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 December 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: 29,223,686 ---------- (Number of shares of Class A common stock outstanding as of January 31, 2005) 36,864,465 ---------- (Number of shares of Class B common stock outstanding as of January 31, 2005) 1-800-FLOWERS.COM, Inc. TABLE OF CONTENTS INDEX Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - December 26, 2004 (Unaudited) and June 27, 2004 1 Consolidated Statements of Income (Unaudited)- Three and Six Months Ended December 26, 2004 and December 28, 2003 2 Consolidated Statements of Cash Flows (Unaudited)- Three and Six Months Ended December 26, 2004 and December 28, 2003 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 15 Item 4. Controls and Procedures 15 Part II. Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 18 PART I. - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) December 26, June 27, 2004 2004 ------------- -------------- (unaudited) Assets Current assets: Cash and equivalents $86,794 $ 80,824 Short-term investments 19,086 22,550 Receivables, net 20,660 9,013 Inventories 27,675 19,625 Deferred income taxes 18,522 16,463 Prepaid and other 2,137 1,517 ------------- -------------- Total current assets 174,874 149,992 Property, plant and equipment, net 41,642 42,460 Investments 3,687 8,260 Goodwill 42,189 34,529 Other intangibles, net 2,266 2,598 Deferred income taxes 9,146 13,548 Other assets 8,714 10,165 ------------- -------------- Total assets $282,518 $261,552 ============= ============== Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $81,017 $ 63,266 Current maturities of long-term debt and obligations under capital leases 2,925 3,022 ------------- -------------- Total current liabilities 83,942 66,288 Long-term debt and obligations under capital leases 4,614 6,062 Other liabilities 3,108 2,812 ------------- -------------- Total liabilities 91,664 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, 29,545,850 and 29,428,143 shares issued at December 26, 2004 and June 27, 2004, respectively 295 295 Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465 shares issued at December 26, 2004 and June 27, 2004, respectively 421 421 Additional paid-in capital 256,474 255,829 Retained deficit (61,053) (67,047) Treasury stock, at cost-326,023 and 52,800 Class A shares at December 26, 2004 and June 27, 2004, respectively and 5,280,000 Class B shares (5,283) (3,108) ------------- -------------- Total stockholders' equity 190,854 186,390 ------------- -------------- Total liabilities and stockholders' equity $282,518 $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 Six Months Ended --------------------------------- --------------------------------- December 26, December 28, December 26, December 28, 2004 2003 2004 2003 ---------------- ---------------- --------------- ---------------- Net revenues $230,014 $213,182 $327,528 $308,342 Cost of revenues 127,402 117,550 185,344 173,643 ---------------- ---------------- --------------- ---------------- Gross profit 102,612 95,632 142,184 134,699 Operating expenses: Marketing and sales 72,841 66,762 102,733 95,608 Technology and development 3,292 3,503 6,396 6,934 General and administrative 7,954 7,577 15,556 15,356 Depreciation and amortization 3,770 3,843 7,666 7,760 ---------------- ---------------- --------------- ---------------- Total operating expenses 87,857 81,685 132,351 125,658 ---------------- ---------------- --------------- ---------------- Operating income 14,755 13,947 9,833 9,041 Other income (expense): Interest income 275 223 657 415 Interest expense (124) (186) (265) (419) Other 21 (14) 25 (213) ---------------- ---------------- --------------- ---------------- Total other income (expense), net 172 23 417 (217) ---------------- ---------------- --------------- ---------------- Income before income taxes 14,927 13,970 10,250 8,824 Income taxes (6,223) (292) (4,256) (292) ---------------- ---------------- --------------- ---------------- Net income $8,704 $13,678 $5,994 $8,532 ================ ================ =============== ================ Net income per common share: Basic $0.13 $0.21 $0.09 $0.13 ================ ================ =============== ================ Diluted $0.13 $0.20 $0.09 $0.12 ================ ================ =============== ================ Weighted average shares used in the calculation of net income per common share: Basic 66,061 65,881 66,135 65,828 ================ ================ =============== ================ Diluted 67,637 69,074 67,627 68,811 ================ ================ =============== ================
