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 April 1, 2001 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: 26,473,520 ------------ (Number of shares of Class A common stock outstanding as of May 9, 2001) 37,748,525 ------------ (Number of shares of Class B common stock outstanding as of May 9, 2001)
1-800-FLOWERS.COM, Inc. FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED APRIL 1, 2001 INDEX Page Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited): Consolidated Balance Sheets - April 1, 2001 and July 2, 2000 1 Consolidated Statements of Operations - Three and Nine Months Ended April 1, 2001 and March 26, 2000 2 Consolidated Statements of Cash Flows - Nine Months Ended April 1, 2001 and March 26, 2000 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
PART I. - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) <TABLE> <S> <C> <C> April 1, 2001 July 2, 2000 ---------------------------------------- (unaudited) Assets Current assets: Cash and equivalents $ 82,660 $111,624 Receivables, net 9,475 8,382 Inventories 15,973 10,569 Prepaid and other 4,438 4,330 ---------------------------------------- Total current assets 112,546 134,905 Property, plant and equipment, at cost, net 45,548 40,854 Capitalized investment in leases 771 965 Goodwill and investment in licenses, net of accumulated amortization 32,155 38,040 Investments 3,000 918 Other assets 6,380 8,959 ---------------------------------------- Total assets $200,400 $224,641 ======================================== Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 62,204 $ 50,937 Current maturities of long-term debt and obligations under capital leases 4,777 1,839 ---------------------------------------- Total current liabilities 66,981 52,776 Long-term debt and obligations under capital leases 12,318 9,441 Other liabilities 3,861 3,506 ---------------------------------------- Total liabilities 83,160 65,723 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, 26,444,978 and 26,362,068 shares issued at April 1, 2001 and July 2, 2000, respectively 264 264 Class B common stock, $.01 par value, 200,000,000 shares authorized, 43,074,985 and 43,141,645 shares issued at April 1, 2001 and July 2, 2000, respectively 431 432 Additional paid-in capital 238,558 239,475 Retained deficit (118,905) (77,357) Deferred compensation - (788) Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108) ---------------------------------------- Total stockholders' equity 117,240 158,918 ---------------------------------------- Total liabilities and stockholders' equity $200,400 $224,641 ======================================== </TABLE> See accompanying notes to consolidated financial statements. 1
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) <TABLE> <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended ------------------------------------------------- April 1, March 26, April 1, March 26, 2001 2000 2001 2000 ------------- ---------- ----------- ------------ Net revenues $103,221 $83,763 $309,980 $257,747 Cost of revenues 64,020 54,143 188,210 161,886 ------------- ---------- ----------- ------------ Gross profit 39,201 29,620 121,770 95,861 Operating expenses: Marketing and sales 32,251 35,507 117,607 111,772 Technology and development 4,253 4,097 13,361 11,999 General and administrative 6,969 6,773 20,981 21,949 Depreciation and amortization 5,383 4,487 15,704 10,202 ------------- ----------- ---------- ------------ Total operating expenses 48,856 50,864 167,653 155,922 ------------- ----------- ---------- ------------ Operating loss (9,655) (21,244) (45,883) (60,061) Other income (expense): Interest income 1,402 1,894 4,821 6,153 Interest expense (333) (294) (985) (1,116) Other, net 76 107 499 194 ------------- ----------- ---------- ------------ Total other income (expense) 1,145 1,707 4,335 5,231 ------------- ----------- ---------- ------------ Loss before income taxes and minority interests (8,510) (19,537) (41,548) (54,830) Benefit from income taxes - 268 - 867 ------------- ----------- ----------- ----------- Loss before minority interests (8,510) (19,269) (41,548) (53,963) Minority interests in operations of consolidated subsidiaries - 4 - 43 ------------- ----------- ----------- ----------- Net loss $(8,510) $(19,265) $(41,548) $(53,920) ============= =========== =========== =========== Basic and diluted net loss per common share $(0.13) $(0.31) $(0.65) $(0.90) ============= =========== =========== =========== Weighted average shares used in the calculation of basic and diluted net loss per common share 64,187 62,667 64,186 59,711 ============= =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 2
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <S> <C> <C> Nine Months Ended -------------------------------------- April 1, 2001 March 26, 2000 ------------------ ------------------- Operating activities: Net loss $(41,548) $(53,920) Reconciliation of net loss to net cash used in operations: Depreciation and amortization 15,704 10,202 Deferred income taxes - 893 Management put liability - 1,451 Bad debt expense 137 607 Minority interests - (43) (Reduction)/amortization of deferred compensation (155) 289 Gain on sale of investment (343) - Other non-cash charges (99) 118 Changes in operating items, excluding the effects of acquisitions: Receivables (1,230) (2,824) Inventories (5,404) (7,029) Prepaid and other (108) (848) Accounts payable and accrued expenses 11,266 29,437 Other assets 2,106 (4,118) Other liabilities 355 858 ------------------ ------------------- Net cash used in operating activities (19,319) (24,927) Investing activities: Acquisitions, net of cash acquired - (25,515) Purchase of investments (3,000) (1,000) Sale of investments 1,188 - Proceeds from sale of business - 2,488 Capital expenditures, net of non-cash expenditures (10,644) (16,760) Notes receivable 13 296 ------------------ ------------------- Net cash used in investing activities (12,443) (40,491) Financing activities: Proceeds from issuance of common stock, net 25 115,840 Proceeds from bank borrowings 16,510 20,340 Repayment of notes payable and bank borrowings (12,685) (39,868) Payment of capital lease obligations (1,052) (1,488) ------------------ ------------------- Net cash provided by financing activities 2,798 94,824 ------------------ ------------------- Net change in cash and equivalents (28,964) 29,406 Cash and equivalents: Beginning of period 111,624 99,183 ------------------ ------------------- End of period $ 82,660 $128,589 ================== =================== </TABLE> See accompanying notes to consolidated financial statements. 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 with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 April 1, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2001. The balance sheet at July 2, 2000 has been derived from the audited financial statements at that date. Certain prior period amounts have been reclassified to conform to the current period presentation. 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 July 2, 2000. Comprehensive Loss For the three and nine months ended April 1, 2001 and March 26, 2000, the Company's comprehensive losses were equal to the respective net losses for each of the periods presented. Note 2 - Acquisitions and Disposition Acquisition of GreatFood.com, Inc. On November 24, 1999, the Company completed its acquisition of GreatFood.com, Inc. ("GreatFood.com"), an online retailer of specialty and gourmet food products. The purchase price of approximately $18.9 million was funded with a portion of the net proceeds available from the Company's initial public offering ("IPO"). The acquisition has been accounted for as a purchase and, accordingly, the operating results of GreatFood.com have been included in the Company's consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximating $18.9 million, is being amortized over three years. Acquisition of TheGift.com, Inc. On November 12, 1999, the Company completed its acquisition of TheGift.com, Inc. ("TheGift.com"), an online retailer of specialty gift products. The purchase price of approximately $1.5 million was funded through the issuance of 117,379 shares of the Company's Class A common stock, as determined based upon the average closing price of the Company's common stock for the five days prior to the date of acquisition. The acquisition has been accounted for as a purchase and, accordingly, the operating results of TheGift.com have been included in the Company's consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximating $1.7 million, is being amortized over three years. Disposition of Floral Works, Inc. On January 12, 2000, the Company completed the sale of its majority owned Floral Works, Inc. ("Floral Works") subsidiary to a private investment firm. Floral Works is a provider of wholesale floral bouquets to supermarkets and grocery store chains. The sales price of $3.1 million approximated the Company's carrying value of the subsidiary's net assets at the time of divestiture. 4
