UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 ___ 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: 27,730,704 ---------- (Number of shares of Class A common stock outstanding as of May 10, 2002) 37,327,425 ---------- (Number of shares of Class B common stock outstanding as of May 10, 2002)
1-800-FLOWERS.COM, Inc. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2002 INDEX PAGE ----- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - March 31, 2002 (Unaudited) and July 1, 2001 1 Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended March 31, 2002 and April 1, 2001 2 Consolidated Statements of Cash Flows (Unaudited)- Nine Months Ended March 31, 2002 and April 1, 2001 3 Notes to Consolidated Financial Statements (Unaudited) 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> March 31, July 1, 2002 2001 ------------ ------------ (unaudited) Assets Current assets: Cash and equivalents $ 60,804 $ 63,896 Receivables, net 11,381 8,209 Inventories 16,209 14,885 Prepaid and other 2,016 1,831 ------------ ------------ Total current assets 90,410 88,821 Property, plant and equipment, net 48,478 49,861 Capitalized investment in leases 525 706 Goodwill 25,548 25,632 Investments 17,372 16,284 Other assets 9,999 13,953 ------------ ------------ Total assets $192,332 $195,257 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 59,747 $ 58,481 Current maturities of long-term debt and obligations under capital leases 3,058 2,931 ------------ ------------ Total current liabilities 62,805 61,412 Long-term debt and obligations under capital leases 13,070 12,519 Other liabilities 3,842 3,510 ------------ ------------ Total liabilities 79,717 77,441 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, 27,723,839 and 26,586,875 shares issued at March 31, 2002 and July 1, 2001, respectively 277 266 Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,607,425 and 43,028,525 shares issued at March 31, 2002 and July 1, 2001, respectively 426 430 Additional paid-in capital 240,669 238,906 Retained deficit (125,649) (118,678) Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares (3,108) (3,108) ------------ ------------ Total stockholders' equity 112,615 117,816 ------------ ------------ Total liabilities and stockholders' equity $192,332 $195,257 ============ ============ </TABLE> See accompanying notes. 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 ----------------------------- --------------------------- March 31, April 1, March 31, April 1, 2002 2001 2002 2001 ------------- ------------- ---------- ------------ Net revenues $115,424 $103,221 $356,918 $309,980 Cost of revenues 70,690 64,020 210,193 188,210 ------------- ------------- ----------- ----------- Gross profit 44,734 39,201 146,725 121,770 Operating expenses: Marketing and sales 31,533 32,251 113,109 117,607 Technology and development 3,222 4,253 10,444 13,361 General and administrative 6,847 6,969 20,826 20,981 Depreciation and amortization 3,788 5,383 11,149 15,704 -------------- ------------ ------------ ---------- Total operating expenses 45,390 48,856 155,528 167,653 -------------- ------------ ------------ ---------- Operating loss (656) (9,655) (8,803) (45,883) Other income (expense): Interest income 515 1,402 2,174 4,821 Interest expense (308) (333) (920) (985) Other, net (92) 76 (128) 499 --------------- ----------- ------------- -------- Total other income 115 1,145 1,126 4,335 --------------- ----------- ------------- --------- Loss before income taxes (541) (8,510) (7,677) (41,548) Benefit from income taxes 706 - 706 - --------------- ----------- ------------ ---------- Net income (loss) $165 $(8,510) $(6,971) $(41,548) =============== =========== ============ ========== Basic and diluted net income (loss) per common share $0.00 $(0.13) $(0.11) $(0.65) =============== =========== ============ ========== Shares used in the calculation of net income (loss) per common share: Basic 64,807 64,187 64,507 64,186 ================ =========== ============ ========= Diluted 68,030 64,187 64,507 64,186 ================ =========== ============ ========= </TABLE> See accompanying notes. 2
1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited) <TABLE> <S> <C> <C> Nine Months Ended ---------------------------- March 31, April 1, 2002 2001 --------------- ------------ Operating activities: Net loss ($6,971) ($41,548) Reconciliation of net loss to net cash provided by (used in) operations: Depreciation and amortization 11,149 15,704 Bad debt expense 144 137 Reduction of deferred compensation - (155) Loss (gain) on sale of assets and investments 566 (442) Changes in operating items: Receivables (3,316) (1,230) Inventories (1,324) (5,404) Prepaid and other (185) (108) Accounts payable and accrued expenses 1,266 11,266 Other assets 3,261 2,106 Other liabilities 332 355 --------------- ------------ Net cash provided by (used in) operating activities 4,922 (19,319) Investing activities: Purchase of investments (1,088) (3,000) Sale of investments - 1,188 Capital expenditures, net of non-cash expenditures (6,470) (10,644) Notes receivable, net (174) 13 ---------------- ----------- Net cash used in investing activities (7,732) (12,443) Financing activities: Proceeds from exercise of employee stock options 1,770 25 Proceeds from bank borrowings - 16,510 Repayment of notes payable and bank borrowings (615) (12,685) Payment of capital lease obligations (1,437) (1,052) --------------- ------------ Net cash (used in) provided by financing activities (282) 2,798 --------------- ------------ Net change in cash and equivalents (3,092) (28,964) Cash and equivalents: Beginning of period 63,896 111,624 --------------- ------------ End of period $60,804 $82,660 ============== ============= </TABLE> 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 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2002. The balance sheet at July 1, 2001 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 1, 2001. Comprehensive Income (Loss) For the three and nine months ended March 31, 2002 and April 1, 2001, the Company's comprehensive income (losses) were equal to the respective net income (losses) for each of the periods presented. Goodwill and Other Intangible Assets On July 2, 2001, the Company adopted Financial Accounting Standards Board Statements No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations completed on or after July 1, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain specified criteria. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment on an annual basis. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. The Company's previous business combinations were accounted for using the purchase method of accounting. As of July 2, 2001, the net carrying amount of goodwill from prior purchase transactions was approximately $25.6 million. Without the adoption of SFAS 142, the annual amortization of this amount, which ceased effective July 2, 2001, would have been approximately $7.4 million during fiscal 2002. The Company has determined that the classification and useful lives utilized for its other intangible assets, which consist primarily of investments in license agreements, are appropriate and consistent with those identified as of July 1, 2001. The Company has completed its assessment of the assets impacted by the adoption of SFAS 142, and based upon such review no impairment to the carrying value of goodwill was identified. 4
1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) Had the Company been accounting for its goodwill under SFAS 142 for all periods presented, the Company's net income (loss) and net income (loss) per diluted share would have been as follows: <TABLE> <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------------- --------------------------- March 31, April 1, March 31, April 1, 2002 2001 2002 2001 --------------- --------------- --------------- ---------- (in thousands, except per share data) Reported net income (loss) $165 ($8,510) ($6,971) ($41,548) Less: goodwill amortization - 1,853 - 5,630 --------------- --------------- --------------- ---------- Adjusted net income (loss) $165 ($6,657) ($6,971) ($35,918) =============== =============== =============== ========== Basic and diluted net income (loss) per common share: Reported net income (loss) $0.00 ($0.13) ($0.11) ($0.65) Goodwill amortization - 0.03 - 0.09 --------------- --------------- --------------- ---------- Adjusted net income (loss) per common share $0.00 ($0.10) ($0.11) ($0.56) =============== =============== =============== ========== </TABLE> Note 2 - Acquisition of Selected Assets of The Children's Group On June 8, 2001, the Company completed its acquisition of selected assets from subsidiaries of Foster & Gallagher, Inc., adding unique and educational children's toys and games to the Company's product offering, sold under the HearthSong and Magic Cabin Dolls brand names. The purchase price of approximately $4.9 million, paid in cash, included the acquisition of a fulfillment center located in Vandalia, Ohio, inventory, and certain other assets, as well as, the assumption of certain related liabilities. The acquisition was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, which approximated the purchase price, and the operating results of The Children's Group have been included in the Company's consolidated results of operations since the date of acquisition. Pro forma Results of Operation The following unaudited pro forma consolidated financial information has been prepared as if the acquisition of The Children's Group businesses had taken place at the beginning of fiscal year 2001. 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 Children's Group taken place at the beginning of the periods presented. <TABLE> <S> <C> <C> Nine Months Ended ------------------------------------- March 31, April 1, 2002 2001 ---------------- ------------------ (in thousands, except per share data) Net revenues (*) $356,918 $340,908 Loss from operations (8,803) (45,096) Net loss (6,971) (41,124) Net loss per common share ($0.11) ($0.64) </TABLE> (*) Pre-acquisition operations related to The Children's Group include revenues derived from six retail stores which were discontinued by the previous owners at various times during fiscal 2001. Operating results associated with these retail stores were not material to the consolidated operations of the Company during such time. 5
1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) 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 major components of the redeployment charge include the estimated unrecoverable book value of abandoned fixtures, equipment and leasehold improvements in the amount of approximately $1.1 million, and the estimated provision for the future lease obligations and related facility shut down costs in the amount of approximately $1.0 million. As part of the redeployment plan, in November 2000, the Company opened a new service center in Ardmore, Oklahoma to replace its Marietta, Georgia facility, which was closed in October 2000. An additional service center, located in Alamagordo, New Mexico became operational in November 2001, replacing its Phoenix, Arizona and San Antonio, Texas service centers, which were closed in June 2001. The Company also completed the planned conversion of certain retail stores into direct fulfillment centers, while closing certain other non-performing retail stores, during fiscal 2001. Through March 31, 2002, $1.6 million was charged against the accrual, leaving a balance of $0.5 million, consisting primarily of accruals for future lease commitments related to the closed service center facilities. Note 4 - Long-Term Debt The Company's long-term debt and obligations under capital leases consist of the following: <TABLE> <S> <C> <C> March 31, July 1, 2002 2001 ----------- ----------- (in thousands) Commercial notes and revolving credit lines $7,584 $8,153 Seller financed acquisition obligations 210 256 Obligations under capital leases 8,334 7,041 ----------- ----------- 16,128 15,450 Less current maturities of long-term debt and obligations under capital leases 3,058 2,931 ----------- ----------- $13,070 $12,519 =========== =========== </TABLE> 6