See accompanying notes. 2 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended -------------------------------- December 26, December 28, 2004 2003 --------------- -------------- Operating activities: Net income $5,994 $8,532 Reconciliation of net income to net cash provided by operations: Depreciation and amortization 7,666 7,760 Deferred income taxes 4,256 - Bad debt expense 146 279 Other non-cash items - 157 Changes in operating items: Receivables (11,078) (8,198) Inventories (7,719) 1,941 Prepaid and other (620) (542) Accounts payable and accrued expenses 15,765 16,154 Other assets 1,592 619 Other liabilities 296 219 --------------- -------------- Net cash provided by operating activities 16,298 26,921 Investing activities: Purchase of investments (32,866) (23,018) Sale of investments 40,903 36,250 Acquisition of business (9,674) - Capital expenditures, net of non-cash expenditures (5,653) (4,296) Other 2 145 --------------- -------------- Net cash (used in) provided by investing activities (7,288) 9,081 Financing activities: Acquisition of treasury stock (2,175) - Proceeds from employee stock options/purchase plan 645 1,005 Repayment of notes payable and bank borrowings (654) (528) Payment of capital lease obligations (856) (862) --------------- -------------- Net cash used in financing activities (3,040) (385) --------------- -------------- Net change in cash and equivalents 5,970 35,617 Cash and equivalents: Beginning of period 80,824 49,079 --------------- -------------- End of period $86,794 $84,696 =============== ==============
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 six months ended December 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 and net income 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 Six Months Ended ------------------------------- ----------------------------- December 26, December 28, December 26, December 28, 2004 2003 2004 2003 --------------- --------------- -------------- -------------- (in thousands, except per share data) Net income - As reported $8,704 $13,678 $5,994 $8,532 Less: Stock based compensation 1,996 1,974 3,690 3,851 --------------- --------------- -------------- -------------- Net income - Pro forma $6,708 $11,704 $2,304 $4,681 =============== =============== ============== ============== Net income per share: Basic - As reported $0.13 $0.21 $0.09 $0.13 Basic - Pro forma $0.10 $0.18 $0.03 $0.07 Diluted - As reported $0.13 $0.20 $0.09 $0.12 Diluted - Pro forma $0.10 $0.17 $0.03 $0.07
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. 4 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Comprehensive Income For the three and six months ended December 26, 2004 and December 28, 2003, the Company's comprehensive income was equal to the respective net income for each of the periods presented. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for all interim periods beginning after June 15, 2005 and, thus, will be effective for the Company beginning with the first quarter of fiscal 2006. The Company is currently evaluating the impact of SFAS123R on its financial position and results of operations. See Employee Stock Incentive Plans, above for information related to the pro forma effects on reported net income and net income per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, "Acounting for Stock Based Compensation," to stock-based employee compensation. Note 2 - Net Income Per Common Share The following table sets forth the computation of basic and diluted net income per common share: Three Months Ended Six Months Ended ---------------------------------- ---------------------------------- December 26, December 28, December 26, December 28, 2004 2003 2004 2003 ----------------- --------------- ---------------- ---------------- (in thousands, except per share data) Numerator: Net income $8,704 $13,678 $5,994 $8,532 ================= =============== ================ ================ Denominator: Weighted average shares outstanding 66,061 65,881 66,135 65,828 Effect of dilutive securities: Employee stock options 1,576 3,193 1,492 2,983 ----------------- --------------- ---------------- ---------------- Adjusted weighted-average shares and assumed conversions 67,637 69,074 67,627 68,811 ================= =============== ================ ================ Net income per common share: Basic $0.13 $0.21 $0.09 $0.13 Diluted $0.13 $0.20 $0.09 $0.12
Note 3 - Goodwill and Intangible Assets The change in the net carrying amount of goodwill is as follows: December 26, 2004 ---------------- (in thousands) Goodwill - beginning of year $34,529 Acquisition of Winetasting Network 7,474 Other 186 ----------- Goodwill - end of period $42,189 ===========
5 The Company's other intangible assets consist of the following: December 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 $3,277 $1,650 $4,927 $3,115 $1,812 Customer lists 3 years 910 809 101 910 657 253 Other 5 years 194 155 39 194 137 57 ------------ -------------- ----------- ---------- --------------- ------------ 6,031 4,241 1,790 6,031 3,909 2,122 Trademarks with indefinite lives - 476 - 476 476 - 476 ------------ -------------- ----------- ---------- --------------- ------------ Total identifiable intangible assets $6,507 $4,241 $2,266 $6,507 $3,909 $2,598 ============ ============== =========== ========== =============== ============
Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.3 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 4 - Long-Term Debt The Company's long-term debt and obligations under capital leases consist of the following: December 26, June 27, 2004 2004 ---------------- ----------- (in thousands) Commercial notes and revolving credit lines $4,890 $5,504 Seller financed acquisition obligations 45 85 Obligations under capital leases 2,604 3,495 ---------------- ----------- 7,539 9,084 Less current maturities of long-term debt and obligations under capital leases 2,925 3,022 ---------------- ----------- $4,614 $6,062 ================ ===========
Note 5 - Income Taxes At the end of each interim reporting period, the Company makes an estimate of the effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. Income taxes have been included in the accompanying financial statements on the basis of an estimated annual effective rate of 41.6%. The primary reason that the tax rate differs from the 35% statutory federal corporate income tax rate is due to state income tax expense. Note 6 - Acquistion of The Winetasting Network On November 15, 2004, the Company acquired The Winetasting Network, a Napa Valley, California based distributor and direct-to-consumer wine marketer, for $9.4 million, including acquisition costs and the retirement of $2.4 million of long-term debt. The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The preliminary allocation of the 6 purchase price consists of the following (in thousands): Net current assets $(845) Other non-current assets 80 Plant and equipment 798 Deferred tax assets 1,914 Goodwill 7,474 ----------- Total purchase price $9,421 ===========
Note 7 - Commitments and Contingencies Legal Proceedings From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its consolidated financial position, results of operations or liquidity. 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" 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. (NASDAQ: FLWS) has been the 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 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 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 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); children's gifts from HearthSong(R) (http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com) and wine gifts from The Wine Tasting Network (www.ambrosiawine.com and www.winetasting.com). Results of Operations Net Revenues Three Months Ended Six Months Ended ----------------------------------------------- --------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change -------------- ---------------- -------------- --------------- -------------- -------------- (in thousands) Net revenues: Telephonic $109,570 $113,374 (3.4%) $147,156 $153,745 (4.3%) Online 107,686 90,878 18.5% 160,772 139,814 15.0% Retail/fulfillment 12,758 8,930 42.9% 19,600 14,783 32.6% -------------- ---------------- --------------- -------------- --------------- Total net revenues $230,014 $213,182 7.9% $327,528 $308,342 6.2% ============== ================ =============== ==============
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 6.4% and 4.9%, respectively, during the three and six months ended December 26, 2004, due to an increase in order volume resulting from: (i) the Company's strong brand name recognition, (ii) continued leveraging of its existing customer base, and (iii) the success of its marketing and merchandising efforts to enhance revenue growth in several of its key gift items, including its gourmet gift foods, unique children's gifts, and expanded line of gift baskets. Growth in these areas was tempered by the growth of the Company's home decor gift items, which increased 1.8% for the quarter, but reversed the negative sales trend experienced in this category during the prior fiscal year and into the first quarter of fiscal 2005. As a result, during the three and six months ended December 26, 2004, non-floral gift 8 products accounted for 66.3% and 57.8%, respectively, of total combined telephonic and online net revenues, which was relatively consistent with the same periods of the prior year. The Company fulfilled approximately 3,635,000 and 5,042,000 orders through its combined telephonic and online sales channels during the three and six months ended December 26, 2004, an increase of 6.3% and 5.0%, respectively, over the prior year periods. This growth was driven by the Company's online sales channel, which experienced a 16.8% and 13.8% increase in order volume during the three and six months ended December 26, 2004, respectively, in comparison to the prior year periods, 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 3.0% and 4.0% decrease in order volume in comparison to the respective periods of the prior year. The Company's combined telephonic and online average order values of $59.77 and $61.08 during the three and six months ended December 26, 2004, were consistent with the same periods of the prior year. The online sales channel contributed 49.6% and 52.2% of total combined telephonic and online revenues