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) The following unaudited pro forma consolidated financial information has been prepared as if the acquisitions of GreatFood.com and TheGift.com and the disposition of Floral Works had taken place at the beginning of fiscal year 2000. The following unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisitions of GreatFood.com and TheGift.com and the disposition of Floral Works taken place at the beginning of the periods presented. <TABLE> <S> <C> <C> Nine Months Ended -------------------------------------------- April 1, 2001 March 26, 2000 ---------------------- -------------------- (in thousands, except per share data) Net revenues (*) $309,980 $255,278 Loss from operations (45,883) (67,893) Net loss (41,548) (61,443) Net loss per common share $(0.65) $(1.03) </TABLE> (*) Pre-acquisition net revenues for GreatFood.com and TheGift.com were not material to the Company's results of operations. Disposition of Minority Interest in American Floral Services, Inc. On November 21, 2000, the Company sold its minority investment in American Floral Services, Inc., a floral wire service, to Teleflora, Inc. The Company received cash proceeds of $1.2 million and recorded a gain of $0.3 million, as a result of the transaction. Acquisition of Minority Interest in The Plow & Hearth, Inc. Upon completion of the Company's IPO in August 1999, the Company satisfied its obligation under the Plow & Hearth management put liability when it acquired the remaining outstanding shares of common stock and stock options from the minority shareholders of Plow & Hearth for cash of approximately $7.9 million, net of Plow & Hearth stock option exercise proceeds of approximately $0.5 million. Accordingly, the incremental amount of funding required to satisfy the management put liability, which was $6.3 million at June 27, 1999, was recorded in the Company's fiscal 2000 quarter ended September 26, 1999 as general and administrative expense and goodwill in the amounts of $1.5 million and $0.1 million, respectively. Note 3 - Redeployment Charge In June 2000, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a redeployment charge of approximately $2.1 million. The principal actions of the charge relate to the Company's plan to close certain retail stores in connection with its strategic redeployment of its retail network as direct fulfillment centers and the relocation of certain customer service centers, enabling the Company to meet increasing call volume requirements while reducing costs per call. The redeployment will be completed in phases during fiscal year 2001. The Company completed the closure of its Marietta, Georgia service center during October 2000, and in November 2000 opened a new service center in Ardmore, Oklahoma. During the nine months ended April 1, 2001, $0.3 million was charged against the accrual, and at April 1, 2001, a balance of $1.8 million remains, consisting primarily of accruals for future lease commitments and the write-off of corresponding lease-hold improvements. 5
1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) Note 4 - Long-Term Debt The Company's long-term debt and obligations under capital leases consist of the following: <TABLE> <S> <C> <C> April 1, 2001 July 2, 2000 --------------- ----------------- (in thousands) Commercial notes and revolving credit lines $10,287 $6,431 Seller financed acquisition obligations 264 295 Obligations under capital leases 6,544 4,554 --------------- ----------------- 17,095 11,280 Less current maturities of long-term debt and obligations under capital leases 4,777 1,839 --------------- ----------------- $12,318 $9,441 =============== ================= </TABLE> In January 2001, the Company obtained a $10.0 million equipment lease line of credit with a bank. Interest under this line, which matures in January 2006, is determined at the time of borrowing based on the bank's base rate. On January 10, 2001, the Company financed $2.6 million of equipment purchases through such lease line. The borrowings, which bear interest at 6.35% annually, are payable in 60 equal monthly installments of principal and interest commencing in February 2001. Borrowings under the line are collateralized by the underlying equipment purchased and an equal amount of pledged investments. Note 5 - Stockholders' Equity Stock Split On July 7, 1999, the board of directors and stockholders approved an amendment to the Company's certificate of incorporation, effective on July 28, 1999, that increased the number of authorized shares of preferred stock to 10,000,000 and provided for a ten-for-one split of the outstanding shares of common stock. Accordingly, the accompanying consolidated financial statements and footnotes have been retroactively restated to reflect the stock split. Initial Public Offering On August 6, 1999, the Company closed its initial public offering of its Class A common stock, issuing 6,000,000 shares at a price of $21.00 per share. The Company raised proceeds of approximately $114.8 million, net of underwriting discounts, commissions and other offering costs of approximately $11.2 million. In anticipation of its IPO, the Company amended and restated its certificate of incorporation on July 7, 1999 to provide that all previously outstanding shares of Class A common stock, of which the holders were entitled to one vote per share, and Class B common stock, which contained no voting rights, convert into a new series of Class B common stock entitled to 10 votes per share. Additionally, a new series of Class A common stock was established that entitles the holders to one vote per share. Each share of new Class B common stock shall automatically convert into one share of new Class A common stock upon transfer, with limited exceptions, and at the option of the holder. Note 6 - Net Loss Per Common Share Net loss per common share is computed using the weighted-average number of common shares outstanding. Shares associated with stock options and warrants, prior to exercise, are not included in the computation as their inclusion would be antidilutive. The shares of the Company's preferred stock were converted into common stock upon completion of its IPO, and are included in the calculation of weighted-average shares as of that date. 6
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) Note 7 - Commitments and Contingencies Online Marketing Agreements On September 1, 2000, the Company entered into a new five-year $22.1 million interactive marketing agreement with America Online, Inc. ("AOL") that effectively extends and enhances the terms of the July 1, 1999 agreement with AOL for an additional two years, through August 2005. Under the terms of the new agreement, the Company will continue as the exclusive marketer of fresh-cut flowers across six AOL properties including AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City and ICQ and receive increased promotions across several AOL properties. As a result of the termination of the previous agreement, the Company recorded a one-time charge of approximately $7.3 million during the three months ended October 1, 2000 to write-off amounts previously owed, paid and unamortized under the old agreement. 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. 7
