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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2004
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
-------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
The number of shares outstanding of each of the Registrant's classes of common
stock:
29,204,473
----------
(Number of shares of Class A common stock outstanding as of November
1, 2004)
36,864,465
----------
(Number of shares of Class B common stock outstanding as of November
1, 2004)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 26, 2004
(Unaudited) and June 27, 2004 1
Consolidated Statements of Income (Unaudited) -
Three Months Ended September 26, 2004 and
September 28, 2003 2
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 26, 2004 and
September 28, 2003 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 26, June
2004 27, 2004
------------- -------------
(unaudited)
Assets
Current assets:
Cash and equivalents $50,790 $ 80,824
Short-term investments 23,343 22,550
Receivables, net 9,761 9,013
Inventories 33,358 19,625
Deferred income taxes 18,430 16,463
Prepaid and other 3,681 1,517
------------- -------------
Total current assets 139,363 149,992
Property, plant and equipment, net 41,670 42,460
Investments 7,729 8,260
Goodwill 34,529 34,529
Other intangibles, net 2,440 2,598
Deferred income taxes 13,548 13,548
Other assets 12,490 10,165
------------- -------------
Total assets $251,769 $261,552
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses 57,581 $ 63,266
Current maturities of long-term debt and obligations under capital leases 2,956 3,022
------------- ------------
Total current liabilities 60,537 66,288
Long-term debt and obligations under capital leases 5,362 6,062
Other liabilities 3,217 2,812
------------- ------------
Total liabilities 69,116 75,162
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, 29,460,966
and 29,428,143 shares issued at September 26, 2004 and June 27, 2004, 295 295
respectively
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
shares issued at September 26, 2004 and June 27, 2004 421 421
Additional paid-in capital 255,975 255,829
Retained deficit (69,757) (67,047)
Treasury stock, at cost-206,471 Class A and 5,280,000 Class B shares (4,281) (3,108)
------------- ------------
Total stockholders' equity 182,653 186,390
------------- ------------
Total liabilities and stockholders' equity $251,769 $261,552
============= ============
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
September 26, September 28,
2004 2003
---------------- ----------------
Net revenues $97,514 $95,160
Cost of revenues 57,942 56,093
---------------- ----------------
Gross profit 39,572 39,067
Operating expenses:
Marketing and sales 29,892 28,846
Technology and development 3,104 3,431
General and administrative 7,602 7,779
Depreciation and amortization 3,896 3,917
---------------- ----------------
Total operating expenses 44,494 43,973
---------------- ----------------
Operating loss (4,922) (4,906)
Other income (expense):
Interest income 382 192
Interest expense (141) (233)
Other 4 (199)
---------------- ----------------
Total other income (expense), net 245 (240)
---------------- ----------------
Loss before income taxes (4,677) (5,146)
Income tax benefit 1,967 -
---------------- ----------------
Net loss ($2,710) ($5,146)
================ ================
Basic and diluted net loss per common share ($0.04) ($0.08)
================ ================
Weighted average shares used in the calculation
of basic and diluted net loss per common share 66,210 65,775
================ ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
September 26, September 28,
2004 2003
--------------- --------------
Operating activities:
Net loss ($2,710) ($5,146)
Reconciliation of net loss to net cash used in operations:
Depreciation and amortization 3,896 3,917
Deferred income taxes (1,967) -
Bad debt expense 46 91
Other non-cash items - 156
Changes in operating items:
Receivables (794) (1,667)
Inventories (13,733) (8,952)
Prepaid and other (2,164) (2,733)
Accounts payable and accrued expenses (5,685) (3,996)
Other assets (2,404) (2,581)
Other liabilities 405 616
--------------- --------------
Net cash used in operating activities (25,110) (20,295)
Investing activities:
Purchase of investments (26,090) (18,666)
Sale of investments 25,828 21,459
Capital expenditures, net of non-cash expenditures (2,945) (2,233)
Other 58 75
--------------- --------------
Net cash (used in) provided by investing activities (3,149) 635
Financing activities:
Acquisition of treasury stock (1,173) -
Proceeds from employee stock options 146 229
Repayment of notes payable and bank borrowings (337) (250)
Payment of capital lease obligations (411) (544)
--------------- --------------
Net cash used in financing activities (1,775) (565)
--------------- --------------
Net change in cash and equivalents (30,034) (20,225)
Cash and equivalents:
Beginning of period 80,824 49,079
--------------- --------------
End of period 50,790 $28,854
=============== ==============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended September 26, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 3, 2005.
The balance sheet information at June 27, 2004 has been derived from the audited
financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 27, 2004.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Employee Stock Incentive Plans
The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no stock-based compensation is reflected
in net income, as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant and the related number
of shares granted is fixed at that point in time. The following table
illustrates the effect on net income (loss) and 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."
Three Months Ended
------------------------------------
September 26, September 28,
2004 2003
---------------- -------------------
(in thousands, except per share data)
Net loss - As reported ($2,710) ($5,146)
Less: Stock based compensation 1,711 1,877
---------------- -------------------
Net loss - Pro forma ($4,421) ($7,023)
================ ===================
Net loss per share:
Basic and diluted - As reported ($0.04) ($0.08)
Basic and diluted - Pro forma ($0.07) ($0.11)
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
Comprehensive Income (Loss)
For the three months ended September 26, 2004 and September 28, 2003, the
Company's comprehensive loss was equal to the respective net loss for each of
the periods presented.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Other Intangibles
The Company's other intangible assets consist of the following:
September 26, 2004 June 27, 2004
---------------------------------------- ---------------------------------------
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 $3,196 $1,731 $4,927 $3,115 $1,812
Customer lists 3 years 910 733 177 910 657 253
Other 5 years 194 138 56 194 137 57
------------- --------------- ---------- ----------- --------------- -----------
6,031 4,067 1,964 6,031 3,909 2,122
Trademarks with
indefinite lives - 476 - 476 476 - 476
------------- --------------- ---------- ----------- --------------- -----------
Total identifiable
intangible assets $6,507 $4,067 $2,440 $6,507 $3,909 $2,598
============= =============== ========== =========== =============== ===========
Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.5
million, fiscal 2006 - $0.3 million, fiscal 2007 - $0.3 million, fiscal 2008 -
$0.3 million, fiscal 2009 - $0.3 million, and thereafter - $0.3 million.
Note 3 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
September 26, June 27,
2004 2004
--------------- -----------
(in thousands)
Commercial notes and revolving credit lines $5,200 $5,504
Seller financed acquisition obligations 52 85
Obligations under capital leases 3,066 3,495
------------ ----------
8,318 9,084
Less current maturities of long-term debt and obligations under
capital leases 2,956 3,022
------------ ----------
$5,362 $6,062
============ ==========
Note 4 - Net Income (Loss) Per Common Share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period, and excludes the effect of 1,404,000 and 2,741,000 dilutive
potential common shares (employee stock options) for the three months ended
September 26, 2004 and September 28, 2003, respectively, as their inclusion
would be antidilutive.
Note 5 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM, Inc. has been a 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 some of the nation's leading florists, as well as
distinctive non-floral gifts appropriate for any occasion or sentiment. The
Company provides gift solutions same day, any day, offering an unparalleled
selection of flowers, plants, gourmet foods and confections, gift baskets and
other impressive unique gifts. As always, satisfaction is guaranteed, and
customer service is paramount with quick, convenient ordering options, fast and
reliable delivery, and gift advisors always available. Customers can shop
1-800-FLOWERS.COM(R) 24-hours a day, seven-days a week via the Internet
(http://www.1800flowers.com); by calling 1-800-FLOWERS(R) (1-800-356-9377); or
by visiting a Company-operated or franchised store. The 1-800-FLOWERS.COM(R)
family of brands also includes home decor and garden merchandise from Plow &
Hearth(R) (1- 800-627-1712 or http://www.plowandhearth.com); premium popcorn and
specialty treats from The Popcorn Factory(R) (1-800-541-2676 or
http://www.thepopcornfactory.com); gourmet foods from GreatFood.com(R)
(http://www.greatfood.com); and children's gifts from HearthSong(R)
(http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com).
Results of Operations
Net Revenues
Three Months Ended
--------------------------------------------
September 26, September 28,
2004 2003 % Change
--------------- ---------------- -----------
(in thousands)
Net revenues:
Telephonic $37,586 $40,371 (6.9%)
Online 53,086 48,936 8.5%
Retail/fulfillment 6,842 5,853 16.9%
-------------- ---------------
Total net revenues $97,514 $95,160 2.5%
============== ===============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company
grew its combined telephonic and online revenue by 1.5% during the three months
ended September 26, 2004, due to a slight increase in order volume even though
the Company's marketing efforts were shifted from direct response marketing, by
lowering circulation, to more brand advertising through media. Although there
are no significant gifting holidays during the summer months, the Company
believes the "top of mind" brand advertising expended during the latter half of
its fiscal first quarter will reinforce its strong brand name recognition as the
Company enters the holiday gift giving season.
The Company fulfilled approximately 1,407,000 orders through its combined
telephonic and online sales channels during the three months ended September 26,
2004, an increase of 1.9% over the prior year period. This growth was driven by
the Company's online sales channel, which experienced a 7.9% increase in order
6
volume in comparison to the prior year period, driven by improved conversion of
qualified traffic through the Company's websites, search engines and affiliates,
and the continued migration of customers from the Company's telephonic sales
channel, which experienced a corresponding 7.0% decrease in order volume in
comparison to the prior year period. The Company's combined telephonic and
online average order value of $64.46 during the three months ended September 26,
2004, was consistent with the same period of the prior year.
The online sales channel contributed 58.5% of total combined telephonic and
online revenues during the three months ended September 26, 2004, compared to
54.8% for the same period of the prior year. The Company intends to continue to
drive revenue growth through its online sales channel, and continue the
migration of its customers from the telephone to the Web for several important
reasons: (i) online orders are less expensive to process than telephonic orders,
(ii) online customers can view the Company's full 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 them in an electronic dialog via cost efficient
marketing programs.
In order to improve the effectiveness of its marketing spend, in response to
forecasted economic conditions and analysis of consumer buying patterns within
the Company's available product offerings, during the three months ended
September 26, 2004, the Company reallocated its marketing spending, reducing the
circulation of certain non-floral product catalogs within the quarter, by
deferring catalog drops until the Company's fiscal second quarter during which
time the Company believes it can achieve a greater return on its catalog
spending, and invested in incremental media programs, featuring floral gifts for
everyday occasions to keep the 1-800-Flowers flagship brand "top of mind" as the
Company enters the upcoming Holiday selling season. As a result, during the
three months ended September 26, 2004, non-floral gift products accounted for
37.4% of total combined telephonic and online net revenues, in comparison to
38.2% during the same period of the prior year. In the future, the Company will
continue to adjust its product mix, emphasizing those products and categories
that best match consumer preferences and economic conditions.
Retail/fulfillment revenues for the three months ended September 26, 2004
increased in comparison to the same periods of the prior year, primarily as a
result of improved comparative store sales and continued enhancements in product
and service offerings to the Company's BloomNet(TM) distribution network.
Gross Profit
Three Months Ended
---------------------------------------------
September 26, September 28,
2004 2003 % Change
-------------- ---------------- -------------
(in thousands)
Gross profit $39,572 $39,067 1.3%
Gross margin % 40.6% 41.1%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (fees paid directly to florists and fees
paid to wire service entities that serve as clearinghouses for floral orders,
net of wire service rebates), the cost of floral and non-floral merchandise sold
from inventory or through third parties, and associated costs including inbound
and outbound shipping charges. Additionally, cost of revenues include labor and
facility costs related to direct-to-consumer merchandise production operations,
as well as facility costs on properties that are sublet to the Company's
franchisees. Gross profit increased during the three months ended September 26,
2004, in comparison to the same periods of the prior year, primarily as a result
of increased order volume on the Company's online sales channel. Gross margin
percentage during the three months ended September 26, 2004 decreased in
comparison to the prior year, by 50 basis points, 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. The reduction in margin percentage resulting from the above was
offset by: i) improvements in inventory management and product sourcing, ii) the
April 2004 increase in the Company's minimum shipping charge, aligning it with
industry norms, and iii) the Company's continued focus on customer service,
whereby stricter quality control standards and enforcement methods reduced the
rate of product credits/returns and replacements.
As the Company implements its plan to restore sustainable growth in its home and
garden gift line, the Company expects that over the longer term it will continue
7
to grow its higher margin, non-floral business. During the remainder of 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 the
results achieved during the fiscal year ended June 27, 2004.
Marketing and Sales Expense
Three Months Ended
----------------------------------------------
September 26, September 28,
2004 2003 % Change
--------------- --------------- -------------
(in thousands)
Marketing and sales $29,892 $28,846 3.6%
Percentage of net revenues 30.7% 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 increased as a percentage of net
revenues during the three months ended September 26, 2004, compared to the same
period of the prior year as a result of increased spending on various media
programs during the latter half of the quarter in order to promote "top of mind"
brand awareness as it enters the upcoming holiday shopping period. Partially
funding the increased spending were volume related operating efficiencies, and a
continued reduction in order processing costs. As a result of the Company's
cost-efficient customer retention programs, of the 1,165,000 customers who
placed orders during the three months ended September 26, 2004, approximately
60.5% represented repeat customers, compared to 58.3%, in the prior year period.
In addition, as a result of the strength of the Company's brands, combined with
its cost-efficient marketing programs, the Company added approximately 460,000
new customers during the three months ended September 26, 2004.
In order to further execute its business plan, the Company expects to continue
to invest in its marketing and sales efforts to acquire new customers, while
also leveraging its already significant customer base through cost effective,
customer retention initiatives. Such spending will be within the context of the
Company's overall marketing plan, which is continually evaluated and revised to
reflect the results of the Company's most recent market research, including the
impact of changing economic conditions and consumer preferences, and seeks to
determine the most cost-efficient use of the Company's marketing dollars.
Although the Company believes that increased spending in the area of marketing
and sales will be necessary for the Company to continue to grow its revenues,
the Company expects that, on an annual basis, marketing and sales expense will
continue to decline as a percentage of net revenues.
Technology and Development Expense
Three Months Ended
--------------------------------------------
September 26, September 28,
2004 2003 % Change
-------------- --------------- -------------
(in thousands)
Technology and development $3,104 $3,431 (9.5%)
Percentage of net revenues 3.2% 3.6%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. During the three months ended September 26,
2004, technology and development expense decreased in comparison to the same
periods of the prior year due to the Company's ability to internalize its
development functions and through continued centralization of key operating
functions across its brands, thereby cost effectively enhancing the content and
functionality of the Company's Web sites and improving the performance of its
fulfillment and customer service systems. During the three months ended
September 26, 2004, the Company expended $5.1 million on technology and
development, of which $2.0 million has been capitalized.
Although the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending in comparison to prior fiscal periods will continue to
decrease as a percentage of net revenues due to the expected benefits from
previous investments in the Company's current technology platform.
8
General and Administrative Expense
Three Months Ended
---------------------------------------------
September 26, September 28,
2004 2003 % Change
---------------- ------------- -------------
(in thousands)
General and administrative $7,602 $7,779 (2.3%)
Percentage of net revenues 7.8% 8.2%
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. General and administrative expense decreased
during the three months ended September 26, 2004 in comparison to the same
period of the prior year, primarily as a result of lower payroll and cost
reduction initiatives, partially offset by higher health insurance costs.
The Company believes that its current general and administrative infrastructure
is sufficient to support existing requirements, and as such, while increasing in
absolute dollars, general and administrative expenses on an annual basis are
expected to continue to decline as a percentage of net revenues.
Depreciation and Amortization Expense
Three Months Ended
---------------------------------------------
September 26, September 28,
2004 2003 % Change
---------------- ------------- -------------
(in thousands)
Depreciation and amortization $3,896 $3,917 (0.5%)
Percentage of net revenues 4.0% 4.1%
Depreciation and amortization expense during the three months ended September
26, 2004 was consistent with the same period of the prior year, and decreased as
a percentage of net revenues, reflecting the impact of the Company's declining
rate of capital additions, and the leverage of the Company's existing
infrastructure.
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.
Other Income (Expense)
Three Months Ended
---------------------------------------------
September 26, September 28,
2004 2003 % Change
---------------- ------------- -------------
(in thousands)
Interest income $382 $192 99.0%
Interest expense (141) (233) 39.5%
Other 4 (199) 102.0%
---------------- -------------
$245 ($240) 202.1%
================ =============
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 three months ended September
26, 2004 was primarily attributable to higher interest income resulting from an
increase in average cash balances, and lower interest expense due to maturing
capital lease obligations, and from the loss incurred upon the
conversion/relocation of a retail store into a local fulfillment center in the
prior year.
9
Income Taxes
During the three months ended September 26, 2004 the Company recorded a $2.0
million income tax benefit based upon the Company's anticipated effective income
tax rate for fiscal 2005 of approximately 41%. Until the fourth quarter of the
prior fiscal year, the Company had recorded a full valuation allowance on its
deferred tax assets, consisting primarily of net operating loss carryforwards.
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred tax assets. Based upon 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, and, accordingly, at that time, the Company removed the valuation
allowance.
Liquidity and Capital Resources
At September 26, 2004, the Company had working capital of $78.8 million,
including cash and equivalents and short-term investments of $74.1 million,
compared to working capital of $83.7 million, including cash and equivalents and
short-term investments of $103.4 million, at June 27, 2004. In addition to its
cash and short-term investments, at September 26, 2004 and June 27, 2004, the
Company maintained approximately $7.7 million and $8.3 million, respectively, of
long-term investments, consisting primarily of investment grade corporate and
U.S. government securities.
Net cash used in operating activities of $25.1 million for the three months
ended September 26, 2004 was primarily attributable to the Company's net loss
and seasonal changes in working capital, consisting of reduction in accounts
payable and accrued expenses and inventory purchases for the upcoming holidays,
offset in part by non-cash charges of depreciation and amortization.
Net cash used in investing activities of $3.1 million for the three months ended
September 26, 2004 was principally comprised of capital expenditures, primarily
related to the Company's technology infrastructure.
Net cash used in financing activities of $1.8 million for the three months ended
September 26, 2004, resulted primarily from the acquisition of Company Class A
common stock, which was placed in treasury, and repayment of amounts outstanding
under the Company's credit facilities and long-term capital lease obligations,
offset in part by the net proceeds received from the exercise of employee stock
options.
At September 26, 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 $5,252 $1,274 $2,728 $1,250
Capital lease obligations 3,066 1,682 1,376 8
Operating lease obligations 10,683 3,834 3,235 1,670 $1,944
Sublease obligations 8,997 2,603 3,450 2,299 645
Other cash obligations (*) 195 195 - - -
Purchase commitments (**) 28,671 28,671 - - -
----------- --------------- ------------ ------------- ----------------
Total $56,864 $38,259 $10,789 $5,227 $2,589
=========== =============== ============ ============= ================
(*) 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
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses, and
10
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue
recognition, inventory and long-lived assets, including goodwill and other
intangible assets related to acquisitions. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affects the Company's more significant judgments and estimates
used in preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses are
impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company 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 the Company will be able to
generate sufficient taxable income so that these assets will be realized. The
factors that the Company considers 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting during the quarter ended September 26,
2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
12
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the first quarter of fiscal 2005 which includes the
period June 28, 2004 through September 26, 2004.
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs Programs
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except average price paid per share)
6/28/04 - 7/25/04 - - - $10,000
7/26/04 - 8/22/04 50.0 $7.43 50.0 $9,628
8/23/04 - 9/26/04 103.7 $7.73 103.7 $8,827
-------------------- ------------------- ----------------------
Total 153.7 $7.63 153.7
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. All share
purchases were made in open-market transactions. The average price paid per
share is calculated on a settlement basis and excludes commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On August 10, 2004, the Company filed a report on Form 8-K,
attaching its press release dated August 5, 2004, disclosing
financial results for its fiscal 2004 fourth quarter ended June
27, 2004.
On October 29, 2004, the Company filed a report on Form 8-K,
attaching its press release dated October 21, 2004, disclosing
financial results for its fiscal 2005 first quarter ended September
26, 2004.
13
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
--------------------------
(Registrant)
Date: November 4, 2004 /s/ James F. McCann
- ----------------------- --------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 4, 2004 /s/William E.Shea
- ----------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)