although declining as a percentage of net
revenues, general and administrative expenses increased during the fiscal years
ended June 27, 2004 and June 29, 2003, in comparison to their respective prior
years, primarily as a result of increased health and business insurance costs,
partially offset by various cost reduction initiatives. The increase in fiscal
2003 was also attributable to the incremental costs associated with the
acquisition of The Popcorn Factory in May 2002.
The Company believes that its current general and administrative infrastructure
32
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
Years Ended
---------------------------------------------------------------------
June 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
Depreciation and amortization $14,992 (2.6)% $15,389 2.2% $15,061
Percentage of sales 2.5% 2.7% 3.0%
Depreciation and amortization expense decreased during the fiscal year ended
June 27, 2004, in comparison to the prior year, due to the declining rate of
capital additions, and that certain software components of the Company's order
entry, customer service, fulfillment and database systems, are now fully
depreciated. The increase in depreciation and amortization expense during the
fiscal year ended June 29, 2003, in comparison to the prior fiscal year, was
primarily the result of the incremental depreciation and amortization associated
with The Popcorn Factory, which was acquired in May 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 27, June 29, June 30,
2004 % Change 2003 % Change 2002
------------- ------------- ------------- ------------- -------------
(in thousands)
Interest income $1,324 14.4% $1,157 (57.0%) $2,688
Interest expense (663) 32.5% (982) 21.1% (1,245)
Other, net (341) 487.9% (58) (126.0%) 5
------------- ------------- -------------
$320 173.5% $117 (91.9%) $1,448
============= ============= =============
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 increase in other income (expense) during the fiscal year ended June 27,
2004, in comparison to the prior fiscal year, resulted primarily from: (i) an
increase in interest income resulting from higher invested cash balances
generated from operations, and (ii) a reduction in interest expense associated
with the refinancing of a series of fixed and variable rate mortgage and
equipment notes in June 2003, partially offset by losses incurred upon
closure/conversion of certain retail stores. The decrease in other income
(expense) during the fiscal year ended June 29, 2003, in comparison to the prior
fiscal year, was primarily due to a decline in interest income resulting from a
decrease in cash and investment balances in order to fund capital expenditures
and the acquisition of The Popcorn Factory in May 2002, as well as the decline
of the Company's average rate of return on its investments, partially offset by
the decline of interest expense due to the decline in interest rates on the
Company's variable rate long-term debt.
33
Income Taxes
During the fiscal year ended June 27, 2004, the Company recorded an income tax
benefit of approximately $19.2 million (net) due to the removal of the Company's
valuation allowance on its deferred tax assets which consisted primarily of net
operating loss carryforwards (see below), offset in part by income tax expense
for federal alternative minimum tax and various state taxes resulting from state
tax law changes that deferred the use of available net operating losses for
state purposes.
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it is more likely than not that the deferred tax assets would be
realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises. The favorable impact of the income tax benefit
has distorted the trends in our net income and will impact the comparability of
our net income with other periods. During fiscal 2005, the Company anticipates
an effective rate of approximately 41%.
During the fiscal year ended June 29, 2003, the Company provided no income tax
provision due to the availability of net operating loss carryforwards. During
the fiscal year ended June 30, 2002, the Company recorded a tax benefit related
to 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.
At June 27, 2004, the Company's federal and state net operating loss
carryforwards were approximately $72.1 million, which, if not utilized, will
begin to expire in fiscal year 2020.
34
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2004 and 2003. 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. 27, Mar. 28, Dec. 28, Sep. 28, Jun. 29, Mar.30, Dec. 29, Sep. 29,
2004 2004 2003 2003 2003 2003 2002 2002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Net revenues:
Telephonic 58,443 50,851 113,374 $40,371 $62,254 $52,287 $113,999 $42,531
Online 93,135 74,521 90,878 48,936 84,133 64,595 75,750 40,800
Retail fulfillment 9,989 8,697 8,930 5,853 8,456 7,239 7,680 5,894
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net revenues 161,567 134,069 213,182 95,160 154,843 124,121 197,429 89,225
Cost of revenues 98,039 79,429 117,550 56,093 91,588 73,095 107,335 52,547
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 63,528 54,640 95,632 39,067 63,255 51,026 90,094 36,678
Operating expenses:
Marketing and sales 38,950 37,693 66,762 28,846 40,372 35,710 64,978 28,953
Technology and development 3,289 3,576 3,503 3,431 3,621 3,323 3,415 3,578
General and administrative 7,187 7,872 7,577 7,779 7,381 7,343 7,462 7,407
Depreciation and amortization 3,660 3,572 3,843 3,917 3,698 3,594 4,068 4,029
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 53,086 52,713 81,685 43,973 55,072 49,970 79,923 43,967
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 10,442 1,927 13,947 (4,906) 8,183 1,056 10,171 (7,289)
Other income (expense), net 455 82 23 (240) 79 127 (84) (5)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 10,897 2,009 13,970 (5,146) 8,262 1,183 10,087 (7,294)
Income tax benefit (provision) 19,532 (66) (292) - - - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $30,429 $1,943 $13,678 $(5,146) $8,262 $1,183 $10,087 $(7,294)
========== ========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share:
Basic $0.46 $0.03 $0.21 $(0.08) $0.13 $0.02 $0.15 $(0.11)
========== ========== ========== ========== ========== ========== ========== ==========
Diluted $0.45 $0.03 $0.20 $(0.08) $0.12 $0.02 $0.15 $(0.11)
========== ========== ========== ========== ========== ========== ========== ==========
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 27, 2004, the Company had working capital of $83.7 million, including
cash and equivalents and short-term investments of $103.4 million, compared to
35
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 cash and
short-term investments, at June 27, 2004 and June 29, 2003, the Company
maintained approximately $8.3 million and $19.5 million of long-term
investments, respectively, consisting primarily of investment grade corporate
and U.S. government securities.
Net cash provided by operating activities of $42.1 million for the fiscal year
ended June 27, 2004 was primarily attributable to earnings, adjusted for
depreciation and amortization, deferred income taxes and other non-cash charges,
which in total amounted to $35.8 million, as well as decreases in other assets,
primarily related to recoverable income taxes.
Net cash used in investing activities of $9.6 million for the fiscal year ended
June 27, 2004 was principally comprised of capital expenditures related to the
Company's technology infrastructure.
Net cash used in financing activities was $0.8 million for the fiscal year ended
June 27, 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 upon the exercise of employee stock
options and employee stock purchase plan. The Company has a $5.0 million
revolving line of credit, renewable November 30, 2004 (none outstanding at any
point during the fiscal year ending June 27, 2004), available for working
capital purposes.
At June 27, 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 $5,589 $1,284 $2,751 $1,554
Capital lease obligations 3,495 1,738 1,732 19 $6
Operating lease obligations 11,788 4,417 3,490 1,570 2,311
Sublease obligations 9,692 2,781 3,670 2,009 1,232
Other cash obligations (*) 228 228 - - -
Purchase commitments (**) 25,894 25,894 - - -
----------- --------------- ----------- ------------ ----------------
Total $56,686 $36,342 $11,643 $5,152 $3,549
=========== =============== =========== ============ ================
(*) Other cash obligations include $0.2 million of franchise lease guarantees.
(**) Purchase commitments consist primarily of inventory and equipment purchase
orders made in the ordinary course of business.
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 June 27, 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 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
36
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue
recognition, inventory and long-lived assets, including goodwill and other
intangible assets related to acquisitions. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers or franchisees to make required
payments. If the financial condition of the Company's customers or franchisees
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.
37
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 has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
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.
38
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-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
June 27, 2004 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 2004
annual meeting of stockholders is incorporated herein by reference.
The Company maintains a Code of Ethics, which is applicable to all
directors, officers and employees on the Investor Relations-
Corporate Governance tab of the Company's website at
1800flowers.com. Any amendment or waiver to the Code of Ethics
that applies to our directors or executive officers will be posted
on our website or in a report filed with the SEC on Form 8-K. A
copy of the Code of Ethics is a available without charge upon
written request to: Investor Relations, 1-800-FLOWERS.COM, Inc.,
1600 Stewart Avenue, Westbury, New York 11590.
Item 11. EXECUTIVE COMPENSATION.
The information set forth in the Proxy Statement for the 2004
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 2004
annual meeting of stockholders is incorporated herein by reference.
39
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in the Proxy Statement for the 2004
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 2004
annual meeting of stockholders is incorporated herein by reference.
40
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(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 Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of June 27, 2004 and June 29, 2003 F-2
Consolidated Statements of Income for the years ended June 27, 2004,
June 29, 2003 and June 30, 2002 F-3
Consolidated Statements of Stockholders' Equity for the years
ended June 27, 2004, June 29, 2003 and June 30, 2002 F-4
Consolidated Statements of Cash Flows for the years ended
June 27, 2004, June 29, 2003 and June 30, 2002 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, and Exhibits 10.24 and 10.25, which are
incorporated by reference to Registrant's Definitive Proxy Statement filed
on October 27, 2003 (No. 000-26841).
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.
41
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
10.24 2003 Long Term Incentive and Share Award Plan.
10.25 Section 16 Executive Officers Bonus 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 Act of
2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ---------------------------
# Confidential treatment requested for certain portions of this
Exhibit pursuant to Rule 24b-2 promulgated under the Exchange Act.
(b) Reports on Form 8-K:
On May 3, 2004, the Company filed a report on Form 8-K which
referenced its April 22, 2004, press release of the Company's
results of operations and financial condition for its fiscal third
quarter ended March 28, 2004.
On May 17, 2004, the Company issued a press release reporting its
order volume for its fiscal 2004 Mother's Day Holiday.
On June 29, 2004, the Company issued a press release of its
anticipated results of operations for its fiscal fourth quarter
ended June 27, 2004.
On August 10, 2004, the Company filed a report on Form 8-K which
referenced its August 5, 2004 press release of the Company's
results of operations and financial condition for its fiscal
fourth quarter and year ended June 27, 2004.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 9, 2004 1-800-FLOWERS.COM, Inc.
By: /s/ James F. McCann
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc. (the
"Company"), hereby severally constitute and appoint James F. McCann and William
E. Shea, and each of them individually, with full powers of substitution and
resubstitution, our true and lawful attorneys, with full powers to them and each
of them to sign for us, in our names and in the capacities indicated below, to
sign any and all amendments to this Annual Report, and other documents in
connection therewith, and to file or cause to be filed the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below:
Dated: September 9, 2004 By: /s/ James F. McCann
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 9, 2004 By: /s/ William E. Shea
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
43
Dated: September 9, 2004 By: /s/ Christopher G. McCann
Christopher G. McCann
Director, President
Dated: September 9, 2004 By: /s/ John J. Conefry, Jr.
John J. Conefry, Jr.
Director
Dated: September 9, 2004 By: /s/ Leonard J. Elmore
Leonard J. Elmore
Director
Dated: September 9, 2004 By: /s/ T. Guy Minetti
T. Guy Minetti
Director, Vice Chairman
Dated: September 9, 2004 By: /s/ Kevin J. O'Connor
Kevin J. O'Connor
Director
Dated: September 9, 2004 By: /s/ Mary Lou Quinlan
Mary Lou Quinlan
Director
Dated: September 9, 2004 By: /s/ Jeffrey C. Walker
Jeffrey C. Walker
Director
44
F-3
Report of Independent Registered Public Accounting Firm
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 27, 2004 and
June 29, 2003, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended June 27,
2004. 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 the standards of the Public Company
Accounting Oversight Board (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 27, 2004 and June 29, 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 27, 2004, in conformity with U.S. generally accepted
accounting principles. 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.
/s/ Ernst & Young LLP
Melville, New York
July 30, 2004
F-1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 27, June 29,
2004 2003
------------- ------------
Assets
Current assets:
Cash and equivalents $ 80,824 $ 49,079
Short-term investments 22,550 12,139
Receivables, net 9,013 7,767
Inventories 19,625 20,370
Deferred income taxes 16,463 -
Prepaid and other 1,517 2,208
------------- ------------
Total current assets 149,992 91,563
Property, plant and equipment, net 42,460 46,500
Investments 8,260 19,471
Goodwill 34,529 37,692
Other intangibles, net 2,598 3,211
Deferred income taxes 13,548 -
Other assets 10,165 16,359
------------- ------------
Total assets $261,552 $214,796
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 63,266 $ 61,663
Current maturities of long-term debt and obligations under capital leases 3,022 3,025
------------- ------------
Total current liabilities 66,288 64,688
Long-term debt and obligations under capital leases 6,062 9,124
Other liabilities 2,812 3,696
------------- ------------
Total liabilities 75,162 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, 29,428,143
and 28,679,848 shares issued in 2004 and 2003, respectively 295 287
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
and 42,399,915 shares issued in 2004 and 2003, respectively 421 424
Additional paid-in capital 255,829 247,636
Retained deficit (67,047) (107,951)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 186,390 137,288
------------- ------------
Total liabilities and stockholders' equity $261,552 $ 214,796
============= ============
See accompanying notes.
F-2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Years ended
----------------------------------------
June 27, June 29, June 30,
2004 2003 2002
------------ ------------ ------------
Net revenues $603,978 $565,618 $497,205
Cost of revenues 351,111 324,565 293,269
------------ ------------ ------------
Gross profit 252,867 241,053 203,936
Operating expenses:
Marketing and sales 172,251 170,013 150,638
Technology and development 13,799 13,937 13,723
General and administrative 30,415 29,593 28,179
Depreciation and amortization 14,992 15,389 15,061
------------ ------------ ------------
Total operating expenses 231,457 228,932 207,601
------------ ------------ ------------
Operating income (loss) 21,410 12,121 (3,665)
Other income (expense):
Interest income 1,324 1,157 2,688
Interest expense (663) (982) (1,245)
Other, net (341) (58) 5
------------ ------------ ------------
Total other income, net 320 117 1,448
------------ ------------ ------------
Income (loss) before income taxes 21,730 12,238 (2,217)
Income tax benefit 19,174 - 706
------------ ------------ ------------
Net income (loss) $40,904 $12,238 $(1,511)
============ ============ ============
Net income (loss) per common share:
Basic $0.62 $0.19 $(0.02)
============ ============ ============
Diluted $0.60 $0.18 $(0.02)
============ ============ ============
Weighted shares used in the calculation of net income (loss)
per common share:
Basic 65,959 65,566 64,703
============ ============ ============
Diluted 68,165 67,670 64,703
============ ============ ============
See accompanying notes.
F-3
F-18
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 27, 2004, June 29, 2003 and June 30, 2002
(in thousands, except share data)
Common Stock
--------------------------------------
Class A Class B Additional Treasury Stock Total
------------------ ------------------- Paid-in Retained ----------------- Stockholders'
Shares Amount Shares Amount Capital Deficit Shares Amount Equity
---------- ------- ---------- -------- --------- ---------- --------- -------- ------------
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) - - - - -
Net 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) - - - - -
Net 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
Exercise of stock options 440,741 4 1,730 1,734
Employee stock purchase plan 52,104 1 391 392
Reversal of valuation allowance
related to income tax benefits
from employee stock option 6,072 6,072
exercises
Conversion of Class B common stock
into Class A common stock 255,450 3 (255,450) (3) -
Net income 40,904 40,904
---------- ------- ---------- -------- --------- ---------- --------- -------- ------------
Balance at June 27, 2004 29,428,143 $ 295 42,144,465 $ 421 $255,829 $ (67,047) 5,332,800 $(3,108) $ 186,390
========== ======= ========== ======== ========= ========== ========= ======== ============
See accompanying notes.
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
June 27, 2004 June 29, 2003 June 30, 2002
--------------- --------------- ---------------
Operating activities:
Net income (loss) $40,904 $12,238 $ (1,511)
Reconciliation of net income (loss) to net cash
provided by operations:
Depreciation and amortization 14,992 15,389 15,061
Deferred income taxes (20,776) - -
Bad debt expense 437 426 107
Other non-cash items 250 72 425
Changes in operating items, excluding the effects of
acquisitions:
Receivables (1,683) 1,152 (1,031)
Inventories 745 (4,723) (7)
Prepaid and other 691 12 (215)
Accounts payable and accrued expenses 1,624 (2,493) 2,264
Other assets 5,829 (2,555) (3,544)
Other liabilities (884) 1 59
--------------- --------------- ---------------
Net cash provided by operating activities 42,129 19,519 11,608
Investing activities:
Acquisitions, net of cash acquired - - (7,037)
Capital expenditures, net of non-cash expenditures-$0,
$0, and $2,894 in 2004, 2003 and 2002, respectively (10,576) (10,269) (11,994)
Purchases of investments (62,584) (56,412) (22,798)
Proceeds from sales of investments 63,384 57,191 6,693
Other 217 390 495
--------------- --------------- ---------------
Net cash used in investing activities (9,559) (9,100) (34,641)
Financing activities:
Proceeds from employee stock options/stock purchase plan 2,126 1,142 2,618
Repayment of notes payable and bank borrowings (1,176) (1,492) (826)
Payments of capital lease obligations (1,775) (1,591) (2,054)
--------------- --------------- ---------------
Net cash used in financing activities (825) (1,941) (262)
--------------- --------------- ---------------
Net change in cash and equivalents 31,745 8,478 (23,295)
Cash and equivalents:
Beginning of year 49,079 40,601 63,896
--------------- --------------- ---------------
End of year $ 80,824 $ 49,079 $ 40,601
=============== =============== ===============
Supplemental Cash Flow Information:
- ------------------------------------
-Interest paid amounted to $663, $982 and $1,245 for the years ended June
27, 2004, June 29, 2003 and June 30, 2002, respectively.
-The Company received tax refunds, net of income taxes paid of approximately
$1,476, $0 and $706 for the years ended June 27, 2004, June 29, 2003 and June
30, 2002, respectively.
See accompanying notes.
F-5
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 1-800-FLOWERS.COM family of brands also includes Plow &
Hearth, a direct marketer of home decor and garden merchandise, GreatFood.com, a
source for gourmet products, The Popcorn Factory, a manufacturer and direct
marketer of premium popcorn and specialty food gifts, and HearthSong and Magic
Cabin, direct marketers of unique children's toys and games. 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 2004, 2003 and 2002, which ended June 27,
2004, June 29, 2003 and June 30, 2002, respectively, consisted of 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned subsidiaries (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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. Amortization of leasehold
improvements and capital leases are 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. The Company's property plant and equipment is depreciated using
the following estimated lives:
F-6
Buildings 40 years
Leasehold Improvements 3-10 years
Furniture, Fixtures and Equipment 3-10 years
Software 3 years
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.
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 $3.8 million and $2.6 million at June 27, 2004 and June 29,
2003, 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 27,
2004, June 29, 2003 and June 30, 2002, 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 27, 2004 and June 29, 2003.
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 consumer,
corporate and franchise accounts receivable ($1.4 million and $1.3 million at
F-7
June 27, 2004 and June 29, 2003, respectively) have been recorded based upon
previous experience and management's evaluation.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Cost of Revenues
Cost of revenues consists primarily of florist fulfillment costs (fees paid
directly to florists and fees paid to wire 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 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, interactive marketing 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, with the exception of catalog costs
(see Deferred Catalog Costs above) at the time the advertisement is first shown.
Advertising expense was $91.1 million, $88.9 million and $69.6 million for the
years ended June 27, 2004, June 29, 2003 and June 30, 2002, 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"):
F-8
Years ended
--------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
-------------- -------------- ------------
(in thousands, except per share data)
Net income (loss), as reported $40,904 $12,238 $(1,511)
Less: FAS 123 stock based compensation (*) 1,339 7,803 5,447
-------------- -------------- ------------
Pro forma net income (loss) $39,565 $4,435 $(6,958)
============== ============== ============
Net income (loss) per share:
Basic - As reported $0.62 $0.19 $(0.02)
Basic - Pro forma $0.60 $0.07 $(0.11)
Diluted - As reported $0.60 $0.18 $(0.02)
Diluted - Pro forma $0.58 $0.07 $(0.11)
(*) Note: During fiscal 2004, FAS 123 stock based compensation is net of the
income tax benefit of 6.1 million, associated with the removal of the
valuation allowance on deferred tax assets arising from employee stock
option exercises.
Comprehensive Income (Loss)
For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, 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 common 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.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
Note 3. Acquisitions and Disposition
Acquisition of Selected Assets of The Popcorn Factory
On May 3, 2002, the Company extended 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 of net assets
F-9
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.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisition of The Popcorn Factory had taken place at the
beginning of fiscal year 2002. The following unaudited pro forma information is
not necessarily indicative of the results of operations in future periods or
results that would have been achieved had the acquisition taken place at the
beginning of the periods presented.
Years Ended
---------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
(as reported) (as reported) (pro forma)
-------------- -------------- --------------
(in thousands, except per share data)
Net revenues $603,978 $565,618 $528,103
Income (loss) from operations $ 21,410 $ 12,121 $ (6,407)
Net income (loss) $ 40,904 $ 12,238 $ (4,688)
Net income (loss) per common share
Basic $ 0.62 $ 0.19 $ (0.07)
Diluted $ 0.60 $ 0.18 $ (0.07)
F-10
Note 4. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
June 27, June 29,
2004 2003
-------------- -------------
(in thousands)
Goodwill - beginning of year $37,692 $37,772
Removal of deferred tax asset valuation allowance related to net
operating losses acquired from GreatFood.com, Inc. (3,163) -
Other - (80)
-------------- -------------
Goodwill - end of year $34,529 $37,692
============== =============
The Company's intangible assets consist of the following:
June 27, 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 $3,115 $1,812 $4,927 $2,792 $2,135
Customer lists 3 years 910 657 253 910 354 556
Other 20 years 194 137 57 171 127 44
------------ --------------- ---------- -------------- ----------------- ----------
6,031 3,909 2,122 6,008 3,273 2,735
Trademarks with
indefinite lives - 476 - 476 476 - 476
------------ --------------- ---------- -------------- ----------------- ----------
Total intangible
assets $6,507 $3,909 $2,598 $6,484 $3,273 $3,211
============ =============== ========== ============== ================= ==========
The amortization of intangible assets for the years ended June 27, 2004, June
29, 2003 and June 30, 2002 was $0.6 million, $0.9 million and $0.7 million,
respectively. Future estimated amortization expense is as follows: 2005 - $0.6
million, 2006 - $0.3 million, 2007 - $0.3 million, 2008 - $0.3 million, and 2009
- - $0.3 million, and thereafter - $0.3 million.
F-11
Note 5. Property, Plant and Equipment
June 27, June 29,
2004 2003
-------------- -------------
(in thousands)
Computer equipment $41,173 $37,429
Software 36,321 31,712
Telecommunication equipment 6,842 6,411
Leasehold improvements 11,767 12,267
Building and building improvements 12,038 11,454
Equipment 8,016 7,160
Furniture and fixtures 3,755 3,712
Land 666 666
-------------- -------------
120,578 110,811
Accumulated depreciation and amortization 78,118 64,311
-------------- -------------
$42,460 $ 46,500
============== =============
Note 6. Long-Term Debt
June 27, June 29,
2004 2003
-------------- -------------
(in thousands)
Commercial notes and revolving credit line (1-2) $5,504 $6,612
Seller financed acquisition obligations (3-4) 85 145
Obligations under capital leases (see Note 12) 3,495 5,392
-------------- -------------
9,084 12,149
Less current maturities of long-term debt and
obligations under capital leases 3,022 3,025
-------------- -------------
$6,062 $9,124
============== =============
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, renewable on November 30, 2004 (none
outstanding at June 27, 2004), bearing interest equal to the monthly
LIBOR Index plus 1.75% per annum (3.09% at June 27, 2004).
(2) $6,612,000 note dated June 27, 2003, ($5,504,000 outstanding at June
27, 2004), 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 ($16,000 outstanding at
June 27, 2004), 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
($69,000 outstanding at June 27, 2004). The note is payable in 8 annual
installments commencing August 2000.
As of June 27, 2004, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
Debt
Year Maturities
---- --------------
(in thousands)
2005 $1,284
2006 1,338
2007 1,413
2008 1,554
--------------
$5,589
==============
Note 7. Income Taxes
Significant components of the income tax benefit are as follows:
Years ended
---------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
------------- -------------- -------------
(in thousands)
Current provision (benefit):
Federal $677 $ - $(706)
State 923 - -
------------- -------------- -------------
1,600 - (706)
Deferred benefit:
Federal (15,796) - -
State (4,980) - -
------------- -------------- -------------
(20,776) - -
------------- -------------- -------------
Income tax benefit $(19,174) $ - $(706)
============= ============== =============
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate is as follows:
Years ended
---------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
------------- -------------- -------------
Tax at U.S. statutory rates 35.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit 2.8 5.9 (3.6)
Goodwill amortization .5 1.0 13.8
Tax settlements 2.7 - -
Change in tax rates 4.2 - -
Change in valuation allowance (140.1) (39.7) (8.6)
Other 6.7 (1.2) 0.6
------------- -------------- -------------
(88.2)% 0.0% (31.8)%
============= ============== =============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred income tax assets (liabilities) are as
follows:
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Years ended
---------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
------------- -------------- --------------
(in thousands)
Deferred income tax assets:
Net operating loss carryforwards $27,878 $ 34,247 $ 37,946
Accrued expenses and reserves 3,463 3,624 3,031
Valuation allowance - (36,523) (38,242)
Deferred income tax liabilities:
Installment sales (39) (53) (54)
Tax in excess of book depreciation (1,291) (1,295) (2,681)
-------------- -------------- --------------
Net deferred income tax assets $30,011 $ - $ -
============== ============== ==============
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred income tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it is more likely than not that the deferred income tax assets
would be realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred income tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises.
During the fiscal year ended June 30, 2002, the Company recorded a benefit
related to 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.
At June 27, 2004, the Company's federal and state net operating loss
carryforwards were approximately $72.1 million, which, if not utilized, will
begin to expire in fiscal year 2020.
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 had been made
as of June 27, 2004.
Note 9. Stock Option Plans
In December 2003, the Company's Board of Directors and shareholders approved the
1-800-FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the "Plan").
The Plan is a broad-based, long-term incentive program that is intended to
F-14
attract, retain and motivate employees, consultants and directors to achieve the
Company's long-term growth and profitability objectives, and therefore align
stockholder and employee interests. The Plan provides for the grant to eligible
employees, consultants and directors of stock options, share appreciation rights
("SARs"), restricted shares, restricted share units, performance shares,
performance units, dividend equivalents, and other share-based awards
(collectively "Awards"). The Plan reserves 7,500,000 shares of Common Stock,
which is approximately the amount of shares which had been previously available
for issuance under the Company's 1999 Stock Incentive Plan. No further awards
will be issued under the 1999 Stock Incentive Plan. During a calendar year i)
the maximum number of shares with respect to which options and SARs may be
granted to an eligible participant under the Plan will be 1,000,000 shares, and
ii) the maximum number of shares with respect to which Awards intended to
qualify as performance-based compensation other than options and SARs may be
granted to an eligible participant under the Plan will be 500,000 shares.
The Plan is administered by the Compensation Committee or such other Board
committee (or the entire Board) as may be designated by the Board (the
"Committee"). Unless otherwise determined by the Board, the Committee will
consist of two or more members of the Board who are nonemployee directors within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The Committee will determine which eligible employees,
consultants and directors receive awards, the types of awards to be received and
the terms and conditions thereof. The Chief Executive Officer shall have the
power and authority to make Awards under the Plan to employees and consultants
not subject to Section 16 of the Exchange Act, subject to limitations imposed by
the Committee.
At June 27, 2004, the Company has reserved approximately 17,415,000 shares of
common stock for issuance under common stock option plans, including options
previously authorized for issuance under the 1999 Stock Incentive Plan.
The following table summarizes activity in stock options:
Years ended
--------------------------------------------------------------------------
June 27, 2004 June 29, 2003 June 30, 2002
----------------------- --------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------------ ---------- ------------ ----------------------- ------------
Balance, beginning of year 10,001,345 $8.28 8,113,144 $8.95 6,455,262 $6.64
Grants 154,800 $10.15 3,036,705 $6.55 2,897,950 $12.43
Exercises (440,741) $3.93 (228,666) $3.69 (788,008) $2.72
Forfeitures (606,419) $9.38 (919,838) $9.43 (452,060) $9.94
------------ ------------ ------------
Balance, end of year 9,108,985 $8.45 10,001,345 $8.28 8,113,144 $8.95
============ ============ ============
F-15
The following table summarizes information about stock options outstanding at
June 27, 2004:
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 - 2.00 297,325 4.0 years $1.95 297,325 $1.95
$3.32 - 4.50 2,664,927 6.2 years $4.05 1,879,829 $4.08
$4.95 - 6.70 2,615,853 8.2 years $6.45 24,724 $5.14
$6.76 -10.00 164,900 8.1 years $8.39 50,000 $8.24
$10.20-14.69 2,725,080 7.0 years $12.41 1,356,950 $12.49
$15.77-17.38 1,100 7.5 years $15.92 440 $15.92
$21.00-23.10 639,800 4.9 years $21.09 639,800 $21.09
------------ -------------
9,108,985 6.9 years $8.45 4,249,068 $9.23
============ =============
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 weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model, were as follows:
Years ended
--------------------------------------------
June 27, June 29, June 30,
2004 2003 2002
------------- -------------- --------------
Weighted average fair value of options granted $5.99 $3.95 $7.32
Risk-free interest rate 3.61% 3.95% 4.50%
Expected life (in years) 5.0 5.0 5.0
Expected volatility 67.8% 70.0% 66.0%
Expected dividend yield 0.0% 0.0% 0.0%
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 27, 2004, the Company has reserved approximately 3,098,000
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
F-16
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 $0.3 million, $0.4 million and $0.3 million, for
the years ended June 27, 2004, June 29 2003 and June 30, 2002, 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. All leases and subleases
with an initial term of greater than one year are accounted for under SFAS No.
13, Accounting for Leases. These leases are classified as either capital leases,
operating leases or subleases, as appropriate.
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 27, 2004 and June 29,
2003, and accumulated amortization of $15.6 million and $14.1 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 27, 2004, approximately $3.5 million is outstanding. The borrowings,
which bear interest at rates ranging from 5.39% to 6.36% annually, are payable
in 60 monthly installments of principal and interest commencing in February
2001. Borrowings under the line are collateralized by the underlying equipment
purchased and an equal amount of pledged investments.
As of June 27, 2004, future minimum payments under non-cancelable capital lease
obligations and
F-17
operating leases with initial terms of one year or more consist of the
following:
Obligations
Under
Capital Operating
Leases Leases
------------ ------------
(in thousands)
2005 $ 1,934 $ 4,417
2006 1,440 2,087
2007 367 1,403
2008 12 1,066
2009 12 504
Thereafter 7 2,311
------------ ------------
Total minimum lease payments 3,772 $ 11,788
============
Less amounts representing interest (277)
------------
Present value of net minimum lease payments $3,495
============
At June 27, 2004, 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)
2005 $ 2,778 $ 2,781
2006 2,066 2,066
2007 1,610 1,604
2008 1,193 1,187
2009 827 822
Thereafter 1,244 1,232
-------------- --------------
$ 9,718 $ 9,692
============== ==============
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
27, 2004, the aggregate minimum rent payable by franchisees guaranteed by the
Company was approximately $0.2 million. Rent expense was approximately $8.4
million, $9.0 million, and $8.7 million for the years ended June 27, 2004, June
29, 2003 and June 30, 2002 respectively.
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.
F-18