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 "Additional Risk Factors that May Affect Future Results" and elsewhere in this Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this 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, Inc. is a leading multi-channel retailer of thoughtful gifts for all occasions, offering an extensive array of fresh-cut flowers, plants, gift baskets, gourmet foods, home decor, garden merchandise and other specialty gift products. The Company's product offering reflects a carefully selected assortment of high quality merchandise chosen for its unique "thoughtful gifting" qualities which accommodate customer needs in celebrating a special occasion or conveying a personal sentiment. Many products are available for same-day or overnight delivery and all come with the Company's 100% satisfaction guarantee. With one of the most recognized brands in retailing and a history of successfully integrating technologies and business innovations, the Company has evolved into a "next age" retailer providing convenient, multi-channel access for customers via the Internet, telephone, catalogs and retail stores. The Company expects to incur losses for the foreseeable future as a result of the significant operating and capital expenditures required to achieve its objectives. However, the Company expects to achieve positive Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the fourth quarter of fiscal 2001 and for the fiscal year ending June 30, 2002. No assurances can be made that positive EBITDA can be achieved on this schedule or in the foreseeable future. In order to achieve and maintain positive EBITDA and/or profitability, the Company will need to generate revenues exceeding historical levels and/or reduce operating expenditures. The Company's prospects for achieving positive EBITDA and profitability must be considered in light of the risks, uncertainties, expenses, and difficulties encountered by companies in the rapidly evolving market of online commerce, including those described under the caption "Additional Risk Factors that May Affect Future Results" and elsewhere in this Quarterly Report. Results of Operations Net Revenues <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------- -------------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ------------- ------------ --------- ------------- ------------ -------- (in thousands) (in thousands) Net revenues: Telephonic $48,642 $46,454 4.7% $169,116 $160,582 5.3% Online 47,139 29,718 58.6% 120,269 69,705 72.5% Retail/fulfillment 7,440 7,591 (2.0%) 20,595 27,460 (25.0%) -------- ------- -------- -------- Total net revenues $103,221 $83,763 23.2% $309,980 $257,747 20.3% </TABLE> Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. Telephonic and online revenues (together, referred to as the Company's "virtual sales channels") increased approximately 25.7% during both the three and nine months ended April 1, 2001, in comparison to the respective periods of the prior fiscal year. The revenue growth was primarily attributable to increased order volume and average order value, which resulted from more efficient marketing efforts, strong brand name recognition and the Company's continued expansion into non-floral products, including a broad range of items such as plants, candies and gourmet foods, home and garden merchandise and other specialty gifts. 8
The Company fulfilled a total of 1,532,000 and 4,563,000 orders through its virtual sales channels during the three and nine months ended April 1, 2001, respectively, representing increases of 21.5% and 22.3%, in comparison to the same periods of the prior fiscal year. The growth was primarily the result of online order volume increases of 50.5% and 58.7% during the three and nine months ended April 1, 2001, respectively, in comparison to the same periods of the prior fiscal year. Additionally, during the three and nine months ended April 1, 2001 the Company's virtual sales channel average order value increased to $62.50 and $63.42, respectively, representing increases of 3.6% and 2.8%, in comparison to the same periods of the prior fiscal year. Complementing the increase in online volume, orders derived from the Company's telephonic sales channel continue to remain strong, further demonstrating the benefit of offering our customers multiple channel access to our products and services. Non-floral products accounted for 31.5% and 40.6% of total virtual net revenues during the three and nine months ended April 1, 2001, respectively, compared to approximately 20.9% and 34.6% during the same periods of the prior fiscal year. The decrease in retail/fulfillment revenues during the three and nine months ended April 1, 2001, in comparison to the same period of the prior fiscal year, was due to a $0.4 million and $7.2 million reduction, respectively, in floral wholesale net revenues, resulting from the disposition of the Company's Floral Works subsidiary in January 2000, partially offset by an increase in revenues from its owned retail stores. The Company does not expect to materially increase the number of owned retail stores in the foreseeable future. Gross Profit <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ---------------------- ----------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ---------- ---------- -------- --------- ---------- --------- (in thousands) (in thousands) Gross profit $39,201 $29,620 32.3% $121,770 $95,861 27.0% Gross margin % 38.0% 35.4% 39.3% 37.2% </TABLE> Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (fees paid to wire services that serve as clearinghouses for floral orders, net of wire service rebates, and fees paid directly to florists), the cost of merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues includes labor and facility costs related to direct-to-consumer operations and to properties that are sublet to the Company's franchisees. Gross profit increased during the three and nine months ended April 1, 2001, in comparison to the same periods of the prior fiscal year, primarily as a result of increased order volume and average order value. Gross margin percentages increased during the three and nine months ended April 1, 2001, over the respective periods of the prior fiscal year, primarily due to increased online service and shipping charges, aligning them with industry norms, and the continued growth in non-floral product sales, which generate a higher gross margin. In addition, gross margin percentage was further improved by enhanced customer service through the implementation of stricter quality control standards and enforcement methods which reduced the rate of credits and replacements on floral orders. The increase in gross margin percentage was partially offset by the aforementioned increase in the average order value on florist fulfilled orders which, while generating a higher gross profit, resulted in a lower gross margin percentage because the Company's fixed service charge is spread over a higher sales price. Marketing and Sales Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended --------------------------- -------------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ------------- ------------- --------- ----------- ------------ -------- (in thousands) (in thousands) Marketing and sales $32,251 $35,507 (9.2%) $117,607 $111,772 5.2% Percentage of net revenues 31.2% 42.4% 37.9% 43.4% </TABLE> Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal agreements, costs associated with retail store, customer service center and fulfillment center operations and related operating expenses of the Company's departments engaged in marketing, 9
selling and merchandising activities. Marketing and sales expenses decreased to 31.2% and 37.9% (35.6%, exclusive of the non-recurring charge discussed below) of net revenues during the three and nine months ended April 1, 2001, respectively, compared to 42.4% and 43.4% during the same periods of the prior fiscal year, as a result of volume related efficiencies and cost-effective advertising, coupled with the Company's strong brand name and savings realized from successful renegotiations of certain of its portal agreements. The increase in marketing and sales expense during the nine months ended April 1, 2001, in comparison to the same period of the prior fiscal year, was primarily attributable to a non-recurring charge of $7.3 million ($0.11 per diluted share), associated with the termination of an interactive marketing agreement with one of the Company's portal partners. The Company subsequently entered into a new, enhanced five-year, $22.1 million agreement with the same portal partner, thereby reducing the Company's continuing annualized expense with such partner by $5.6 million. The balance of the increase in marketing and sales expense over the prior fiscal year was primarily attributable to volume driven order fulfillment and customer service expenses. In order to continue to execute its business plan, in future periods, the Company expects to continue to invest significantly in its marketing and sales efforts to continue 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 market research, which seeks to determine the most cost-efficient use of the Company's marketing dollars. Such evaluation includes the ongoing review of the Company's strategic relationships with its Internet portal partners to ensure that such relationships continue to generate cost-effective incremental volume. As such, the Company expects spending will continue to decrease as a percentage of net revenues, in comparison to prior years. Technology and Development Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ---------------------- ------------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ---------- ---------- -------- ----------- ---------- -------- (in thousands) (in thousands) Technology and development $4,253 $4,097 3.8% $13,361 $11,999 11.4% Percentage of net revenues 4.1% 4.9% 4.3% 4.7% </TABLE> 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. The increase in technology and development expense during the three and nine months ended April 1, 2001, in comparison to the same periods of the prior fiscal year, was primarily attributable to on-going development costs incurred to enhance the content and functionality of the Company's web sites, as well as enhancements to the Company's fulfillment and database systems and volume related increases in web hosting fees charged by the Company's third-party hosting facility. During the three months ended April 1, 2001, the Company transitioned its Web-hosting function in-house, thereby providing for future cost efficiencies, while improving operating flexibility and providing additional back-up and system redundancy. During the three and nine months ended April 1, 2001, the Company expended $7.0 million and $21.2 million, respectively, on technology and development, of which $2.7 million and $7.8 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, particularly in the areas of web site hosting and development and database management, will decrease in comparison to prior fiscal years as the Company continues to benefit from previous investments in its current technology platform. General and Administrative Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ------------------------- ------------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ----------- ---------- -------- ----------- ------------ -------- (in thousands) (in thousands) General and administrative $6,969 $6,773 2.9% $20,981 $21,949 (4.4%) Percentage of net revenues 6.8% 8.1% 6.8% 8.5% </TABLE> 10
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 months ended April 1, 2001, in comparison to the same period of the prior fiscal year, was primarily the result of increased insurance costs partially offset by various cost reduction initiatives. The decrease in general and administrative expense during the nine months ended April 1, 2001, in comparison to the same period of the prior fiscal year, was attributable to a $1.5 million charge recorded in August 1999 to account for the increase in the management put liability associated with the Company's acquisition of the minority shareholders' interest in Plow & Hearth. Exclusive of such prior fiscal year charge, general and administrative expense increased by $0.5 million over the prior fiscal year due to increased insurance costs and incremental administrative costs associated with operating as a public company. The Company believes that its general and administrative infrastructure is sufficient to support its existing requirements and, as such, the Company expects general and administrative expenses will continue to decline as a percentage of net revenues, in comparison to prior fiscal years. Depreciation and Amortization Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ---------------------- ---------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ---------- ----------- -------- ----------- --------- -------- (in thousands) (in thousands) Depreciation and amortization $5,383 $4,487 20.0% $15,704 $10,202 53.9% Percentage of net revenues 5.2% 5.4% 5.1% 4.0% </TABLE> The increases in depreciation and amortization expense during the three and nine months ended April 1, 2001 over the comparable periods of the prior fiscal year resulted from additional capital expenditures in information systems hardware and software. In addition to the increase in depreciation caused by the aforementioned capital expenditures, goodwill amortization for the nine months ended April 1, 2001 increased in comparison to the prior year as a result of the November 1999 acquisitions of GreatFood.com and TheGift.com. Other Income (Expense) <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ----------------------- --------------------------- April 1, March 26, April 1, March 26, 2001 2000 % Change 2001 2000 % Change ------------- --------- --------- ------------ -------------- --------- (in thousands) (in thousands) Interest income $1,402 $1,894 (26.0%) $4,821 $6,153 (21.6%) Interest expense (333) (294) 13.3% (985) (1,116) (11.7%) Other 76 107 (29.0%) 499 194 157.2% ---------- -------- -------- -------- $1,145 $1,707 (32.9%) $4,335 $5,231 (17.1%) </TABLE> 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 mortgage notes. In November 2000, the Company recognized a gain of $0.3 million on the sale of its minority investment in American Floral Services, Inc. ("AFS"). Income Taxes Based on the utilization of loss carrybacks available during fiscal 2000, the Company recorded tax benefits of $0.3 million and $0.9 million during the three and nine months ended March 26, 2000, respectively. All available loss carrybacks were fully utilized during fiscal 2000, and therefore no similar benefit has been recorded during any period of fiscal 2001. The Company has provided a full valuation allowance on that portion of its deferred tax assets, consisting primarily of net operating loss carryforwards, that exceeded the amount of recoverable income taxes due to allowable carryback claims. Liquidity and Capital Resources At April 1, 2001, the Company had working capital of $45.6 million, including cash and equivalents of $82.7 million, compared to working capital of $82.1 million, including cash and equivalents of $111.6 million, at July 2, 2000. 11
Net cash used in operating activities of $19.3 million for the nine months ended April 1, 2001 was primarily attributable to net losses, reduced by non-cash charges of depreciation and amortization and working capital changes comprised primarily of increases in accounts payable and accrued expenses, partially offset by increases in inventory associated with the Company's expansion into non-floral product lines and in anticipation of the upcoming Easter and Mother's Day holidays. Net cash used in investing activities was $12.4 million for the nine months ended April 1, 2001 and consisted primarily of capital expenditures for computer hardware and software, including the development and implementation of a scalable, Company-operated hosting facility, installation of a new state-of-the-art inventory warehouse management system at the Company's principal fulfillment center and the opening of a new 300 seat service center in Ardmore, Oklahoma. In addition, based upon the Company's assessment of its future cash requirements, during the three months ended April 1, 2001, the Company invested $3.0 million in long-term investment grade government and corporate securities. Such expenditures were offset by the proceeds realized from the sale of the Company's investment in AFS in November 2000. The Company expects that as it begins its return to positive cash flow, that it will continue to reallocate available cash balances into longer term securities in order to maximize the return on its investments. Net cash provided by financing activities was $2.8 million for the nine months ended April 1, 2001, resulting primarily from the net proceeds from long-term bank borrowings to finance the purchase of the aforementioned hosting equipment, inventory warehouse management system, offset by repayments of amounts outstanding under the Company's credit facilities and capital lease obligations. The Company intends to continue to invest in support of its growth strategy. These investments include continued advertising and marketing programs designed to enhance the Company's brand name recognition and acquire new customers, expansion of its product lines to include a broad variety of specialty gift and gourmet items, and the further development of its Web site and operating infrastructure. The Company believes that current cash and equivalents will be sufficient to meet these anticipated cash needs for at least the next twelve months. However, any projection of future cash needs and cash flows are subject to substantial uncertainty. If current cash and equivalents that may be generated from operations are insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or debt securities or to increase its lines of credit. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. Additional Risk Factors that May Affect Future Results The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that are currently deemed immaterial may also impair its business operations. If any of the following risks actually occur, the Company's business, financial condition or results of operations would likely suffer. The Company expects to incur losses for the foreseeable future, which may reduce the trading price of its Class A common stock. The Company expects to incur significant operating and capital expenditures in order to: o expand the 1-800-FLOWERS.COM brand through marketing and other promotional activities; o expand its product offering; and o enhance the Company's technological infrastructure and order fulfillment capabilities. Although the Company has been profitable in the past, management expects that the Company will incur losses for the foreseeable future as a result of these and other expenditures. However, the Company does expect to achieve positive EBITDA for the fourth quarter of fiscal 2001 and for the fiscal year ending June 30, 2002. No assurances can be made that positive EBITDA can be achieved on this schedule or in the foreseeable future. In order to achieve and maintain positive EBITDA and/or profitability, the Company will need to generate revenues exceeding historical levels and/or reduce operating expenses. Management cannot assure you that the Company will generate revenues or reduce operating expenses sufficiently to achieve positive EBITDA and/or profitability. Even if the Company does achieve positive EBITDA and/or profitability, it may not sustain or increase positive EBITDA and/or profitability on a quarterly or annual basis in the future. 12
The Company's quarterly operating results may significantly fluctuate and you should not rely on them as an indication of its future results. The Company's future revenues and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management's control. The most important of these factors include: o seasonality; o the retail economy; o the timing and effectiveness of marketing programs; o the timing of the introduction of new products and services; o the timing and effectiveness of capital expenditures; o the Company's ability to enter into or renew marketing agreements with Internet companies; and o competition. The Company may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue in relation to its expenses, operating results could suffer. The Company's operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company's future performance. It is possible that results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of the Company's Class A common stock to fall. Consumer spending on flowers, gifts and other products sold by the Company may vary with general economic conditions. If general economic conditions deteriorate and the Company's customers have less disposable income, consumers may spend less on its products and its quarterly operating results may suffer. The Company's operating results may suffer if revenues during the Company's peak seasons do not meet its expectations. Sales of the Company's products are seasonal, concentrated in the second calendar quarter, due to Mother's Day, Administrative and Professionals' Week and Easter, and the fourth calendar quarter, due to the Thanksgiving and Christmas holidays. In anticipation of increased sales activity during these periods, the Company hires a significant number of temporary employees to supplement its permanent staff and the Company increases its inventory levels. If revenues during these periods do not meet the Company's expectations, it may not generate sufficient revenue to offset these increased costs and its operating results may suffer. If the Company's customers do not find its expanded product lines appealing, revenues may not grow and net income may decrease. The Company's business historically has focused on offering floral and floral related gift products. The Company has expanded its product lines in the plant, gift baskets, gourmet treats, unique or specialty gifts and home and garden categories, and expects to continue to incur significant costs in marketing these new products. If the Company's customers do not find its expanded product lines appealing, the Company may not generate sufficient revenue to offset its related costs and its results of operations may be negatively impacted. If the Company fails to develop and maintain its brand, it may not increase or maintain its customer base or its revenues. The Company must develop and maintain the 1-800-FLOWERS.COM brand to expand its customer base and its revenues. In addition, the Company has introduced and acquired other brands in the past, and may continue to do so in the future. The Company believes that the importance of brand recognition will increase as it expands its product offerings. Many of the Company's customers may not be aware of the Company's non-floral products. The Company intends to maintain its expenditures for creating and maintaining brand loyalty and raising awareness of its additional product offerings. However, if the Company fails to advertise and market its products effectively, it may not succeed in establishing its brands and may lose customers leading to a reduction of revenues. The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brand will also depend on its success in providing its customers high-quality products and a high level of customer service. If the Company's customers do not perceive its products and services to be of high quality, the value of the 1-800-FLOWERS.COM brand would be diminished, the Company may lose customers and its revenues may decline. If the Company does not cost effectively market its products, its advertising expenses will increase and reduce its income The Company must advertise its products effectively and cost efficiently in order to increase sales and maintain its expenses. If the Company does not advertise effectively, it will likely be necessary to increase marketing expenditures to maintain its revenue growth. As a result, the Company's customer acquisition costs will increase, leading to an increase in expenses and a decrease in income. A failure to establish and maintain strategic online relationships that generate a significant amount of traffic could limit the growth of the Company's business. The Company expects that while a greater percentage of its online customers will continue to come to its Web site directly, it will also rely on third party Web sites with which the Company has strategic relationships, including AOL, Yahoo!, and the Microsoft Network for traffic. If these 13
third-parties do not attract a significant number of visitors, the Company may not receive a significant number of online customers from these relationships and its revenues from these relationships may decrease or not grow. There continues to be strong competition to establish relationships with leading Internet companies, and the Company may not successfully enter into additional relationships, or renew existing ones beyond their current terms. The Company may also be required to pay significant fees to maintain and expand existing relationships. The Company's online revenues may suffer if it fails to enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs. If local florists and other third-party vendors do not fulfill orders to the Company's customers' satisfaction, its customers may not shop with the Company again. Floral orders placed by the Company's customers are fulfilled by local florists, a majority of which are either part of the Company's "BloomNet" network of independent florists or the Company's owned or franchised stores. Except for the 43 Company-owned stores as of April 1, 2001, the Company does not directly control any of these florists. In addition, many of the non-floral products sold by the Company are manufactured and delivered to its customers by independent third-party vendors. If customers are dissatisfied with the performance of the local florist or other third-party vendors, they may not utilize the Company's services when placing future orders and its revenues may decrease. If a florist discontinues its relationship with the Company, the Company's customers may experience delays in service or declines in quality and may not shop with the Company again. Many of the Company's arrangements with local florists for order fulfillment may be terminated with 10 days notice. If a florist discontinues its relationship with the Company, the Company will be required to obtain a suitable replacement located in the same area, which may cause delays in delivery or a decline in quality, leading to customer dissatisfaction and loss of customers. If a significant amount of customers are not satisfied with their purchase, the Company will be required to incur substantial costs to issue refunds, credits or replacement products. The Company offers its customers a 100% satisfaction guarantee on its products. If customers are not satisfied with the products they receive, the Company will either send the customer another product or issue the customer a refund or a credit. The Company's net income could decrease if a significant number of customers request replacement products, refunds or credits. Increased shipping costs and labor stoppages may adversely affect sales of the Company's non-floral products. Non-floral products are delivered to customers either directly from the manufacturer or from the Company's distribution facility in Virginia. The Company has established relationships with the United States Postal Service, Federal Express, United Parcel Service and other common carriers for the delivery of these products. If these carriers were to raise the prices they charge to ship the Company's goods, its customers might choose to buy comparable products locally to avoid shipping charges. In addition, these carriers may experience labor stoppages, which could impact the Company's ability to deliver products on a timely basis to its customers and adversely affect its customer relationships. If the Company fails to continuously improve its Web site, it may not attract or retain customers. If potential or existing customers do not find the Company's Web site a convenient place to shop, the Company may not attract or retain customers and its sales may suffer. To encourage the use of the Company's Web site, it must continuously improve its accessibility, content and ease of use. Customer traffic and the Company's business would be adversely affected if competitors' Web sites are perceived as easier to use or better able to satisfy customer needs. Competition in the floral, plant, gift basket, gourmet treat, specialty gift and home and garden industries is intense and a failure to respond to competitive pressure could result in lost revenues. There are many companies that offer products in these categories. In the floral category, the Company's competitors include: o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; o supermarkets and mass merchants with floral departments; and o specialty gift retailers. Similarly, the plant, gift basket, gourmet treat, specialty gift and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products and is highly fragmented. Products in these categories may be purchased from a number of outlets, including mass merchants, retail specialty shops, online retailers and mail-order catalogs. 14
Competition is intense and the Company expects it to increase. Increased competition could result in: o price reductions, decreased revenue and lower profit margins; o loss of market share; and o increased marketing expenditures. These and other competitive factors could materially and adversely affect the Company's results of operations. If the Company does not accurately predict customer demand for its products, it may lose customers or experience increased costs. In the past, the Company did not need to maintain a significant inventory of products. However, as the Company expands the volume of non-floral products offered to its customers, the Company may be required to increase inventory levels and the number of products maintained in its warehouses. Because the Company has limited experience offering many of its non-floral products through its Web site, the Company may not predict inventory levels accurately. If the Company overestimates customer demand for its products, excess inventory and outdated merchandise could accumulate, tying up working capital and potentially resulting in reduced warehouse capacity and inventory losses due to damage, theft and obsolescence. If the Company underestimates customer demand, it may disappoint customers who may turn to its competitors. Moreover, the strength of the 1-800-FLOWERS.COM brand could be diminished due to misjudgments in merchandise selection. If the supply of flowers for sale becomes limited, the price of flowers could rise or flowers may be unavailable and the Company's revenues and gross margins could decline. A variety of factors affect the supply of flowers in the United States and the price of the Company's floral products. If the supply of flowers available for sale is limited due to weather conditions or other factors, prices for flowers could rise and customer demand for the Company's floral products may be reduced, causing revenues and gross margins to decline. Alternatively, the Company may not be able to obtain high quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternative sources may be of lesser quality and/or may be more expensive than those currently offered by the Company. Most of the flowers sold in the United States are grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that this will continue in the future. The availability and price of flowers could be affected by a number of factors affecting these regions, including: o import duties and quotas; o agricultural limitations and restrictions to manage pests and disease; o changes in trading status; o economic uncertainties and currency fluctuations; o severe weather; o work stoppages; o foreign government regulations and political unrest; and o trade restrictions, including United States retaliation against foreign trade practices. A failure to manage its internal operating and financial functions could lead to inefficiencies in conducting the Company's business and subject it to increased expenses. The Company's expansion efforts have significantly strained its operational and financial systems. To accommodate the Company's growth, it implemented new or upgraded operating and financial systems, procedures and controls. Additionally, the Company continues to improve its operating infrastructure through technology initiatives and any failure to integrate these initiatives in an efficient manner could adversely affect its business. In addition, the Company's systems, procedures and controls may prove to be inadequate to support its future operations. The Company's franchisees may damage its brand or increase its costs by failing to comply with its franchise agreements or its operating standards. The Company's franchise business is governed by its Uniform Franchise Offering Circular, franchise agreements and applicable franchise law. If the Company's franchisees do not comply with its established operating standards or the terms of the franchise agreements, the 1-800-FLOWERS.COM brand may be damaged. The Company may incur significant additional costs, including time-consuming and expensive litigation, to enforce its rights under the franchise agreements. Additionally, the Company is the primary tenant on certain leases, which the franchisees sublease from the Company. If a franchisee fails to meet its obligations as subtenant, the Company could incur significant costs to avoid default under the primary lease. Furthermore, as a franchiser, the Company has obligations to its franchisees. Franchisees may challenge the performance of the Company's obligations under the franchise agreements and subject it to costs in defending these claims and, if the claims are successful, costs in connection with their compliance. 15
If third parties acquire rights to use similar domain names or phone numbers or if the Company loses the right to use its phone numbers, its brand may be damaged and it may lose sales. The Company's Internet domain names are an important aspect of its brand recognition. The Company cannot practically acquire rights to all domain names similar to www.1800flowers.com. If third parties obtain rights to similar domain names, these third parties may confuse the Company's customers and cause its customers to inadvertently place orders with these third parties, which could result in lost sales and could damage its brand. Likewise, the phone number that spells 1-800-FLOWERS is important to the Company's brand and its business. While the Company has obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common "FLOWERS" misdials, it may not be able to obtain rights to use the FLOWERS phone number as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells "FLOWERS" with a different prefix or a toll-free number similar to FLOWERS, these parties may also confuse the Company's customers and cause lost sales and potential damage to its brand. In addition, under applicable FCC rules, ownership rights to telephone numbers cannot be acquired. Accordingly, the FCC may rescind the Company's right to use any of its phone numbers, including 1-800-FLOWERS. If the Company does not continue to receive rebates from wire services, its results of operations could suffer. The Company has entered into arrangements with independent wire service companies that provide it with rebates when it settles its customers' floral orders utilizing their service. If the Company cannot renew these arrangements or enter similar arrangements on commercially reasonable terms, its results of operations could suffer. In addition, these companies may eliminate or modify the rebate structure they have in place with the Company. Any adverse modification to these rebate structures could also cause the Company's results of operations to suffer. The Company's net sales and gross margins would decrease if it experiences significant credit card fraud. A failure to adequately control fraudulent credit card transactions would reduce its net sales and gross margins because it does not carry insurance against this risk. The Company has developed technology to help detect the fraudulent use of credit card information. Nonetheless, to date, the Company has suffered losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, the Company is liable for fraudulent credit card transactions because it does not obtain a cardholder's signature. A failure to integrate the systems and operations of any acquired business with the Company's operations may disrupt its business. The Company has acquired complementary businesses and may continue to do so in the future. If the Company is unable to fully integrate any future acquisition into its operations, its business and operations could suffer, management may be distracted and its expenses may increase. Moreover, the expected benefits from any acquisition may not be realized, resulting in lost opportunities and loss of capital. The Company's revenues may not grow if the Internet is not accepted as a medium for commerce. The Company expects to derive an increasing amount of its revenue from electronic commerce, and intends to extensively market its non-floral products online. If the Internet is not accepted as a medium for commerce, its revenues may not grow as the Company expects and its business may suffer. A number of factors may inhibit Internet usage, including: o inadequate network infrastructure; o consumer concerns for Internet privacy and security; o inconsistent quality of service; and o lack of availability of cost-effective, high speed service. If Internet usage grows, the infrastructure may not be able to support the demands placed on it by that growth and its performance and reliability may decline. Web sites have experienced interruptions as a result of delays or outages throughout the Internet infrastructure. If these interruptions continue, Internet usage may decline. A lack of security over the Internet may cause Internet usage to decline and cause the Company to expend capital and resources to protect against security breaches. A significant barrier to electronic commerce over the Internet has been the need for secure transmission of confidential information and transaction information. Internet usage could decline if any well-publicized compromise of security occurred. Additionally, computer "viruses" may cause the Company's systems to incur delays or experience other service interruptions. Such interruptions may materially impact the Company's ability to operate its business. If a computer virus affecting the Internet in general is highly publicized or particularly damaging, the Company's customers may not use the Internet or may be prevented from using the Internet, which would have an adverse effect on its revenues. As a result, the Company may be required to expend capital and resources to protect against or to alleviate these problems. 16
Unexpected system interruptions caused by system failures may result in reduced revenues and harm to the Company's reputation. In the past, particularly during peak holiday periods, the Company has experienced significant increases in traffic on its Web site and in its toll-free customer service centers. The Company's operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. The Company's systems have in the past, and may in the future, experience: o system interruptions; o long response times; and o degradation in service. The Company cannot assure you that it will adequately implement systems to improve the speed, security and availability of its Internet and telecommunications systems. Because the Company's business depends on customers making purchases on its systems, its revenues may decrease and its reputation could be harmed if it experiences frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season. If AT&T and MCI do not adequately maintain the Company's telephone service, the Company may experience system failures and its revenues may decrease. The Company is dependent on AT&T and MCI to provide telephone services to its customer service centers. If AT&T and MCI experience system failures or fail to adequately maintain the Company's systems, the Company would experience interruptions and its customers might not continue to utilize its services. If the Company does not maintain its telephone service, it will be unable to generate revenue. The Company's future success depends upon these third-party relationships because it does not have the resources to maintain its telephone service without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt the Company's operations or require it to incur significant unanticipated costs. Interruptions in FTD's Mercury system or a reduction in the Company's access to this system may disrupt order fulfillment and create customer dissatisfaction. A portion of the Company's customers' orders are communicated to the fulfilling florist through FTD's Mercury system. The Mercury system is an order processing and messaging network used to facilitate the transmission of floral orders between florists. The Mercury system has in the past experienced interruptions in service. If the Mercury system experiences interruptions in the future, the Company would experience difficulties in fulfilling its customers' orders and many of its customers might not continue to shop with the Company. If the Company is unable to hire and retain key personnel, its business and growth may suffer. The Company's success is dependent on its ability to hire, retain and motivate highly qualified personnel. In particular, the Company's success depends on the continued efforts of its Chairman and Chief Executive Officer, James F. McCann, and its President, Christopher G. McCann. In addition, the Company has recently hired or promoted several new members to its senior management team to help manage its growth and it may need to recruit, train and retain additional employees, particularly employees with technical backgrounds. These individuals are in high demand and the Company is not certain it will be able to attract the personnel it needs. The loss of the services of any of the Company's executive management or key personnel, its failure to integrate any of its new senior management into its operations or its inability to attract qualified additional personnel could cause its growth to suffer and force it to expend time and resources in locating and training additional personnel. Many governmental regulations may impact the Internet, which could affect the Company's ability to conduct business. Any new law or regulation, or the application or interpretation of existing laws, may decrease the growth in the use of the Internet or the Company's Web site. The Company expects there will be an increasing number of laws and regulations pertaining to the Internet in the United States and throughout the world. These laws or regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. This could decrease the demand for the Company's products, increase its costs or otherwise adversely affect its business. Regulations imposed by the Federal Trade Commission may adversely affect the growth of the Company's Internet business or its marketing efforts. The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations may include requirements that the Company establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by the Company. These regulations may also include enforcement and redress provisions. Moreover, even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the 17
principles noted above. The Company may become a party to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts may adversely affect its ability to collect demographic and personal information from users, which could adversely affect its marketing efforts. Unauthorized use of the Company's intellectual property by third parties may damage its brand. Unauthorized use of the Company's intellectual property by third parties may damage its brand and its reputation and may likely result in a loss of customers. It may be possible for third parties to obtain and use the Company's intellectual property without authorization. Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes infringements and misappropriations will continue to occur in the future. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The Company may be unable to register its intellectual property in some foreign countries, and furthermore, the laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. Defending against intellectual property infringement claims could be expensive and, if the Company is not successful, could disrupt its ability to conduct business. The Company cannot be certain that its products do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. The Company may be a party to legal proceedings and claims relating to the intellectual property of others from time to time in the ordinary course of its business. The Company may incur substantial expense in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against the Company may result in substantial monetary liability or may materially disrupt its ability to conduct business. If states begin imposing state sales and use taxes, the Company may lose sales or incur significant expenses in satisfaction of these obligations. At present, except for the Company's retail store operations, the Company does not collect sales or other similar taxes in respect of sales and shipments of its products in states other than those where the Company's telephonic and interactive sales channels have applicable nexus. However, various states have sought to impose state sales tax collection obligations on out-of-state direct marketing companies such as 1-800-FLOWERS.COM. A successful assertion by one or more of these states that the Company should have collected or be collecting sales tax on the sale of its products could result in additional costs and corresponding price increases to its customers. Any imposition of state sales and use taxes on the Company's products sold over the Internet may decrease customers' demand for its products and revenue. Recent federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, which places a three-year moratorium on state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on discriminatory taxes on e-commerce. There is a possibility that Congress may not renew this legislation in 2001. If Congress chooses not to renew this legislation, U.S. state and local governments would be free to impose new taxes on electronically purchased goods. The imposition of taxes on goods sold over the Internet by U.S. state and local governments would create administrative burdens for the Company and could decrease future sales. Product liability claims may subject the Company to increased costs. Several of the products the Company sells, including perishable food products, may expose it to product liability claims in the event that the use or consumption of these products results in personal injury. Although the Company has not experienced any material losses due to product liability claims to date, it may be a party to product liability claims in the future and incur significant costs in their defense. Product liability claims often create negative publicity, which could materially damage the Company's reputation and its brand. Although the Company maintains insurance against product liability claims, its coverage may be inadequate to cover any liabilities it may incur. The Company's stock price may be highly volatile and could drop unexpectedly, particularly because it has Internet operations. The price at which the Company's Class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of companies with Internet operations. As a result, investors may experience a material decline in the market price of the Company's Class A common stock, regardless of the Company's operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. The Company may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management's attention and resources. 18
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, 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. 19
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. None. (b) Reports on Form 8-K Not applicable. 20
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 16, 2001 /s/ James F. McCann ---------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: May 16, 2001 /s/ William E. Shea ---------------------------------- William E.Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer) 21