1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) Note 5 - Net Income (Loss) Per Common Share The following table sets forth the computation of basic and diluted net income (loss) per common share: <TABLE> <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------------- ------------------------------ March 31, April 1, March 31, April 1, 2002 2001 2002 2001 -------------- ---------------- -------------- -------------- (in thousands, except per share data) Numerator: Net income (loss) $165 ($8,510) ($6,971) ($41,548) ============== ================ ============== ============== Denominator: Weighted average shares outstanding 64,807 64,187 64,507 64,186 Effect of dilutive securities: Employee stock options 3,223 - - - -------------- ---------------- -------------- -------------- Adjusted weighted-average shares and assumed conversions 68,030 64,187 64,507 64,186 ============== ================ ============== ============== Basic and diluted net income (loss) per common share $0.00 ($0.13) ($0.11) ($0.65) ============== ================ ============== ============== </TABLE> Note 6 - 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 AOL Time Warner, Inc. ("AOL") commencing October 1, 2000 and ending August 31, 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. As a result of the modification of the previous agreement, the Company recorded a non-recurring charge of approximately $7.3 million during the nine months ended March 31, 2001. 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. Note 7 - Subsequent Event - Acquisition of Selected Assets of The Popcorn Factory On May 3, 2002, the Company completed its acquisition of certain operating assets and liabilities of The Popcorn Factory, a direct marketer of premium popcorn and specialty food gifts, with revenues of approximately $30 million during the calendar year ended December 31, 2001. The purchase price of approximately $12.2 million 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. The acquired assets include inventory, as well as manufacturing and other equipment located in a leased facility in Lake Forest, Illinois. The acquisition will be accounted for using the purchase method. 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 "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 food and candies, home decor, garden merchandise, unique children's toys and other specialty products. 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'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. In addition to the Company's selection of thoughtful gifts, the Company's product line is complemented by its other brands which include Plow & Hearth, home decor and garden merchandise, (www.plowandhearth.com), GreatFood.com, gourmet food products, (www.greatfood.com), HearthSong (www.hearthsong.com) and Magic Cabin Dolls (www.magiccabindolls.com), unique and educational children's toys and games, and The Popcorn Factory (www.thepopcornfactory.com), a direct marketer of gourmet popcorn and other food gift products which was acquired by the Company on May 3, 2002. Although profitable during the quarter ended March 31, 2002, the Company expects to incur a loss for the full year of fiscal 2002 as a result of the significant operating and capital expenditures required to achieve its objectives. However, the Company expects to achieve positive EBITDA of approximately $9.0 million for the full year of fiscal 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 profitability must be considered in light of the risks, uncertainties, expenses, challenging retail environment, and difficulties encountered by companies in the evolving market of online commerce, including those described under the caption "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 ------------------------------------------------ --------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change --------------- -------------- --------------- ------------- ------------- -------------- (in thousands) Net revenues: Telephonic $50,715 $48,642 4.3% $185,232 $169,116 9.5% Online 56,874 47,139 20.7% 149,711 120,269 24.5% Retail/fulfillment 7,835 7,440 5.3% 21,975 20,595 6.7% --------------- -------------- ------------- ------------- Total net revenues $115,424 $103,221 11.8% $356,918 $309,980 15.1% =============== ============== ============= ============= </TABLE> 8
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 31, 2002 was due primarily to an increase in order volume, resulting from efficient marketing efforts, strong brand name recognition and the Company's continued expansion of its non-floral product offerings, including a broad range of items such as plants, candies and gourmet foods, items for the home and garden, children's toys and other specialty gifts. Non-floral gift products accounted for 34.3% and 47.9% of total combined telephonic and online net revenues during the three and nine months ended March 31, 2002, respectively, in comparison to 30.8% and 42.7% during the same periods of the prior year. During the three and nine months ended March 31, 2002 the Company fulfilled approximately 1,722,000 and 5,150,000 orders through its combined telephonic and online sales channels, representing increases of 12.4% and 12.9% over the respective periods of the prior year. This growth was a result of increases in both online order volume, driven by traffic directly to the Company's URL's ("Universal Resource Locators") and through third party portals, and telephonic order volume, resulting primarily from the addition of the Company's children's gifts product line in June 2001. The Company's combined telephonic and online sales channels average order value was essentially unchanged at $62.47 during the three months ended March 31, 2002 and increased 2.6% to $65.04 during the nine months ended March 31, 2002. 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 range of gift offerings - including non-floral gifts, which yield higher gross margin opportunities, (iii) online customers can utilize all of the Company's services, such as the various gift search functions, order status check and reminder service, thereby deepening its relationship with them and leading to increased order rates, and (iv) when customers visit the Company online, it provides an opportunity to engage them in an electronic dialog via cost efficient e-mail marketing programs. Retail/fulfillment revenues for the three and nine months ended March 31, 2002 increased in comparison to the same periods of the prior year primarily due to the November 2001 opening of a new home and garden outlet store in Williamsburg, VA, and increased same store sales. <TABLE> <S> <C> <C> <C> <C> <C> <C> Gross Profit Three Months Ended Nine Months Ended -------------------------------------------- ------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change -------------- --------------- ------------- ------------- ------------- ------------- (in thousands) Gross profit $44,734 $39,201 14.1% $146,725 $121,770 20.5% Gross margin % 38.8% 38.0% 41.1% 39.3% </TABLE> Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (fees paid directly to florists and fees paid to wire 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 31, 2002 in comparison to the same periods of the prior year, primarily as a result of increased order volume, and an improved gross margin percentage. The gross margin percentage increased 80 and 180 basis points during the three and nine months ended March 31, 2002, primarily as a result of the continued growth in non-floral product sales, which was further complemented by the addition of the Company's children's gifts product line, which generate a higher gross margin, and an increase of online service and shipping charges, aligning them with industry norms. In addition, the Company's continued focus on customer service and operational efficiencies further enhanced the gross margin percentage through the implementation of stricter quality control standards and enforcement methods which reduced the rate of credits/returns and replacements. As the Company continues to expand 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. 9
Marketing and Sales Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended ---------------------------------------------- ---------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change -------------- --------------- ------------- ------------- ------------- --------------- (in thousands) Marketing and sales $31,533 $32,251 (2.2%) $113,109 $117,607 (3.8%) Percentage of net revenues 27.3% 31.2% 31.7% 37.9% </TABLE> Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal agreements, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company's departments engaged in marketing, selling and merchandising activities. Marketing and sales expenses decreased to 27.3% and 31.7% of net revenues during the three and nine months ended March 31, 2002, compared to 31.2% and 37.9% (34.1%, exclusive of the non-recurring charge discussed below) 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. In September 2000, the Company incurred a non-recurring charge of $7.3 million ($0.11 per share), as a result of the modification of an interactive marketing agreement with one of the Company's portal providers. The Company subsequently entered into a new five-year, $22.1 million agreement with the same portal provider, thereby reducing the Company's continuing annualized expense with such provider by $5.6 million. As a result of the Company's cost efficient customer retention programs, of the 1,426,000 and 4,422,000 customers who placed orders during the three and nine months ended March 31, 2002, respectively, approximately 50.4% and 49.3% represented repeat customers compared to 45.9% and 43.9% in the prior year periods. In addition, despite the overall reduction in spending, as a result of the strength of the Company's brands, combined with its cost-efficient marketing programs, the Company added approximately 707,000 and 2,241,000 new customers during the three and nine months ended March 31, 2002, respectively. In order to continue to execute its business plan, the Company expects to continue to invest in its marketing and sales efforts to acquire new customers, while also leveraging its already significant customer base through cost effective, customer retention initiatives. Such spending will be within the context of the Company's overall marketing plan, which is continually evaluated and revised to reflect the results of the Company's most recent market research, including changing economic conditions, and 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 providers to ensure that these relationships continue to generate cost-effective incremental volume. As such, although the Company expects spending will increase due to the incremental marketing efforts associated with the acquisitions of The Children's Group in June 2001 and The Popcorn Factory in May 2002, spending as a percentage of net revenues is expected to continue to decrease in comparison to prior years. Technology and Development Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------------------------- -------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change ------------- --------------- ------------ ------------- ------------- -------------- (in thousands) Technology and development $3,222 $4,253 (24.2%) $10,444 $13,361 (21.8%) Percentage of net revenues 2.8% 4.1% 2.9% 4.3% </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. Technology and development expense decreased during the three and nine months ended March 31, 2002 in comparison to the same periods of the prior year, as a result of cost efficiencies realized by bringing the Company's Web-hosting and development capabilities in-house during the latter half of fiscal 2001. Internalizing the Company's hosting and development functions has enabled the Company to cost effectively enhance the content and functionality of its Web sites, including the September 2001 relaunch of its Plow & Hearth Web site (www.plowandhearth.com), 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 31, 2002, the Company expended 10
$4.3 million and $15.3 million on technology and development, of which $1.1 million and $4.9 million, respectively, has been capitalized. Although the Company believes that continued investment in technology and development is critical to attaining its strategic objectives, the Company expects that its spending in comparison to prior fiscal periods, particularly in the areas of Website hosting and development and database management, will continue to decrease as a percentage of net revenues, as the ongoing benefits from previous investments in the Company's current technology platform will mitigate the effect of incremental costs expected to be incurred as a result of the acquisition of The Popcorn Factory in May 2002. General and Administrative Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended --------------------------------------------- --------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change ------------- --------------- ------------- ------------- ------------- --------------- (in thousands) General and administrative $6,847 $6,969 (1.8%) $20,826 $20,981 (0.7%) Percentage of net revenues 5.9% 6.8% 5.8% 6.8% </TABLE> 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 decrease in general and administrative expense during the three and nine months ended March 31, 2002, in comparison to the same periods of the prior year, was primarily the result of various cost reduction initiatives, partially offset by incremental costs associated with the Company's children's gifts product line and increased insurance costs. The Company believes that its current general and administrative infrastructure is sufficient to support existing requirements and, as such, while increasing in absolute dollars due primarily to the incremental costs associated with the acquisitions of The Children's Group in June 2001 and The Popcorn Factory in May 2002, general and administrative expenses are expected to, on a seasonally adjusted basis, continue to decline as a percentage of net revenues. Depreciation and Amortization Expense <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------------------------- --------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change ------------ --------------- ------------- ------------- ------------- --------------- (in thousands) Depreciation and amortization $3,788 $5,383 (29.6%) $11,149 $15,704 (29.0%) Percentage of net revenues 3.3% 5.2% 3.1% 5.1% </TABLE> The decrease in depreciation and amortization expense during the three and nine months ended March 31, 2002, in comparison to the same periods of the prior year, was primarily the result of the Company's early adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which requires the discontinuance of amortization of goodwill and intangible assets with indefinite useful lives. As a result, depreciation and amortization expense for the three and nine months ended April 1, 2001 includes $1.9 million and $5.6 million, respectively, of goodwill amortization, which is not included in the comparable periods of fiscal 2002. Based upon the Company's assessment of the assets impacted by the adoption of SFAS 142, which was completed during the quarter ended December 30, 2001, the Company has determined that the adoption of SFAS 142 will reduce its fiscal 2002 annualized amortization expense by approximately $7.4 million. 11
Other Income (Expense) <TABLE> <S> <C> <C> <C> <C> <C> <C> Three Months Ended Nine Months Ended -------------------------------------------- --------------------------------------------- March 31, April 1, March 31, April 1, 2002 2001 % Change 2002 2001 % Change ------------ --------------- ------------- ------------- ------------- --------------- (in thousands) Interest income $515 $1,402 (63.3%) $2,174 $4,821 (54.9%) Interest expense (308) (333) (7.5%) (920) (985) (6.6%) Other (92) 76 (221.1%) (128) 499 (125.7%) ------------ --------------- ------------- ------------- $115 $1,145 (90.0%) $1,126 $4,335 (74.0%) ============ =============== ============= ============= </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 other long-term debt. The decrease in other income (expense) for the three and nine months ended March 31, 2002 was primarily due to the decline in invested cash balances which were used to fund the Company's capital expenditures and repayment of debt, as well as a decline of the Company's average rate of return on its investments. In addition, during the nine months ended April 1, 2000, the Company recorded a non-recurring gain ($0.3 million) on the sale of its minority investment in American Floral Services, Inc. Income Taxes As a result of recent tax law changes, which extended the period for which companies are allowed to carry-back losses, the Company was able to recover previously paid income taxes, thereby resulting in an income tax benefit of $0.7 million during the three months ended March 31, 2002. The Company has provided a full valuation allowance on its deferred tax assets, consisting primarily of net operating loss carryforwards. Liquidity and Capital Resources At March 31, 2002, the Company had working capital of $27.6 million, including cash and equivalents of $60.8 million, compared to working capital of $27.4 million, including cash and equivalents of $63.9 million, at July 1, 2001. In addition to its working capital, the Company's long-term investments, consisting primarily of investment grade corporate and U.S. government securities, amounted to