during the three and six months ended December 26, 2004, respectively, compared to 44.5% and 47.6% for the respective periods 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. Retail/fulfillment revenues for the three and six months ended December 26, 2004 increased in comparison to the same periods of the prior year, primarily as a result of increased membership and sales of product and service offerings to the Company's BloomNet(TM) network, as well as the incremental revenue generated by the acquisition of the Wine Tasting Network during the month of November 2004. In order to extend the Company's leadership position in the floral and thoughtful gift marketplace, the Company plans to increase its marketing spending during the second half of fiscal 2005. In addition to increasing its presence in online media, as well as broadcast advertising, the Company plans to further expand its BloomNet operations to increase its market share, and build out the technology platform, and increase the depth of its marketing programs and personnel within its recently acquired wine gift business in support of the Company's growing gourmet gift and gift basket product lines. While these investments will impact the Company's earnings growth over the short term, over the longer term, the Company believes that this strategy will enable it to achieve sustainable double digit revenue growth and provide further leverage within its business model and therefore improved profitability. Gross Profit Three Months Ended Six Months Ended --------------------------------------------- ------------------------------------------------ December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change -------------- --------------- ------------- --------------- --------------- ------------- (in thousands) Gross profit $102,612 $95,632 7.3% $142,184 $134,699 5.6% Gross margin % 44.6% 44.9% 43.4% 43.7%
Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (primarily fees paid directly to florists), 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 operations, as well as facility costs on properties that are sublet to the Company's franchisees. Gross profit increased during the three and six months ended December 26, 2004, in comparison to the same periods of the prior year, primarily as a result of increased revenue on the Company's online and retail fulfillment sales channels. Gross margin percentage during the three and six months ended December 26, 2004 decreased in comparison to the prior year, by 30 basis points, primarily as a result of the effect of increased shipping costs and holiday-season promotional pricing. 9 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 to grow its higher margin, non-floral business. However, 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 relatively consistent with the results achieved during the fiscal year ended June 27, 2004. Marketing and Sales Expense Three Months Ended Six Months Ended ---------------------------------------------- ---------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change --------------- --------------- -------------- -------------- --------------- --------------- (in thousands) Marketing and sales $72,841 $66,762 9.1% $102,733 $95,608 7.5% Percentage of net revenues 31.7% 31.3% 31.4% 31.0%
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 and six months ended December 26, 2004, compared to the same periods of the prior year as a result of increased spending in evolving areas including search and affiliate marketing as well as in a variety of direct marketing and broadcast advertising programs to promote "top of mind" brand awareness both prior to and during the 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 2,515,000 and 3,457,000 customers who placed orders during the three and six months ended December 26, 2004, approximately 51.3% represented repeat customers, compared to 48.6 and 48.9%, in the respective prior year periods. In addition, as a result of the strength of the Company's brands, combined with its cost-efficient marketing programs, the Company added approximately 1,225,000 and 1,685,000 new customers during the three and six months ended December 26, 2004, respectively. During the remainder of fiscal 2005, the Company expects to increase its marketing and sales spending in order to accelerate its rate of new customer acquisition, while also leveraging its already significant customer base through cost effective, customer retention initiatives. Such spending will include an increasing presence in online search and affiliate relationships, as well as in direct marketing and broadcast advertising programs. In addition, the Company plans to add personnel to grow its BloomNet membership and support the anticipated growth of its recently acquired wine business. As a result, over the short term the Company expects that marketing and sales expense will increase as a percentage of net revenues, enabling the Company to accelerate revenue growth and thereby extend the Company's leadership in the floral and thoughtful gift marketplace. Technology and Development Expense Three Months Ended Six Months Ended ---------------------------------------------- ---------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change -------------- --------------- --------------- -------------- --------------- -------------- (in thousands) Technology and development $3,292 $3,503 (6.0%) $6,396 $6,934 (7.8%) Percentage of net revenues 1.4% 1.6% 2.0% 2.2%
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 and six months ended December 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 and six months ended December 26, 2004, the Company expended $4.9 million and $10.0 million on technology and development, of which $1.6 million and $3.6 million has been capitalized. 10 Although over the longer term, the Company believes that it will continue to demonstrate its ability to leverage its IT platforms, during the remainder of fiscal 2005, the Company intends to improve the technology infrastructure of its recently acquired wine business, and therefore expects that technology and development spending as a percentage of net revenues will be consistent with, or slightly higher than in prior years. General and Administrative Expense Three Months Ended Six Months Ended ---------------------------------------------- --------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change ---------------- --------------- -------------- -------------- --------------- ------------ (in thousands) General and administrative $7,954 $7,577 5.0% $15,556 $15,356 1.3% Percentage of net revenues 3.5% 3.6% 4.7% 5.0%
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 increased during the three and six months ended December 26, 2004 in comparison to the same periods of the prior year, primarily as a result of the incremental expenses associated with the acquisition of the Wine Tasting Network and compliance with the Sarbanes Oxley Act, offset in part by lower payroll and cost reduction initiatives. Although the Company believes that its current general and administrative infrastructure is sufficient to support existing requirements, as a result of the incremental expenses associated with the Company's wine gift product line, during the remainder of fiscal 2005, the Company expects that its general and administrative expenses as a percentage of net revenue will be consistent with, or slightly higher than the prior year. Depreciation and Amortization Expense Three Months Ended Six Months Ended -------------------------------------------- ---------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change -------------- --------------- ------------ --------------- --------------- ------------ (in thousands) Depreciation and amortization $3,770 $3,843 (1.9%) $7,666 $7,760 (1.2%) Percentage of net revenues 1.6% 1.8% 2.3% 2.5%
Depreciation and amortization expense during the three and six months ended December 26, 2004 decreased slightly over the same periods of the prior year, 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, including the improvement and absorption of the technology platform of the Company's newly acquired wine business, 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 Six Months Ended -------------------------------------------- --------------------------------------------- December 26, December 28, December 26, December 28, 2004 2003 % Change 2004 2003 % Change -------------- --------------- ----------- --------------- --------------- ------------ (in thousands) Interest income $275 $223 23.3% $657 $415 58.3% Interest expense (124) (186) 33.3% (265) (419) 36.8% Other 21 (14) 250.0% 25 (213) 111.7% -------------- -------------- -------------- --------------- $172 $23 647.8% $417 ($217) 292.2% ============== ============== ============== ===============
11 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 and six months ended December 26, 2004 was primarily attributable to higher interest income resulting from an increase in average cash balances and interest rate returns, as well as lower interest expense due to maturing capital lease obligations. Additionally, during the six months ended December 26, 2004, other income (expense) increased as a result of a loss incurred upon the conversion/relocation of a retail store into a local fulfillment center in the prior year period. Income Taxes During the three and six months ended December 26, 2004 the Company recorded income taxes of $6.2 million and $4.3 million, based upon the Company's anticipated effective annualized income tax rate of approximately 41.6%. 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 December 26, 2004, the Company had working capital of $90.9 million, including cash and equivalents and short-term investments of $105.9 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 December 26, 2004 and June 27, 2004, the Company maintained approximately $3.7 million and $8.3 million, respectively, of long-term investments, consisting primarily of investment grade corporate and U.S. government securities. Net cash provided by operating activities of $16.3 million for the six months ended December 26, 2004 was primarily attributable to the Company's net income as well as non-cash charges of depreciation and amortization and deferred income taxes, offset in part by seasonal changes in working capital, including receivables which increased in comparison to the prior year due to the timing of the Christmas Holiday in relation to the Company's quarter end, and inventory, which increased due to early buys of spring related merchandise which, in part, is sourced from overseas, and expansion of inventory for sale to the Company's BloomNet members for the upcoming floral holidays. Net cash used in investing activities of $7.3 million for the six months ended December 26, 2004 was primarily attributable to acquisition of the Wine Tasting Network as well as capital expenditures, primarily related to the Company's technology infrastructure, offset in part by maturities of long-term investments. Net cash used in financing activities of $3.0 million for the six months ended December 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. 12 At December 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 $4,935 $1,268 $2,728 $939 - Capital lease obligations 2,604 1,717 887 - - Operating lease obligations 11,098 3,565 3,908 1,817 $1,808 Sublease obligations 8,301 2,424 3,230 2,086 561 Other cash obligations (*) 161 161 - - - Purchase commitments (**) 14,611 14,611 - - - ----------- --------------- ------------ ------------- --------------- Total $41,710 $23,746 $10,753 $4,842 $2,369 =========== =============== ============ ============= ================
(*) 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 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 13 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. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for all interim periods beginning after June 15, 2005 and, thus, will be effective for the Company beginning with the first quarter of fiscal 2006. The Company is currently evaluating the impact of SFAS123R on its financial position and results of operations. See Note 1 of notes to consolidated financial statements included in Part 1, Item 1 of this report for information related to the pro forma effects on reported net income and net income per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, "Acounting for Stock Based Compensation," to stock-based employee compensation. 14 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 December 26, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 15 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 second quarter of fiscal 2005 which includes the period September 27, 2004 through December 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) 9/27/04 - 10/24/04 86.6 $8.44 86.6 $8,096 10/25/04 - 11/21/04 33.0 $8.22 33.0 $7,825 11/22/04 - 12/26/04 - $- - $7,825 ----------------- ----------------- ------------------ Total 119.6 $8.38 119.6
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 The Company's Annual Meeting of Stockholders was held on December 10, 2004. The following nominees were elected as directors, each to serve until the 2007 Annual Meeting or until their respective successors shall have been duly elected and qualified, by the vote set forth below: Nominee For Withheld ---------------------------- ----------------------------------- ------------------------------------------ John J. Conefry, Jr. 388,725,877 2,264,269 Leonard J. Elmore 388,689,663 2,300,483 Mary Lou Quinlan 382,768,589 8,221,557 The following Directors who were not nominees for election at this Annual Meeting will continue to serve on the Board of Directors of the Company: James F. McCann, Christopher G. McCann, T. Guy Minetti, Jeffrey C. Walker and Kevin J. O'Connor. The proposal to ratify the selection of Ernst & Young LLP, independent public accountants, as auditors of the Company for the fiscal year ending July 3, 2005 was approved by the vote set forth below: For Against Abstain ------------------------- ----------------------------------- ------------------------------------------ 390,400,623 580,581 8,942
ITEM 5. OTHER INFORMATION Not applicable. 16 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 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. On November 16, 2004, the Company filed a report on Form 8-K, announcing that it had acquired the Winetasting Network. On January 31, 2005, the Company filed a report on Form 8-K, attaching its press release dated January 18, 2005, disclosing financial results for its fiscal 2005 second quarter ended December 26, 2004. 17 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: February 4, 2005 /s/ James F. McCann --------------------------- ---------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: February 4, 2005 /s/ William E. Shea --------------------------- ---------------------------------- William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer)