UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2003
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of each of the Registrant's classes of common
stock:
28,472,803
----------
(Number of shares of Class A common stock outstanding as of May 7, 2003)
37,199,915
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(Number of shares of Class B common stock outstanding as of May 7, 2003)
1-800-FLOWERS.COM, Inc.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 30, 2003
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 30, 2003
(Unaudited) and June 30, 2002 1
Consolidated Statements of Operations (Unaudited) - Three
and Nine Months Ended March 30, 2003 and March 31,
2002 2
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended March 30, 2003 and March 31, 2002 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
March 30, June 30,
2003 2002
------------- ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 48,562 $ 40,601
Short-term investments 12,130 22,798
Receivables, net 9,826 9,345
Inventories 24,417 15,647
Prepaid and other 2,903 2,220
------------- ------------
Total current assets 97,838 90,611
Property, plant and equipment, net 44,454 51,002
Investments 4,394 9,591
Capitalized investment in leases 324 465
Goodwill 37,717 37,772
Other intangibles, net 3,369 4,074
Other assets 19,140 13,642
------------- ------------
Total assets $207,236 $207,157
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 61,454 $ 64,156
Current maturities of long-term debt and obligations under capital leases 2,779 3,154
------------- ------------
Total current liabilities 64,233 67,310
Long-term debt and obligations under capital leases 10,070 12,244
Other liabilities 4,478 3,695
------------- ------------
Total liabilities 78,781 83,249
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000 shares authorized,
28,454,180 and 28,319,677 shares issued at March 30, 2003 and June 30, 2002,
respectively 285 283
Class B common stock, $.01 par value, 200,000,000 shares authorized,
42,479,915 and 42,480,925 shares issued at March 30, 2003 and June 30, 2002,
respectively 425 425
Additional paid-in capital 247,066 246,497
Retained deficit (116,213) (120,189)
Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108)
------------- ------------
Total stockholders' equity 128,455 123,908
------------- ------------
Total liabilities and stockholders' equity $207,236 $207,157
============= ============
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------- --------------------------
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
------------- ----------- ------------- -----------
Net revenues $124,121 $115,424 $410,775 $356,918
Cost of revenues 73,095 70,690 232,977 210,193
------------- ----------- ------------- -----------
Gross profit 51,026 44,734 177,798 146,725
Operating expenses:
Marketing and sales 35,710 31,533 129,641 113,109
Technology and development 3,323 3,222 10,316 10,444
General and administrative 7,343 6,847 22,212 20,826
Depreciation and amortization 3,594 3,788 11,691 11,149
------------- ----------- ------------- -----------
Total operating expenses 49,970 45,390 173,860 155,528
------------- ----------- ------------- -----------
Operating income (loss) 1,056 (656) 3,938 (8,803)
Other income (expense):
Interest income 245 515 880 2,174
Interest expense (213) (308) (789) (920)
Other, net 95 (92) (53) (128)
------------- ----------- ------------- -----------
Total other income (expense), net 127 115 38 1,126
------------- ----------- ------------- -----------
Income (loss) before income taxes 1,183 (541) 3,976 (7,677)
Benefit from income taxes - 706 - 706
------------- ----------- ------------- -----------
Net income (loss) $1,183 $165 $3,976 $(6,971)
============= =========== ============= ===========
Basic and diluted net income (loss) per common share $0.02 $0.00 $0.06 $(0.11)
============= =========== ============= ===========
Weighted average shares used in the calculation of net income (loss)
per common share:
Basic 65,583 64,807 65,528 64,507
============== =========== ============= ===========
Diluted 67,117 68,030 67,581 64,507
============== =========== ============= ===========
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
--------------------------------
March 30, March 31,
2003 2002
-------------- --------------
Operating activities:
Net income (loss) $3,976 ($6,971)
Reconciliation of net income (loss) to net cash (used in) provided by
operations:
Depreciation and amortization 11,691 11,149
Bad debt expense 452 144
Other non-cash items 65 566
Changes in operating items:
Receivables (933) (3,316)
Inventories (8,770) (1,324)
Prepaid and other (683) (185)
Accounts payable and accrued expenses (2,702) 1,266
Other assets (5,534) 3,261
Other liabilities 783 332
-------------- --------------
Net cash (used in) provided by operating activities (1,655) 4,922
Investing activities:
Purchase of investments (21,350) (1,088)
Sale of investments 37,215 -
Capital expenditures, net of non-cash expenditures (4,680) (6,470)
Other 284 (174)
-------------- --------------
Net cash provided by (used in) investing activities 11,469 (7,732)
Financing activities:
Proceeds from employee stock options/stock purchase plan 571 1,770
Repayment of notes payable and bank borrowings (721) (615)
Payment of capital lease obligations (1,703) (1,437)
-------------- --------------
Net cash used in financing activities (1,853) (282)
-------------- --------------
Net change in cash and equivalents 7,961 (3,092)
Cash and equivalents:
Beginning of period 40,601 63,896
-------------- --------------
End of period $48,562 $60,804
============== ==============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended March 30, 2003 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 29, 2003.
The balance sheet information at June 30, 2002 has been derived from the audited
financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Comprehensive Income (Loss)
For the three and nine months ended March 30, 2003 and March 31, 2002, the
Company's comprehensive income (losses) were equal to the respective net income
(losses) for each of the periods presented.
Note 2 - 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. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
-------------- ------------- -------------- -------------
(in thousands, except per share data)
Net income (loss):
As reported $1,183 $165 $3,976 ($6,971)
Pro-forma ($851) ($1,448) ($1,758) ($10,944)
Basic and diluted net income (loss) per common share:
As reported $0.02 $0.00 $0.06 ($0.11)
Pro-forma ($0.01) ($0.02) ($0.03) ($0.17)
Note 3 - Acquisition of Selected Assets of The Popcorn Factory
On May 3, 2002, the Company extended the breadth of its gourmet food product
assortment when it completed the acquisition of selected operating assets and
liabilities of The Popcorn Factory, Inc. ("The Popcorn Factory"), a manufacturer
4
and direct marketer of premium popcorn and specialty food gifts. The purchase
price of approximately $12.6 million, including $0.3 million of transaction
costs, was comprised of $7.3 million used to retire The Popcorn Factory's
outstanding debt and the issuance of 353,003 shares of the Company's Class A
common stock, valued at approximately $5.0 million, based upon the average
closing price of the Company's common stock on the date of and the two days
preceding and following the closing of the transaction. The acquisition was
accounted for as a purchase and, accordingly, acquired assets and liabilities
are recorded at their fair values, and the operating results of The Popcorn
Factory have been included in the Company's consolidated results of operations
since the date of acquisition.
Pro forma Results of Operations
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisition of The Popcorn Factory business had taken place
at the beginning of fiscal year 2002. The following unaudited pro forma
information is not necessarily indicative of the results of operations in future
periods or results that would have been achieved had the acquisition of The
Popcorn Factory taken place at the beginning of the period presented.
Nine Months Ended
-------------------------------------
March 30, March 31,
2003 2002
---------------- -------------------
(in thousands, except per share data)
Net revenues $410,775 $387,079
Operating income (loss) 3,938 (11,020)
Net income (loss) 3,976 (9,594)
Basic and diluted net income (loss) per common share $0.06 ($0.15)
Note 4 - Goodwill and Intangible Assets
The Company's goodwill and intangible assets consist of the following:
March 30, 2003 June 30, 2002
---------------------------------------- -------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ------------ -------------- ------------ ----------- ------------- -----------
(in thousands)
Goodwill - $51,622 $13,905 $37,717 $51,677 $13,905 $37,772
============ ============== ============ =========== ============= ===========
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $2,711 $2,216 $4,927 $2,468 $2,459
Customer lists 3 years 910 278 632 910 51 859
Technology 3 years 1,659 1,659 - 1,659 1,428 231
Other 20 years 171 126 45 171 122 49
------------ -------------- ------------ ----------- ------------- -----------
7,667 4,774 2,893 7,667 4,069 3,598
Trademarks with
indefinite lives - 480 4 476 480 4 476
------------ -------------- ------------ ----------- ------------- -----------
Total identifiable
intangible assets $8,147 $4,778 $3,369 $8,147 $4,073 $4,074
============ ============== ============ =========== ============= ===========
Estimated amortization expense is as follows: fiscal 2003: $0.9 million, fiscal
2004: $0.6 million, fiscal 2005: $0.6 million, fiscal 2006: $0.3 million, fiscal
2007: $0.3 million, and thereafter: $0.9 million.
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 5 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
March 30, June 30,
2003 2002
------------ ------------
(in thousands)
Commercial notes and revolving credit lines $6,661 $7,380
Seller financed acquisition obligations 201 202
Obligations under capital leases 5,987 7,816
------------ ------------
12,849 15,398
Less current maturities of long-term debt and obligations
under capital leases 2,779 3,154
------------ ------------
$10,070 $12,244
============ ============
Note 6 - Net Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- -----------
(in thousands, except per share data)
Numerator:
Net income (loss) $1,183 $165 $3,976 ($6,971)
=============== =============== =============== ===========
Denominator:
Weighted average shares outstanding 65,583 64,807 65,528 64,507
Effect of dilutive securities:
Employee stock options 1,534 3,223 2,053 -
--------------- --------------- --------------- -----------
Adjusted weighted-average shares and assumed
conversions 67,117 68,030 67,581 64,507
=============== =============== =============== ===========
Basic and diluted net income (loss) per common share $0.02 $0.00 $0.06 ($0.11)
=============== =============== =============== ===========
Note 7 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
1-800-FLOWERS.COM helps millions of customers connect to the people they care
about with a broad range of thoughtful gifts, award-winning customer service and
its unique technology and fulfillment infrastructure. The Company's product line
- including flowers, plants, gourmet foods, candies, gift baskets and other
unique gifts - is available to customers around the world via: the Internet
(www.1800flowers.com); by calling 1-800-FLOWERS(R) (1-800-356-9377) 24 hours a
day; or by visiting one of the Company-operated or franchised stores. The
Company's collection of thoughtful gifting brands includes home decor and garden
merchandise from Plow & Hearth(R) (phone: 1-800-627-1712 and web:
www.plowandhearth.com), premium popcorn and other food gifts from The Popcorn
Factory(R)(phone: 1-800-541-2676 and web: www.thepopcornfactory.com), gourmet
food products from GreatFood.com(R) (www.greatfood.com), and children's gifts
from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com).
The Company achieved profitability during the three and nine months ended March
30, 2003 and expects to be profitable for the full year of fiscal 2003. However,
the Company's prospects for maintaining profitability must be considered in
light of risks, uncertainties, expenses and the current challenging retail and
geo-political environment, as well as those more fully described under the
caption "Risk Factors that May Affect Future Results" within the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
Results of Operations
Net Revenues
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
--------------- ---------------- ------------- -------------- ------------- --------------
(in thousands)
Net revenues:
Telephonic $52,287 $50,715 3.1% $208,817 $185,232 12.7%
Online 64,595 56,874 13.6% 181,145 149,711 21.0%
Retail/fulfillment 7,239 7,835 (7.6%) 20,813 21,975 (5.3%)
--------------- ---------------- -------------- -------------
Total net revenues $124,121 $115,424 7.5% $410,775 $356,918 15.1%
=============== ================ ============== =============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined telephonic and online revenue growth during the three and nine months
ended March 30, 2003 was due primarily to an increase in order volume, resulting
from the Company's effective marketing efforts, continued strong brand name
recognition and further expansion of its non-floral product offerings such as
candies and gourmet popcorn from The Popcorn Factory line of products which was
acquired in May 2002, as well as items for the home and garden, children's toys
and other specialty gifts. During the three and nine months ended March 30,
2003, non-floral gift products accounted for 38.1% and 52.5% of total combined
telephonic and online net revenues, respectively, as compared to 34.3% and 47.9%
during the same periods of the prior year.
7
The Company fulfilled approximately 1,871,000 and 6,339,000 orders through its
combined telephonic and online sales channels during the three and nine months
ended March 30, 2003, an increase of 8.7% and 23.1% over the respective prior
year periods. The growth in order volume was generated on both the Company's
online sales channel, which experienced increases of 11.3% and 23.7% during the
three and nine months ended March 30, 2003, respectively, in comparison to the
prior year periods, driven by traffic increases through the Company's websites
as well as through third party portals and affiliates, and the Company's
telephonic sales channel, which during the three and nine months ended March 30,
2003 increased 5.2% and 22.5%, over the respective prior year periods, resulting
primarily from the acquisition of the Company's gourmet popcorn product line in
May 2002. The Company's combined telephonic and online sales channels average
order value of $62.46 during the three months ended March 30, 2003, was
consistent with the same period of the prior year, but decreased 5.4% to $61.52
during the nine months ended March 30, 2003, in comparison to the same period of
the prior year, due to the seasonal impact of The Popcorn Factory product line
which has a lower average order value. The Company intends to continue to drive
revenue growth through its online business, and continue the migration of its
customers from the telephone to the Web for several important reasons: (i)
online orders are less expensive to process than telephonic orders, (ii) online
customers can view the Company's full array of gift offerings including
non-floral gifts, which yield higher gross margin opportunities, (iii) online
customers can utilize all of the Company's services, such as the various gift
search functions, order status check and reminder service, thereby deepening the
relationship with its customers and leading to increased order rates, and (iv)
when customers visit the Company online, it provides an opportunity to interact
with them in an electronic dialog via cost efficient marketing programs.
Retail/fulfillment revenues for the three and nine months ended March 30, 2003
decreased in comparison to the same periods of the prior year, primarily as a
result of closing or converting certain company owned retail stores into
franchised operations.
Gross Profit
Three Months Ended Nine Months Ended
---------------------------------------------- ---------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
-------------- --------------- ------------- ------------- ------------- ---------------
(in thousands)
Gross profit $51,026 $44,734 14.1% $177,798 $146,725 21.2%
Gross margin % 41.1% 38.8% 43.3% 41.1%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (fees paid to florists directly and
through wire services that serve as clearinghouses for floral orders, net of
wire service rebates), the cost of floral and non-floral merchandise sold from
inventory or through third parties, and associated costs including inbound and
outbound shipping charges. Additionally, cost of revenues include labor and
facility costs related to direct-to-consumer merchandise production operations,
as well as facility costs on properties that are sublet to the Company's
franchisees. Gross profit increased during the three and nine months ended March
30, 2003, in comparison to the same periods of the prior year, primarily as a
result of increased order volume and an improved gross margin percentage. Gross
margin percentage increased by 230 and 220 basis points during the three and
nine months ended March 30, 2003, respectively, due to several factors
including: i) increased non-floral product sales, which were further
complemented by the acquisition of The Popcorn Factory line of products in May
2002, which generate higher gross margins, ii) improvements in product shipping
costs, inventory management and product sourcing, iii) an increase in the
Company's service charge, aligning it with industry norms, and iv) 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 continues to grow its higher margin, non-floral business, the
Company expects that gross margin percentage, while varying by quarter due to
seasonal changes in product mix, will continue to increase.
8
Marketing and Sales Expense
Three Months Ended Nine Months Ended
---------------------------------------------- --------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
-------------- --------------- ------------- ------------- ------------- --------------
(in thousands)
Marketing and sales $35,710 $31,533 13.2% $129,641 $113,109 14.6%
Percentage of net revenues 28.8% 27.3% 31.6% 31.7%
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 March 30, 2003, compared to the same
period of the prior fiscal year due primarily to three factors specific to this
current fiscal period: i) the timing of revenues associated with the Easter
Holiday, which occurs in the Company's fiscal fourth quarter ending June 29,
2003, in comparison to fiscal 2002 when it occurred in the Company's fiscal
third quarter; ii) an increase in fixed operating expenses associated with The
Popcorn Factory, acquired in May 2002. Due to the highly seasonal nature of its
business, The Popcorn Factory has low sales volume relative to its overhead
during the Company's fiscal third quarter; and iii) slower demand in the latter
part of the quarter due to the war in Iraq and the severe weather in much of the
country which reduced demand for spring-related products. Despite the
aforementioned increase in the fiscal third quarter, during the nine months
ended March 30, 2003, marketing and sales expenses as a percentage of net
revenues were consistent with prior year due to targeted cost-effective online
advertising, coupled with the Company's strong brand name and order processing
cost reduction initiatives. As a result of the Company's cost-efficient customer
retention programs, of the 1,516,000 and 4,219,000 customers who placed orders
during the three and nine months ended March 30, 2003, respectively,
approximately 55.1% and 43.9% represented repeat customers as compared to 50.4%
and 42.7% in the respective prior year periods. In addition, as a result of the
strength of the Company's brands, combined with its cost-efficient marketing
programs, the Company added approximately 680,000 and 2,366,000 new customers
during the three and nine months ended March 30, 2003, respectively.
In order to further execute its business plan, the Company expects to continue
to prudently invest in its marketing and sales efforts to acquire new customers,
while also leveraging its already significant customer base through cost
effective, customer retention initiatives. Such spending will be within the
context of the Company's overall marketing plan, which is continually evaluated
and revised to reflect the results of the Company's most recent market research,
including changing economic conditions, and seeks to determine the most
cost-efficient use of the Company's marketing dollars. Although the Company
believes that increased spending in the area of marketing and sales will be
necessary for the Company to continue to grow its revenues, the Company expects
that on an annual basis marketing and sales expense will decline as a percentage
of net revenues.
Technology and Development Expense
Three Months Ended Nine Months Ended
-------------------------------------------- --------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
------------- --------------- ------------ ------------- ------------- ---------------
(in thousands)
Technology and development $3,323 $3,222 3.1% $10,316 $10,444 (1.2%)
Percentage of net revenues 2.7% 2.8% 2.5% 2.9%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Technology and development expense increased
during the three months ended March 30, 2003, in comparison to the same period
of the prior year, as a result of incremental costs associated with The Popcorn
Factory, acquired in May 2002, but decreased as a percentage of net revenues
during the three and nine months ended March 30, 2003 due to
9
cost-efficiencies realized by in-sourcing technology applications and bringing
the Company's disaster recovery web-hosting platform in-house. Internalizing the
Company's development functions has enabled the Company to cost effectively
enhance the content and functionality of its Web sites and improve the
performance of the Company's fulfillment and database systems, while adding
improved operational flexibility and supplemental back-up and system redundancy.
During the three and nine months ended March 30, 2003, the Company expended $4.3
million and $13.5 million, respectively, on technology and development, of which
$1.0 million and $3.2 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.
General and Administrative Expense
Three Months Ended Nine Months Ended
-------------------------------------------- ---------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
------------- --------------- ------------- ------------- ------------- --------------
(in thousands)
General and administrative $7,343 $6,847 7.2% $22,212 $20,826 6.7%
Percentage of net revenues 5.9% 5.9% 5.4% 5.8%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. The increase in general and administrative
expense during the three and nine months ended March 30, 2003, in comparison to
the same periods of the prior year, was primarily attributable to incremental
costs associated with the operation of The Popcorn Factory, acquired in May
2002, and increased insurance costs resulting from overall market conditions,
partially offset by various cost reduction initiatives.
The Company believes that its current general and administrative infrastructure
is sufficient to support existing requirements, and as such, while increasing in
absolute dollars, general and administrative expenses on an annual basis are
expected to continue to decline as a percentage of net revenues.
Depreciation and Amortization Expense
Three Months Ended Nine Months Ended
------------------------------------------- ---------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
----------- --------------- ------------- ------------- ------------- ---------------
(in thousands)
Depreciation and amortization $3,594 $3,788 (5.1%) $11,691 $11,149 4.9%
Percentage of net revenues 2.9% 3.3% 2.8% 3.1%
The decrease in depreciation and amortization expense during the three months
ended March 30, 2003, in comparison to the same period of the prior year,
reflects the impact of the Company's declining rate of capital additions, and
the fact that certain software components of the Company's order entry, customer
service, fulfillment and database systems, implemented in fiscal 2000, are now
fully depreciated. The increase in depreciation and amortization expense during
the nine months ended March 31, 2003, in comparison to the same period of the
prior year, was primarily the result of additional depreciation and amortization
associated with The Popcorn Factory, acquired in May 2002, and current year
capital additions, offset in part by the aforementioned reduction due to fully
depreciated assets.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, is critical to attaining
its strategic objectives, the Company expects that depreciation and amortization
will continue to decrease as a percentage of net revenues in comparison to prior
fiscal periods.
10
Other Income (Expense)
Three Months Ended Nine Months Ended
-------------------------------------------- ---------------------------------------------
March 30, March 31, March 30, March 31,
2003 2002 % Change 2003 2002 % Change
------------- ------------- ------------- ------------- ------------- ---------------
(in thousands)
Interest income $245 $515 (52.4%) $880 $2,174 (59.5%)
Interest expense (213) (308) 30.8% (789) (920) 14.2%
Other 95 (92) 203.3% (53) (128) 58.6%
------------- ------------- ------------- -------------
$127 $115 10.4% $38 $1,126 (96.6%)
============= ============= ============= =============
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) for the three months ended March 30, 2003
was primarily due to a gain related to the sale of certain retail store assets,
offset in part by lower interest income due to the decline in invested cash and
investment balances in order to fund operations, capital expenditures and the
acquisition of The Popcorn Factory in May 2002, as well as a decline in the
Company's average rate of return on its investments due to market conditions.
The decrease in other income (expense) for the nine months ended March 30, 2003
was primarily due to the decline in invested cash and investment balances in
order to fund operations, capital expenditures and the acquisition of The
Popcorn Factory in May 2002, as well as a decline of the Company's average rate
of return on its investments due to market conditions.
Income Taxes
During the three and nine months ended March 30, 2003 the Company provided no
income tax provision due to the availability of net operating loss
carryforwards. However, during the three and nine months ended March 31, 2002
the Company recovered previously paid income taxes of approximately $0.7 million
as a result of tax law changes, which extended the period for which companies
were allowed to carry-back losses. The Company has provided a full valuation
allowance against the remaining portion of its deferred tax asset, consisting
primarily of net operating losses, because of uncertainty regarding its future
realization.
Liquidity and Capital Resources
At March 30, 2003, the Company had working capital of $33.6 million, including
cash and equivalents and short-term investments of $60.7 million, compared to
working capital of $23.3 million, including cash and equivalents and short-term
investments of $63.4 million, at June 30, 2002. The increase in working capital
resulted primarily from earnings, adjusted for non-cash items primarily
consisting of depreciation and amortization, offset in part by capital
expenditures, repayment of long-term debt and capital lease obligations and the
final payment on a long-term online marketing contract. In addition to its cash
and short-term investments, at March 30, 2003 and June 30, 2002, the Company
maintained approximately $4.4 million and $9.6 million of long-term investments,
respectively, consisting primarily of investment grade corporate and U.S.
government securities.
Net cash used in operating activities of $1.7 million for the nine months ended
March 30, 2003 was primarily attributable to seasonal changes in working
capital, consisting of inventory purchases for the upcoming holidays and spring
selling season, a contractual payment on a long-term online marketing agreement
and a reduction in accounts payable and accrued expenses, offset by net income,
adjusted for non-cash charges of depreciation and amortization.
Net cash provided by investing activities of $11.5 million for the nine months
ended March 30, 2003 was principally comprised of net maturities of long-term
investments, reduced by capital expenditures related to the Company's technology
infrastructure.
Net cash used in financing activities was $1.9 million for the nine months ended
March 30, 2003, resulting primarily from repayments of amounts outstanding under
the Company's credit facilities and long-term capital lease obligations, offset
in part by the net proceeds received upon the exercise of employee stock options
and purchases of stock under the Company's Employee Stock Purchase Plan.
At March 30, 2003, the Company's material capital commitments consist of:
11
o obligations outstanding under capital and operating leases (excluding
guarantees of $0.5 million), as well as commercial notes related to
obligations arising from, and collateralized by, the underlying assets of
the Company's warehousing/fulfillment facility in Madison, Virginia (fiscal
2003: $3.4 million, fiscal 2004: $10.2 million, fiscal 2005: $8.9 million,
fiscal 2006: $5.2 million, fiscal 2007: $3.2 million, fiscal 2008: $1.6
million, and thereafter: $9.4 million);
o online marketing agreements ($1.1 million); and
o inventory commitments ($8.0 million).
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. Although no
repurchases have been made as of May 7, 2003, any such purchases could be made
from time to time in the open market and through privately negotiated
transactions, subject to general market conditions. The repurchase program will
be funded utilizing available cash.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amount of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, inventory and long-lived assets,
including goodwill and other intangible assets related to acquisitions.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities and, secondarily,
12
certain of its financing arrangements. Under its current policies, the Company
does not use interest rate derivative instruments to manage exposure to interest
rate changes.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
For purposes of rule 13a-14 and 15d-14 of the Securities Exchange Act of
1934 ("Exchange Act") the term "disclosure controls and procedures" refers
to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. Within 90 days prior to the date of
this report ("Evaluation Date"), the Company carried out an evaluation
under the supervision and with the participation of the Company's Chief
Executive Officer and its Chief Financial Officer of the effectiveness of
the design and operation of its disclosure controls and procedures. Based
on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date, such
controls and procedures were effective at ensuring that required
information will be disclosed on a timely basis in our periodic reports
filed under and pursuant to the Exchange Act.
(b) Changes in internal controls
There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls subsequent
to the Evaluation Date.
13
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification by James F. McCann, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by William E. Shea, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 7, 2003, the Company announced that it received
notification from J.P. Morgan Partners (SBIC), LLC that it had
terminated its Rule 10b5-1 Sales Plan, effective at the close of
business on Tuesday, April 8, 2003.
On April 22, 2003, the Company filed a report on Form 8-K
announcing results of operations and financial condition for its
fiscal 2003 third quarter ended March 30, 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
--------------------------
(Registrant)
Date: May 14, 2003 /s/ James F. McCann
---------------------- --------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 14, 2003 /s/ William E. Shea
---------------------- --------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
15
CERTIFICATIONS
--------------
I, James McCann, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of 1-800-FLOWERS.COM,
Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ James F. McCann
----------------------- ------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
16
I, William Shea, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of 1-800-FLOWERS.COM,
Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ William E. Shea
----------------------- ------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
17