approximately $17.4 million and $16.3 million, at March 31, 2002 and July 1, 2001, respectively. Net cash provided by operating activities of $4.9 million for the nine months ended March 31, 2002 was primarily attributable to non-cash charges of depreciation and amortization, which exceeded the Company's net loss. Net cash used in investing activities of $7.7 million for the nine months ended March 31, 2002 was principally comprised of capital expenditures for computer hardware and software, including those associated with the construction of a new 300 seat service center in Alamogordo, New Mexico, as well as the purchase of certain long-term investment grade government and corporate securities. The Company expects that as it continues its return to positive cash flow, it will reallocate available cash balances into longer term securities in order to maximize the return on its investments. In connection with the Company's May 3, 2002 acquisition of The Popcorn Factory, for approximately $12.2 million, the Company paid cash, from existing balances, of $7.3 million to retire The Popcorn Factory's outstanding debt, and issued 353,003 shares of the Company's Class A common stock to the former shareholders of The Popcorn Factory. Net cash used in financing activities was $0.3 million for the nine months ended March 31, 2002, resulting primarily from the repayment of amounts outstanding under the Company's credit facilities and capital lease obligations, offset in part by the net proceeds received upon the exercise of employee stock options. 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, retain and acquire new customers, expand its current product offerings and further develop 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 12
securities or to increase its lines of credit, in addition to the $8.0 million general and $10.0 million equipment lines of credit currently available. 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. Risk Factors that May Affect Future Results The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known to the Company or that are currently deemed immaterial may also impair its business operations. If any of the following risks actually occur, the Company's business, financial condition or results of operations may suffer. The Company expects to incur a loss during fiscal 2002, 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 brands 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 a loss during the fiscal year ending June 30, 2002 as a result of these and other expenditures. However, the Company does expect to achieve positive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of approximately $9.0 million 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. 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 reduce operating expenses quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue without a corresponding reduction to its expenses, operating results may suffer. The Company's operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company's future performance. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of the Company's Class A common stock to fall. Consumer spending on flowers, gifts and other products sold by the Company may vary with general economic conditions. If general economic conditions deteriorate 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 and Administrative and Professionals' Week, and the fourth calendar quarter, due to the Thanksgiving and Christmas-time holidays. In anticipation of increased sales activity during these periods, the Company hires a significant number of 13
temporary employees to supplement its permanent staff and the Company increases its inventory levels. If revenues during these periods do not meet the Company's expectations, it may not generate sufficient revenue to offset these increased costs and its operating results may suffer. If the Company's customers do not find its expanded product lines appealing, revenues may not grow and net income may decrease. The Company's business historically has focused on offering floral and floral related gift products. Although the Company has been successful in the introduction of its expanded product lines including plants, gift baskets, gourmet food, children's gifts, unique or specialty gifts and home and garden categories, it 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 brands, it may not increase or maintain its customer base or its revenues. The Company must develop and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its revenues. In addition, the Company has introduced and acquired other brands in the past, and may continue to do so in the future. The Company believes that the importance of brand recognition will increase as it expands its product offerings. Many of the Company's customers may not be aware of the Company's non-floral products. 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 brands will also depend on its success in providing its customers high-quality products and a high level of customer service. If the Company's customers do not perceive its products and services to be of high quality, the value of the 1-800-FLOWERS.COM brands would be diminished and the Company may lose customers and its revenues may decline. A failure to establish and maintain strategic online relationships that generate a significant amount of traffic could limit the growth of the Company's business. 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 Time Warner, Yahoo! and Microsoft Corporation, for traffic. If these third-parties do not attract a significant number of visitors, the Company may not receive a significant number of online customers from these relationships and its revenues from these relationships may decrease or not grow. There continues to be strong competition to establish or maintain relationships with leading Internet companies, and the Company may not successfully enter into additional relationships, or renew existing ones beyond their current terms. The Company may also be required to pay significant fees to maintain and expand existing relationships. The Company's online revenues may suffer if it fails to enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs. If local florists and other third-party vendors do not fulfill orders to the Company's customers' satisfaction, its customers may not shop with the Company again. In many cases, floral orders placed by the Company's customers are fulfilled by local independent florists, a majority of which are a part of BloomNet. 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 would decrease if a significant number of customers request replacement products, refunds or credits and the Company is unable to pass such costs onto the supplier. 14
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 facilities in Virginia, Ohio and Illinois. The Company has established relationships with the United States Postal Service, Federal Express, United Parcel Service and other common carriers for the delivery of these products. If these carriers were to raise the prices they charge to ship the Company's goods, 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, children's toys and games and home and garden industries is intense and a failure to respond to competitive pressure could result in lost revenues. There are many companies that offer products in these categories. In the floral category, the Company's competitors include: o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o supermarkets, mass merchants and specialty gift retailers with floral departments. Similarly, the plant, gift basket, gourmet food, specialty gift, children's toys and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products and is highly fragmented. Products in these categories may be purchased from a number of outlets, including mass merchants, retail specialty shops, online retailers and mail-order catalogs. Competition is intense and the Company expects it to increase. Increased competition could result in: o price reductions, decreased revenue and lower profit margins; o loss of market share; and o increased marketing expenditures. These and other competitive factors could materially and adversely affect the Company's results of operations. If the Company does not accurately predict customer demand for its products, it may lose customers or experience increased costs. In the past, the Company did not need to maintain a significant inventory of products. However, as the Company expands the volume of non-floral products offered to its customers, the Company will be required to increase inventory levels and the number of products maintained in its warehouses. 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 brands could be diminished due to misjudgments in merchandise selection. If the supply of flowers for sale becomes limited, the price of flowers could rise or flowers may be unavailable and the Company's revenues and gross margins could decline. A variety of factors affect the supply of flowers in the United States and the price of the Company's floral products. If the supply of flowers available for sale is limited due to weather conditions or other factors, prices for flowers could rise and customer demand for the Company's floral products may be reduced, causing revenues and gross margins to decline. Alternatively, the Company may not be able to obtain high quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternative sources may be of lesser quality and/or may be more expensive than those currently offered by the Company. 15
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 may strain 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 brands or increase its costs by failing to comply with its franchise agreements or its operating standards. The Company's franchise business is governed by its Uniform Franchise Offering 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 brands may be damaged. The Company may incur significant additional costs, including time-consuming and expensive litigation, to enforce its rights under the franchise agreements. Additionally, the Company is the primary tenant on certain leases, which the franchisees sublease from the Company. If a franchisee fails to meet its obligations as subtenant, the Company could incur significant costs to avoid default under the primary lease. Furthermore, as a franchiser, the Company has obligations to its franchisees. Franchisees may challenge the performance of the Company's obligations under the franchise agreements and subject it to costs in defending these claims and, if the claims are successful, costs in connection with their compliance. If third parties acquire rights to use similar domain names or phone numbers or if the Company loses the right to use its phone numbers, its brands may be damaged and it may lose sales. The Company's Internet domain names are an important aspect of its brand recognition. The Company cannot practically acquire rights to all domain names similar to www.1800flowers.com., whether under existing top level domains or those issued in the future. If third parties obtain rights to similar domain names, these third parties may confuse the Company's customers and cause its customers to inadvertently place orders with these third parties, which could result in lost sales and could damage its brands. Likewise, the phone number that spells 1-800-FLOWERS is important to the Company's brand and its business. While the Company has obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common "FLOWERS" misdials, it may not be able to obtain rights to use the FLOWERS phone number as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells "FLOWERS" with a different prefix or a toll-free number similar to FLOWERS, these parties may also confuse the Company's customers and cause lost sales and potential damage to its brands. In addition, under applicable FCC rules, ownership rights to 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. 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 if it does not obtain a cardholder's signature. 16
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 select assets and may continue to do so in the future. If the Company is unable to fully integrate future acquisitions 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 does not continue to gain acceptance 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. Unexpected system interruptions caused by system failures may result in reduced revenues and harm to the Company's brand. In the past, particularly during peak holiday periods, the Company has experienced significant increases in traffic on its Web site and in its toll-free customer service centers. The Company's operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. The Company's systems have in the past, and may in the future, experience: o system interruptions; o long response times; and o degradation in service. The Company's business depends on customers making purchases on its systems, its revenues may decrease and its reputation could be harmed if it experiences frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season. 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 loses its telephone service, it will be unable to generate revenue. The Company's future success depends upon these third-party relationships because it does not have the resources to maintain its telephone service without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt the Company's operations or require it to incur significant unanticipated costs. 17
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 could experience difficulties in fulfilling its customers' orders and those customers might not continue to shop with the Company. The Company's operating results may suffer due to economic, political and social unrest or disturbances. Like other American businesses, the Company is unable to predict what long-term effect, the terrorist attacks on the World Trade Center and the Pentagon, or similar future events, may have on its business. The Company's results of operations and financial condition could be adversely impacted if such events cause a downturn in the economy, or other negative effects which cannot now be anticipated. 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 hired or promoted several new members to its senior management team to help manage its business and growth. 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 business and 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 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 brands. Unauthorized use of the Company's intellectual property by third parties may damage its brands and its reputation and may likely result in a loss of customers. It may be possible for third parties to obtain and use the Company's intellectual property without authorization. Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes infringements and misappropriations will continue to occur in the future. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The Company may be unable to register its intellectual property in some foreign countries and, furthermore, the laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. Defending against intellectual property infringement claims could be expensive and, if the Company is not successful, could disrupt its ability to conduct 18
business. The Company cannot be certain that the products it sells 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 broader guidelines to state sales and use taxes, the Company may lose sales or incur significant expenses in satisfaction of these obligations. In addition to the Company's retail store operations, the Company collects sales or other similar taxes in states 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 states that the Company should have collected or be collecting sales tax on the sale of its products in their states 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 placed 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. This moratorium expired on October 21, 2001, and a risk exists that the moratorium will not be re-enacted. 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. states 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, or children's toys may expose it to product liability claims in the event that the use or consumption of these products results in personal injury. Although the Company has not experienced any material losses due to product liability claims to date, it may be a party to product liability claims in the future and incur significant costs in their defense. Product liability claims often create negative publicity, which could materially damage the Company's reputation and its brands. Although the Company maintains insurance against product liability claims, its coverage may be inadequate to cover any liabilities it may incur. The Company's stock price may be highly volatile and could drop unexpectedly, particularly because it has Internet operations. The price at which the Company's Class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced 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. 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 On May 6, 2002, the Company reported the acquisition of The Popcorn Factory for a purchase price of approximately $12.2 million, comprised of $7.3 million used to retire The Popcorn Factory's outstanding debt and 353,003 shares of the Company's Class A common stock. 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 14, 2002 /s/ James F. McCann - ------------------------- ------------------------------------ James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: May 14, 2002 /s/ William E. Shea - -------------------------- ----------------------------------- William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer)