10-Q 1 ten.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 2004 ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File No. 0-26841 1-800-FLOWERS.COM, Inc. (Exact name of registrant as specified in its charter) DELAWARE 11-3117311 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 Stewart Avenue, Westbury, New York 11590 --------------------------------------------- (Address of principal executive offices)(Zip code) (516) 237-6000 ------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( ) The number of shares outstanding of each of the Registrant's classes of common stock: 29,204,473 ---------- (Number of shares of Class A common stock outstanding as of November 1, 2004) 36,864,465 ---------- (Number of shares of Class B common stock outstanding as of November 1, 2004) 1-800-FLOWERS.COM, Inc. TABLE OF CONTENTS INDEX Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - September 26, 2004 (Unaudited) and June 27, 2004 1 Consolidated Statements of Income (Unaudited) - Three Months Ended September 26, 2004 and September 28, 2003 2 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended September 26, 2004 and September 28, 2003 3 Notes to Consolidated Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 12 Part II. Other Information Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART I. - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) September 26, June 2004 27, 2004 ------------- ------------- (unaudited) Assets Current assets: Cash and equivalents $50,790 $ 80,824 Short-term investments 23,343 22,550 Receivables, net 9,761 9,013 Inventories 33,358 19,625 Deferred income taxes 18,430 16,463 Prepaid and other 3,681 1,517 ------------- ------------- Total current assets 139,363 149,992 Property, plant and equipment, net 41,670 42,460 Investments 7,729 8,260 Goodwill 34,529 34,529 Other intangibles, net 2,440 2,598 Deferred income taxes 13,548 13,548 Other assets 12,490 10,165 ------------- ------------- Total assets $251,769 $261,552 ============= ============= Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses 57,581 $ 63,266 Current maturities of long-term debt and obligations under capital leases 2,956 3,022 ------------- ------------ Total current liabilities 60,537 66,288 Long-term debt and obligations under capital leases 5,362 6,062 Other liabilities 3,217 2,812 ------------- ------------ Total liabilities 69,116 75,162 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - - Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,460,966 and 29,428,143 shares issued at September 26, 2004 and June 27, 2004, 295 295 respectively Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465 shares issued at September 26, 2004 and June 27, 2004 421 421 Additional paid-in capital 255,975 255,829 Retained deficit (69,757) (67,047) Treasury stock, at cost-206,471 Class A and 5,280,000 Class B shares (4,281) (3,108) ------------- ------------ Total stockholders' equity 182,653 186,390 ------------- ------------ Total liabilities and stockholders' equity $251,769 $261,552 ============= ============
See accompanying notes. 1 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) (unaudited) Three Months Ended --------------------------------- September 26, September 28, 2004 2003 ---------------- ---------------- Net revenues $97,514 $95,160 Cost of revenues 57,942 56,093 ---------------- ---------------- Gross profit 39,572 39,067 Operating expenses: Marketing and sales 29,892 28,846 Technology and development 3,104 3,431 General and administrative 7,602 7,779 Depreciation and amortization 3,896 3,917 ---------------- ---------------- Total operating expenses 44,494 43,973 ---------------- ---------------- Operating loss (4,922) (4,906) Other income (expense): Interest income 382 192 Interest expense (141) (233) Other 4 (199) ---------------- ---------------- Total other income (expense), net 245 (240) ---------------- ---------------- Loss before income taxes (4,677) (5,146) Income tax benefit 1,967 - ---------------- ---------------- Net loss ($2,710) ($5,146) ================ ================ Basic and diluted net loss per common share ($0.04) ($0.08) ================ ================ Weighted average shares used in the calculation of basic and diluted net loss per common share 66,210 65,775 ================ ================
See accompanying notes. 2 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended -------------------------------- September 26, September 28, 2004 2003 --------------- -------------- Operating activities: Net loss ($2,710) ($5,146) Reconciliation of net loss to net cash used in operations: Depreciation and amortization 3,896 3,917 Deferred income taxes (1,967) - Bad debt expense 46 91 Other non-cash items - 156 Changes in operating items: Receivables (794) (1,667) Inventories (13,733) (8,952) Prepaid and other (2,164) (2,733) Accounts payable and accrued expenses (5,685) (3,996) Other assets (2,404) (2,581) Other liabilities 405 616 --------------- -------------- Net cash used in operating activities (25,110) (20,295) Investing activities: Purchase of investments (26,090) (18,666) Sale of investments 25,828 21,459 Capital expenditures, net of non-cash expenditures (2,945) (2,233) Other 58 75 --------------- -------------- Net cash (used in) provided by investing activities (3,149) 635 Financing activities: Acquisition of treasury stock (1,173) - Proceeds from employee stock options 146 229 Repayment of notes payable and bank borrowings (337) (250) Payment of capital lease obligations (411) (544) --------------- -------------- Net cash used in financing activities (1,775) (565) --------------- -------------- Net change in cash and equivalents (30,034) (20,225) Cash and equivalents: Beginning of period 80,824 49,079 --------------- -------------- End of period 50,790 $28,854 =============== ==============
See accompanying notes. 3 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2005. The balance sheet information at June 27, 2004 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2004. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Employee Stock Incentive Plans The Company accounts for its stock option plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no stock-based compensation is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant and the related number of shares granted is fixed at that point in time. The following table illustrates the effect on net income (loss) and net income (loss) per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Three Months Ended ------------------------------------ September 26, September 28, 2004 2003 ---------------- ------------------- (in thousands, except per share data) Net loss - As reported ($2,710) ($5,146) Less: Stock based compensation 1,711 1,877 ---------------- ------------------- Net loss - Pro forma ($4,421) ($7,023) ================ =================== Net loss per share: Basic and diluted - As reported ($0.04) ($0.08) Basic and diluted - Pro forma ($0.07) ($0.11)
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. Comprehensive Income (Loss) For the three months ended September 26, 2004 and September 28, 2003, the Company's comprehensive loss was equal to the respective net loss for each of the periods presented. 4 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Note 2 - Other Intangibles The Company's other intangible assets consist of the following: September 26, 2004 June 27, 2004 ---------------------------------------- --------------------------------------- Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period Amount Amortization Net Amount Amortization Net -------------- ------------- --------------- ---------- ----------- --------------- ----------- (in thousands) Intangible assets with determinable lives Investment in licenses 14 - 16 years $4,927 $3,196 $1,731 $4,927 $3,115 $1,812 Customer lists 3 years 910 733 177 910 657 253 Other 5 years 194 138 56 194 137 57 ------------- --------------- ---------- ----------- --------------- ----------- 6,031 4,067 1,964 6,031 3,909 2,122 Trademarks with indefinite lives - 476 - 476 476 - 476 ------------- --------------- ---------- ----------- --------------- ----------- Total identifiable intangible assets $6,507 $4,067 $2,440 $6,507 $3,909 $2,598 ============= =============== ========== =========== =============== ===========
Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.5 million, fiscal 2006 - $0.3 million, fiscal 2007 - $0.3 million, fiscal 2008 - $0.3 million, fiscal 2009 - $0.3 million, and thereafter - $0.3 million. Note 3 - Long-Term Debt The Company's long-term debt and obligations under capital leases consist of the following: September 26, June 27, 2004 2004 --------------- ----------- (in thousands) Commercial notes and revolving credit lines $5,200 $5,504 Seller financed acquisition obligations 52 85 Obligations under capital leases 3,066 3,495 ------------ ---------- 8,318 9,084 Less current maturities of long-term debt and obligations under capital leases 2,956 3,022 ------------ ---------- $5,362 $6,062 ============ ==========
Note 4 - Net Income (Loss) Per Common Share Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common shares outstanding during the period, and excludes the effect of 1,404,000 and 2,741,000 dilutive potential common shares (employee stock options) for the three months ended September 26, 2004 and September 28, 2003, respectively, as their inclusion would be antidilutive. Note 5 - Commitments and Contingencies Legal Proceedings From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its consolidated financial position, results of operations or liquidity. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements Certain of the matters and subject areas discussed in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company's current expectations, assumptions, estimates and projections about its business and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those more fully described under the caption "Risk Factors that May Affect Future Results" within the Company's Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Overview For more than 25 years, 1-800-FLOWERS.COM, Inc. has been a leading innovator in the floral industry, taking the extra step to help people connect and express themselves quickly and easily with exquisite floral gifts crafted with care by renowned artisans and some of the nation's leading florists, as well as distinctive non-floral gifts appropriate for any occasion or sentiment. The Company provides gift solutions same day, any day, offering an unparalleled selection of flowers, plants, gourmet foods and confections, gift baskets and other impressive unique gifts. As always, satisfaction is guaranteed, and customer service is paramount with quick, convenient ordering options, fast and reliable delivery, and gift advisors always available. Customers can shop 1-800-FLOWERS.COM(R) 24-hours a day, seven-days a week via the Internet (http://www.1800flowers.com); by calling 1-800-FLOWERS(R) (1-800-356-9377); or by visiting a Company-operated or franchised store. The 1-800-FLOWERS.COM(R) family of brands also includes home decor and garden merchandise from Plow & Hearth(R) (1- 800-627-1712 or http://www.plowandhearth.com); premium popcorn and specialty treats from The Popcorn Factory(R) (1-800-541-2676 or http://www.thepopcornfactory.com); gourmet foods from GreatFood.com(R) (http://www.greatfood.com); and children's gifts from HearthSong(R) (http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com). Results of Operations Net Revenues Three Months Ended -------------------------------------------- September 26, September 28, 2004 2003 % Change --------------- ---------------- ----------- (in thousands) Net revenues: Telephonic $37,586 $40,371 (6.9%) Online 53,086 48,936 8.5% Retail/fulfillment 6,842 5,853 16.9% -------------- --------------- Total net revenues $97,514 $95,160 2.5% ============== =============== Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. The Company grew its combined telephonic and online revenue by 1.5% during the three months ended September 26, 2004, due to a slight increase in order volume even though the Company's marketing efforts were shifted from direct response marketing, by lowering circulation, to more brand advertising through media. Although there are no significant gifting holidays during the summer months, the Company believes the "top of mind" brand advertising expended during the latter half of its fiscal first quarter will reinforce its strong brand name recognition as the Company enters the holiday gift giving season. The Company fulfilled approximately 1,407,000 orders through its combined telephonic and online sales channels during the three months ended September 26, 2004, an increase of 1.9% over the prior year period. This growth was driven by the Company's online sales channel, which experienced a 7.9% increase in order 6 volume in comparison to the prior year period, driven by improved conversion of qualified traffic through the Company's websites, search engines and affiliates, and the continued migration of customers from the Company's telephonic sales channel, which experienced a corresponding 7.0% decrease in order volume in comparison to the prior year period. The Company's combined telephonic and online average order value of $64.46 during the three months ended September 26, 2004, was consistent with the same period of the prior year. The online sales channel contributed 58.5% of total combined telephonic and online revenues during the three months ended September 26, 2004, compared to 54.8% for the same period of the prior year. The Company intends to continue to drive revenue growth through its online sales channel, and continue the migration of its customers from the telephone to the Web for several important reasons: (i) online orders are less expensive to process than telephonic orders, (ii) online customers can view the Company's full range of gift offerings, including non-floral gifts, which yield higher gross margin opportunities, (iii) online customers can utilize all of the Company's services, such as the various gift search functions, order status check and reminder service, thereby deepening the relationship with its customers and leading to increased order rates, and (iv) when customers visit the Company online, it provides an opportunity to interact with them in an electronic dialog via cost efficient marketing programs. In order to improve the effectiveness of its marketing spend, in response to forecasted economic conditions and analysis of consumer buying patterns within the Company's available product offerings, during the three months ended September 26, 2004, the Company reallocated its marketing spending, reducing the circulation of certain non-floral product catalogs within the quarter, by deferring catalog drops until the Company's fiscal second quarter during which time the Company believes it can achieve a greater return on its catalog spending, and invested in incremental media programs, featuring floral gifts for everyday occasions to keep the 1-800-Flowers flagship brand "top of mind" as the Company enters the upcoming Holiday selling season. As a result, during the three months ended September 26, 2004, non-floral gift products accounted for 37.4% of total combined telephonic and online net revenues, in comparison to 38.2% during the same period of the prior year. In the future, the Company will continue to adjust its product mix, emphasizing those products and categories that best match consumer preferences and economic conditions. Retail/fulfillment revenues for the three months ended September 26, 2004 increased in comparison to the same periods of the prior year, primarily as a result of improved comparative store sales and continued enhancements in product and service offerings to the Company's BloomNet(TM) distribution network. Gross Profit Three Months Ended --------------------------------------------- September 26, September 28, 2004 2003 % Change -------------- ---------------- ------------- (in thousands) Gross profit $39,572 $39,067 1.3% Gross margin % 40.6% 41.1% Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (fees paid directly to florists and fees paid to wire service entities that serve as clearinghouses for floral orders, net of wire service rebates), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues include labor and facility costs related to direct-to-consumer merchandise production operations, as well as facility costs on properties that are sublet to the Company's franchisees. Gross profit increased during the three months ended September 26, 2004, in comparison to the same periods of the prior year, primarily as a result of increased order volume on the Company's online sales channel. Gross margin percentage during the three months ended September 26, 2004 decreased in comparison to the prior year, by 50 basis points, primarily as a result of product mix, specifically, lower sales of home decor and garden merchandise which generate higher gross margins in comparison to the Company's floral merchandise. The reduction in margin percentage resulting from the above was offset by: i) improvements in inventory management and product sourcing, ii) the April 2004 increase in the Company's minimum shipping charge, aligning it with industry norms, and iii) the Company's continued focus on customer service, whereby stricter quality control standards and enforcement methods reduced the rate of product credits/returns and replacements. As the Company implements its plan to restore sustainable growth in its home and garden gift line, the Company expects that over the longer term it will continue 7 to grow its higher margin, non-floral business. During the remainder of fiscal 2005, while varying by quarter due to seasonal changes in product mix, the Company expects that its gross margin percentage will remain consistent with the results achieved during the fiscal year ended June 27, 2004. Marketing and Sales Expense Three Months Ended ---------------------------------------------- September 26, September 28, 2004 2003 % Change --------------- --------------- ------------- (in thousands) Marketing and sales $29,892 $28,846 3.6% Percentage of net revenues 30.7% 30.3% Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal agreements, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company's departments engaged in marketing, selling and merchandising activities. Marketing and sales expenses increased as a percentage of net revenues during the three months ended September 26, 2004, compared to the same period of the prior year as a result of increased spending on various media programs during the latter half of the quarter in order to promote "top of mind" brand awareness as it enters the upcoming holiday shopping period. Partially funding the increased spending were volume related operating efficiencies, and a continued reduction in order processing costs. As a result of the Company's cost-efficient customer retention programs, of the 1,165,000 customers who placed orders during the three months ended September 26, 2004, approximately 60.5% represented repeat customers, compared to 58.3%, in the prior year period. In addition, as a result of the strength of the Company's brands, combined with its cost-efficient marketing programs, the Company added approximately 460,000 new customers during the three months ended September 26, 2004. In order to further execute its business plan, the Company expects to continue to invest in its marketing and sales efforts to acquire new customers, while also leveraging its already significant customer base through cost effective, customer retention initiatives. Such spending will be within the context of the Company's overall marketing plan, which is continually evaluated and revised to reflect the results of the Company's most recent market research, including the impact of changing economic conditions and consumer preferences, and seeks to determine the most cost-efficient use of the Company's marketing dollars. Although the Company believes that increased spending in the area of marketing and sales will be necessary for the Company to continue to grow its revenues, the Company expects that, on an annual basis, marketing and sales expense will continue to decline as a percentage of net revenues. Technology and Development Expense Three Months Ended -------------------------------------------- September 26, September 28, 2004 2003 % Change -------------- --------------- ------------- (in thousands) Technology and development $3,104 $3,431 (9.5%) Percentage of net revenues 3.2% 3.6% Technology and development expense consists primarily of payroll and operating expenses of the Company's information technology group, costs associated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company's order entry, customer service, fulfillment and database systems. During the three months ended September 26, 2004, technology and development expense decreased in comparison to the same periods of the prior year due to the Company's ability to internalize its development functions and through continued centralization of key operating functions across its brands, thereby cost effectively enhancing the content and functionality of the Company's Web sites and improving the performance of its fulfillment and customer service systems. During the three months ended September 26, 2004, the Company expended $5.1 million on technology and development, of which $2.0 million has been capitalized. Although the Company believes that continued investment in technology and development is critical to attaining its strategic objectives, the Company expects that its spending in comparison to prior fiscal periods will continue to decrease as a percentage of net revenues due to the expected benefits from previous investments in the Company's current technology platform. 8 General and Administrative Expense Three Months Ended --------------------------------------------- September 26, September 28, 2004 2003 % Change ---------------- ------------- ------------- (in thousands) General and administrative $7,602 $7,779 (2.3%) Percentage of net revenues 7.8% 8.2%
General and administrative expense consists of payroll and other expenses in support of the Company's executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses. General and administrative expense decreased during the three months ended September 26, 2004 in comparison to the same period of the prior year, primarily as a result of lower payroll and cost reduction initiatives, partially offset by higher health insurance costs. The Company believes that its current general and administrative infrastructure is sufficient to support existing requirements, and as such, while increasing in absolute dollars, general and administrative expenses on an annual basis are expected to continue to decline as a percentage of net revenues. Depreciation and Amortization Expense Three Months Ended --------------------------------------------- September 26, September 28, 2004 2003 % Change ---------------- ------------- ------------- (in thousands) Depreciation and amortization $3,896 $3,917 (0.5%) Percentage of net revenues 4.0% 4.1%
Depreciation and amortization expense during the three months ended September 26, 2004 was consistent with the same period of the prior year, and decreased as a percentage of net revenues, reflecting the impact of the Company's declining rate of capital additions, and the leverage of the Company's existing infrastructure. Although the Company believes that continued investment in its infrastructure, primarily in the areas of technology and development, is critical to attaining its strategic objectives, the Company expects that depreciation and amortization will continue to decrease as a percentage of net revenues. Other Income (Expense) Three Months Ended --------------------------------------------- September 26, September 28, 2004 2003 % Change ---------------- ------------- ------------- (in thousands) Interest income $382 $192 99.0% Interest expense (141) (233) 39.5% Other 4 (199) 102.0% ---------------- ------------- $245 ($240) 202.1% ================ =============
Other income (expense) consists primarily of interest income earned on the Company's investments and available cash balances, offset by interest expense, primarily attributable to the Company's capital leases and other long-term debt. The increase in other income (expense) during the three months ended September 26, 2004 was primarily attributable to higher interest income resulting from an increase in average cash balances, and lower interest expense due to maturing capital lease obligations, and from the loss incurred upon the conversion/relocation of a retail store into a local fulfillment center in the prior year. 9 Income Taxes During the three months ended September 26, 2004 the Company recorded a $2.0 million income tax benefit based upon the Company's anticipated effective income tax rate for fiscal 2005 of approximately 41%. Until the fourth quarter of the prior fiscal year, the Company had recorded a full valuation allowance on its deferred tax assets, consisting primarily of net operating loss carryforwards. At June 27, 2004, management of the Company reassessed the valuation allowance previously established against its net deferred tax assets. Based upon the Company's earnings history and projected future taxable income, management determined that it is more likely than not that the deferred tax assets would be realized, and, accordingly, at that time, the Company removed the valuation allowance. Liquidity and Capital Resources At September 26, 2004, the Company had working capital of $78.8 million, including cash and equivalents and short-term investments of $74.1 million, compared to working capital of $83.7 million, including cash and equivalents and short-term investments of $103.4 million, at June 27, 2004. In addition to its cash and short-term investments, at September 26, 2004 and June 27, 2004, the Company maintained approximately $7.7 million and $8.3 million, respectively, of long-term investments, consisting primarily of investment grade corporate and U.S. government securities. Net cash used in operating activities of $25.1 million for the three months ended September 26, 2004 was primarily attributable to the Company's net loss and seasonal changes in working capital, consisting of reduction in accounts payable and accrued expenses and inventory purchases for the upcoming holidays, offset in part by non-cash charges of depreciation and amortization. Net cash used in investing activities of $3.1 million for the three months ended September 26, 2004 was principally comprised of capital expenditures, primarily related to the Company's technology infrastructure. Net cash used in financing activities of $1.8 million for the three months ended September 26, 2004, resulted primarily from the acquisition of Company Class A common stock, which was placed in treasury, and repayment of amounts outstanding under the Company's credit facilities and long-term capital lease obligations, offset in part by the net proceeds received from the exercise of employee stock options. At September 26, 2004, the Company's contractual obligations consist of: Payments due by period ----------------------------------------------------------------------------------- (in thousands) Less than 1 1 - 3 3 - 5 More than 5 Total year years years years ----------- --------------- ------------ ------------- ---------------- Long-term debt $5,252 $1,274 $2,728 $1,250 Capital lease obligations 3,066 1,682 1,376 8 Operating lease obligations 10,683 3,834 3,235 1,670 $1,944 Sublease obligations 8,997 2,603 3,450 2,299 645 Other cash obligations (*) 195 195 - - - Purchase commitments (**) 28,671 28,671 - - - ----------- --------------- ------------ ------------- ---------------- Total $56,864 $38,259 $10,789 $5,227 $2,589 =========== =============== ============ ============= ================
(*) Other cash obligations include $0.2 million of franchise lease guarantees. (**) Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial statements and results of operations are based upon the consolidated financial statements of 1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and 10 related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affects the Company's more significant judgments and estimates used in preparation of its consolidated financial statements. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company states inventory at the lower of cost or market. In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare that with inventory levels. It is possible that changes in consumer demand could cause a reduction in the net realizable value of inventory. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is evaluated annually for impairment. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits consumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. The Company periodically evaluates acquired businesses for potential impairment indicators. Judgment regarding the existence of impairment indicators is based on market conditions and operational performance of the Company. Future events could cause the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. Capitalized Software The carrying value of capitalized software, both purchased and internally developed, is periodically reviewed for potential impairment indicators. Future events could cause the Company to conclude that impairment indicators exist and that capitalized software is impaired. Income Taxes The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company has recognized as a deferred tax asset the tax benefits associated with losses related to operations, which are expected to result in a future tax benefit. Realization of this deferred tax asset assumes that the Company will be able to generate sufficient taxable income so that these assets will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in investment grade corporate and U.S. government securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended September 26, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 12 PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, consolidated financial position, results of operations or liquidity. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following table sets forth, for the months indicated, the Company's purchase of common stock during the first quarter of fiscal 2005 which includes the period June 28, 2004 through September 26, 2004. Total Number of Dollar Value of Shares Purchased as Shares that May Yet Part of Publicly Be Purchased Under Total Number of Average Price Announced Plans or the Plans or Period Shares Purchased Paid Per Share Programs Programs -------------------------------------------------------------------------------------------------------------------------- (in thousands, except average price paid per share) 6/28/04 - 7/25/04 - - - $10,000 7/26/04 - 8/22/04 50.0 $7.43 50.0 $9,628 8/23/04 - 9/26/04 103.7 $7.73 103.7 $8,827 -------------------- ------------------- ---------------------- Total 153.7 $7.63 153.7
On September 16, 2001, the Company's Board of Directors approved the repurchase of up to $10.0 million of the Company's Class A common stock. All share purchases were made in open-market transactions. The average price paid per share is calculated on a settlement basis and excludes commission. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On August 10, 2004, the Company filed a report on Form 8-K, attaching its press release dated August 5, 2004, disclosing financial results for its fiscal 2004 fourth quarter ended June 27, 2004. On October 29, 2004, the Company filed a report on Form 8-K, attaching its press release dated October 21, 2004, disclosing financial results for its fiscal 2005 first quarter ended September 26, 2004. 13 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1-800-FLOWERS.COM, Inc. -------------------------- (Registrant) Date: November 4, 2004 /s/ James F. McCann ----------------------- -------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: November 4, 2004 /s/William E.Shea ----------------------- ---------------------------------- William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer)