Item 1. BUSINESS
The Company
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 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); and children's gifts from HearthSong(R) (http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com). The Company's Class A common stock is listed on the NASDAQ National Market (ticker symbol "FLWS").
References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" and the "Company" refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's principal offices are located at 1600 Stewart Avenue, Westbury, New York, 11590 and its telephone number at that location is (516) 237-6000.
The Origins of 1-800-FLOWERS.COM
The Company's operations began in 1976 when James F. McCann, its Chairman and Chief Executive Officer, acquired a single retail florist in New York City, which he subsequently expanded to a 14-store chain. Thereafter, the Company modified its business strategy to take advantage of the rapid emergence of toll-free calling. The Company acquired the right to use the toll-free telephone number 1-800-FLOWERS, adopted it as its corporate identity and began to aggressively build a national brand around it. The Company believes it was one of the first companies to embrace this new way of conducting business.
To support the growth of its toll-free business and to provide superior customer service, the Company developed an operating infrastructure that incorporated the best available technologies. Over time, the Company implemented a sophisticated
transaction processing system that facilitated rapid order entry and fulfillment, an advanced telecommunications system and multiple customer service centers to handle increasing call volume.
To enable the Company to deliver products reliably nationwide on a same-day or next-day basis and to market pre-selected, high-quality floral products, the Company created BloomNet(R), a nationwide network including independent local florists selected for their high-quality products, superior customer service and order fulfillment and delivery capabilities.
In the early 1990s, the Company recognized the emergence of the Internet as a significant strategic opportunity and moved aggressively to embrace this new medium. By taking advantage of investments in its infrastructure, the Company was able to quickly develop and implement an online presence. As a result, the Company was one of the first companies to market products online through CompuServe beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In April 1995, the Company opened its fully functional, e-commerce Web site (www.1800flowers.com) and subsequently entered into strategic relationships with AOL, Yahoo! and Microsoft, among others, to build its online brand and customer base.
The Company's online presence has enabled it to expand the number and types of products it can effectively offer. As a result, the Company has developed relationships with customers who purchase products not only for gifting occasions but also for everyday consumption. Since 1995, the Company has broadened its product offerings of flowers, gourmet foods and gifts and added complementary home and garden merchandise through its April 1998 acquisition of Plow & Hearth, as well as unique and educational children's toys and games when it acquired the HearthSong and Magic Cabin product lines in June 2001. In order to further expand its gourmet food line, the Company acquired GreatFood.com in November 1999, and purchased selected assets of The Popcorn Factory in May 2002, adding premium popcorn and specialty snack foods to the Company's product offerings.
The Company's Strategy
1-800-FLOWERS.COM's objective is to become the leading provider of thoughtful gifts, helping its customers connect with the important people in their lives. The Company will continue to build on the trusted relationships with our customers by providing them with ease of access, tasteful and appropriate gifts, and superior service. The key elements of its strategy to achieve this objective are:
Opportunistically Extend the Company's Brands. The Company believes that 1-800-FLOWERS.COM is one of the most recognized brands in the floral and gift industry. The strength of its brand has enabled the Company to extend its product offerings to complementary products, including giftware, gourmet foods, home and garden merchandise, and children's toys and games. This extension of product offerings through its brands has enabled the Company to increase the number of purchases by existing customers who have come to trust the 1-800-FLOWERS.COM brand, as well as continue to attract new customers.
The Company believes its brands are characterized by:
o Convenience. All of the Company's product offerings can be purchased either via the web (www.1800flowers.com) from their home or office 24 hours a day, seven days a week, or via the Company's toll-free telephone numbers for those customers who prefer a personal gift advisor to assist them. The Company offers a variety of delivery options, including same-day or next-day service throughout the world. o Quality. High-quality products are critical to the Company's continued brand strength and are integral to the brand loyalty that it has built over the years. The Company offers its customers a 100% satisfaction
guarantee on all of its products. o Delivery. The Company has developed a market-proven fulfillment infrastructure that allows delivery on a same-day, next-day and any-day basis. Key to the Company's fulfillment capability is an innovative "hybrid" model which combines BloomNet(R)(comprised of independent florists operating retail flower shops and Local Fulfillment Centers ("LFC's"), Company-owned stores and fulfillment centers, and franchise stores), with Company-owned distribution centers in Madison, Virginia, Vandalia, Ohio and Lake Forest, Illinois and brand-name vendors who ship directly to the Company's customers. These fulfillment points are connected by the Company's proprietary "BloomLink(R)" communication system, a secure internet-based system through which orders and related information are transmitted. o Selection. Over the course of a year, the Company offers over 2,700 varieties of fresh-cut flowers, floral arrangements and plants, over 3,200 SKUs of gifts and gourmet foods, approximately 9,400 different products for the home and garden, including garden accessories and casual lifestyle furnishings, and over 6,300 unique and educational toys and games. o Customer Service. The Company strives to ensure that customer service, whether online, via the telephone, or in one of its retail stores is of the highest caliber. The Company operates four customer service facilities to provide helpful assistance on everything from advice on product selection to the monitoring of the fulfillment and delivery process.
The Company's goal is to make its brands synonymous with thoughtful gifting. To do this, the Company intends to continue to invest in its brands through the use of selective media, public relations and strategic internet portal relationships, while capitalizing on the Company's large and loyal customer base through cost-effective customer retention programs.
As part of the Company's continuing effort to serve the thoughtful gifting needs of its customers, the Company intends to market other high-quality brands in addition to 1-800-FLOWERS.COM. The Company intends to accomplish this through internal development, co-branding arrangements, strategic relationships and/or acquisitions of complementary businesses. In keeping with this strategy, in May 2002 the Company acquired The Popcorn Factory, a manufacturer and direct marketer of giftable premium popcorn and related food gift products, and in June 2001 the Company acquired The Children's Group, including its two brands of unique and educational children's toys and games. In fiscal 2000 the Company acquired GreatFood.com, an online retailer of gourmet foods, and in 1998, the Company acquired Plow & Hearth, a direct marketer of home decor and garden merchandise. As a complement to the Company's own brands and product lines, the Company has formed strategic relationships with Lenox(R), Waterford(R), Swarovski(R), Godiva(R), Hershey's(R), Gund(R), Crabtree and Evelyn(R), Things Remembered(R) and Yankee Candle(R), among others, in order to provide our customers with an even broader selection of products to further its position as a destination for all of their gifting needs.
Expand its Product Offerings. The Company's wide selection of products creates the opportunity to have a relationship with customers who purchase items not only for gift-giving occasions but also for everyday consumption. The Company's merchandising team works closely with manufacturers and suppliers to select and design its floral, gourmet food, home and garden and children's toys, as well as other gift-related products that accommodate our customers' needs to celebrate a special occasion, convey a sentiment or cater to a casual lifestyle. As part of this continuing effort, the Company intends to increase the number of, as well as expand its relationships with its existing product manufacturers or, where appropriate, acquire businesses with complementary product lines.
Enhance its Customer Relationships. The Company intends to deepen its relationship with its customers and be their trusted resource to fulfill their need for quality, tasteful gifts. The Company plans to encourage more frequent
and extensive use of its Web site, by continuing to provide product-related content and interactive features. The Company will also continue to improve its customers' shopping experience by personalizing the features of its Web site and, in compliance with the Company's privacy policy, utilizing customer information to target product promotions, identify individual and mass market consumption trends, remind customers of upcoming occasions and convey other marketing messages. As of June 27, 2004, the Company's total database of customers numbered approximately 23.9 million (12.0 million of which have transacted business with the Company within the past 36 months), 9.7 million of which have transacted business with the Company online (6.7 million of which have transacted business with the Company online within the past 36 months).
In addition, the Company believes it has significant opportunity to expand its corporate customer base and intends to leverage existing and/or develop successful gifting programs with corporate customers, many of which are included in the Fortune 1000, such as AT&T, Bank of America, General Electric, IBM, JP Morgan Chase, and Verizon, to name a few. These programs focus on developing and/or strengthening strategic partnerships with Fortune 1000 organizations to develop customized and personalized gifts for their clients and employees.
Increase the Number of Online Customers. Online transactions are more cost efficient to process. Although the Company expects its customers to choose the most convenient channel available to them at the time of their purchase, the Company expects its trend of online growth to continue. In fact, to further increase the number of customer orders placed through its Web site, the Company intends to continue to:
o actively promote its Web site through internet portals, online networks and search engines; o expand its online affiliate program, in which independent Web sites link directly to the Company's Web site; o aggressively market the Company's Web site in its advertising campaigns; o facilitate access to the Company's Web site for its corporate customers by implementing direct links from their internal corporate networks.
Capitalize upon the Company's Technology Infrastructure. The Company believes it has been and continues to be a leader in implementing new technologies and systems to give its customers the best possible shopping experience, whether online or over the telephone.
The Company's online and telephonic orders are fed directly from the Company's secure Web site, or with the assistance of a gift advisor, into a transaction processing system which captures the required customer and recipient information. The system then routes the order to the appropriate Company warehouse, or for florist fulfilled or drop-shipped items selects a vendor to fulfill the customer's order and electronically transmits the necessary information to assure timely delivery. In addition, the Company's gift advisors have electronic access to this system, enabling them to assist in order fulfillment and subsequently track other customer and/or order information.
In prior years, the Company invested heavily in building a scalable technology platform to support the Company's order volume growth, including in-sourcing of its Web-hosting and disaster recovery systems. In addition to cost savings, in-sourcing has provided improved operational flexibility, additional capacity and system redundancy. Although the Company will continue to make significant investments, and use available technologies in order to improve its operations, the Company plans to leverage its existing information technology infrastructure capabilities, thereby allowing for continued reduction in overall technology spending as a percentage of revenues while providing resources to focus on customer specific projects to ensure that our customers are provided an enjoyable shopping experience.
Continue to Improve the Company's Fulfillment Capabilities. A majority of the Company's customers' purchases of floral and floral-related gift products are fulfilled by one of the Company's BloomNet(R) members. This allows the Company to deliver its floral products on a same-day or next-day basis to ensure freshness and to meet its customers' need for prompt delivery. In addition, the Company is better positioned to ensure consistent product quality and presentation and offer a greater variety of arrangements, which creates a better experience for its customers and gift recipients. The Company selects BloomNet(R) members for their high-quality products, superior customer service and order fulfillment and delivery capabilities. Beginning in fiscal 2001, the Company began entering into Order Fulfillment Agreement(s) with selected BloomNet(R) members to operate LFC's to facilitate the fulfillment of the Company's floral and gift orders, improving the economics of florist fulfilled transactions, and improving the Company's ability to control product quality and branding.
The Company fulfills most of its gift basket and gourmet food items, other than its premium popcorn and related products, which are shipped from the Company's 148,000 square foot manufacturing and distribution center located in Lake Forest, Illinois, primarily through members of BloomNet(R) or third-party gift vendors that ship products directly to the customer by next-day or other delivery options chosen by the customer. The Company selects its third-party gift vendors based upon the quality of their products, their reliability and ability to meet volume requirements. The Company primarily packages and ships its home and garden products from its 300,000 square foot distribution center located in Madison, Virginia, or through the Company's 200,000 square foot distribution center in Vandalia, Ohio. Shipment of children's merchandise is primarily facilitated through the Vandalia, Ohio distribution center.
To ensure reliable and efficient communication of online and telephonic orders to its BloomNet(R) members and third party gift vendors, the Company internally-developed BloomLink(R), a proprietary and secure internet-based communications system. All BloomNet(R) members and third-party gift vendors have adopted BloomLink(R). The Company also has the ability to arrange for international delivery of floral products through independent wire services and direct relationships.
The Company intends to improve its fulfillment capabilities to make its operations more efficient by:
o strengthening relationships and increasing the number of its vendors and BloomNet(R) member florists, as appropriate, to ensure geographic coverage and shorten delivery times; o implementing alternative means of fulfillment, including centralized production and strategic expansion and logistical positioning of Company-owned fulfillment centers and LFC's; o continuing to improve warehousing operations and reduce fulfillment times in support of its gift, gourmet food, home and garden and children's product lines.
The Company's Products
The Company offers a wide range of products, including fresh-cut flowers, floral arrangements and plants, gifts, popcorn, baked goods and gourmet foods, home and garden merchandise and unique toys and games for children. In addition to selecting its core products, the Company's merchandising team works closely with manufacturers and suppliers to select and design products that meet the seasonal, holiday and other special needs of its customers. For the years ended June 27, 2004, June 29, 2003, and June 30, 2002, the sale of floral products represented 52.2%, 50.5%, and 54.2% of total combined telephonic and online net revenues, respectively.
Over the course of a year, the Company's product selection consists of:
Flowers. The Company offers more than 2,000 varieties of fresh-cut flowers and floral arrangements for all occasions and holidays, available for same-day delivery. The Company provides its customers with a choice of florist designed products, flowers delivered from the farm through its "Fresh From Our Growers" program, and most recently, the Company launched its "celebrity" gift collections, including the unique floral creations of Jane Carroll, and designs to make every day a celebration from the Company's entertaining expert Donata Maggipinto.
Plants. The Company also offers approximately 700 varieties of popular plants to brighten the home and/or office, and accent gardens and landscapes.
Gourmet Food. The Company offers more than 800 premium popcorn and specialty snack products from The Popcorn Factory brand, as well as approximately 700 carefully selected gourmet food and sweet products from the GreatFood brand, including candies, chocolates, nuts, cookies, fruit, imported cheeses and giftable surf-and-turf dinners. The Company's introduction of its own brand of bakeshop gifts, "Mama Moore's" is becoming one of the Company's best selling food gift lines, and the Company's most popular items are offered in beautiful and innovative gift baskets, providing customers with an assortment of baskets to choose from. In addition, The Popcorn Factory brand's premium popcorn and related products can be packaged in seasonal, occasion specific, decorative tins, fitting the "giftable" requirement of our individual customers, while also adding the capability to customize the tins with corporate logos and other personalized features for the Company's corporate customer's gifting needs.
Unique and Specialty Gifts. The Company offers 1,700 specially selected gift items, including plush toys, balloons, bath and spa items, candles, wreaths, ornaments, collectibles, home accessories, giftware and fine jewelry.
Home and Garden. Through its Plow & Hearth brand, the Company offers more than 7,500 SKUs for home, hearth and outdoor living, including casual lifestyle furniture and home accessories, clothing, footwear, candles and lighting, vases, kitchen items and accents and approximately 1,900 gardening items, including tools and accessories, pottery, nature-related products, books and related products.
Children's Gifts. Through the HearthSong and Magic Cabin brands, the Company offers over 6,300 products, including environmentally friendly toys, plush stuffed animals, crafts and books with educational, nature and art themes, as well as, natural-fiber soft dolls, kits and accessories for children ages 3 through 12.
Greetings. Through its relationships with American Greetings Corporation and Cardstore.com, the Company provides its customers the ability to send personalized electronic and printed greeting cards with hundreds of fun and creative ways to express emotions, offer congratulations, or just keep in touch.
The Company's Web Sites
The Company offers floral, plant, gourmet food and specialty gift products through its 1-800-FLOWERS.COM Web site (www.1800flowers.com). Customers can come to the Web site directly or be linked by one of the Company's portal providers or search engine relationships. These include AOL (keyword:flowers), Yahoo!, Microsoft, Google and Overture, as well as thousands of its online affiliate program members. The Company also offers home and garden products through the Plow & Hearth Web site (www.plowandhearth.com), gourmet food products through GreatFood.com (www.greatfood.com), premium popcorn and specialty food products through The Popcorn Factory (www.thepopcornfactory.com) and children's gifts through its HearthSong (www.hearthsong.com) and Magic Cabin (www.magiccabin.com) Web sites. As of June 27, 2004, approximately 9.6 million customers had made a purchase through the Company's online sales channel. Approximately 70% of online
revenues are derived from traffic coming directly to one of the Company's Universal Resource Locators ("URL's").
The Company's Web sites allow customers to easily browse and purchase its products, promote brand loyalty and encourage repeat purchases by providing an inviting customer experience. The Company's Web sites offer customers detailed product information, complete with photographs, personalized shopping services, contests, home decorating and how-to tips, information on floral trends, gift-giving suggestions and information about special events and offers. The Company has designed its Web sites to be fast, secure and easy to use and allows customers to order products with minimal effort. The Company's Web sites include the following key features in addition to the variety of delivery and shipping options (same day/next day) and 24 hour/7 day customer service that are available to all its customers:
Product Search and Order Tracking. The Company has implemented sophisticated search capabilities, which enable customers to search for products by occasion, category/department, price point, flower type, brand or keyword. The Company's Web site also features a "more shopping" section, containing an easy-to-view drop-down list and quick-links to some of the most popular categories. The Company's online order tracking capabilities allow customers to quickly and easily view the delivery status of their purchase, while its "Delivery Wizard" provides customers with expected delivery dates for each product selection.
Personalization. The Company utilizes its Web site to enhance the direct relationship with its customers, including greeting customers by name and personalized Web pages tailored to its registered customers. The "Member Benefits" provide customers with an online address book for names and addresses of their gift recipients, express checkout services and e-mail notification of special promotions, product previews and events. The Company's registered customers can also utilize its "Gift Reminder Program," which sends e-mail reminders prior to any pre-selected occasion and offers suggestions to specific flower and/or gift products.
Multiple Channel Access to Gift Advisors. The Company's Web site offers customers the ability to use e-mail, real-time online keyboard-to-keyboard chat messaging and "click-to-talk" capability to reach one of the Company's gift advisors who can answer product questions, provide gifting suggestions or resolve order issues. The Company also offers its customers answers to frequently asked questions directly on the Web site.
Security. The Company provides a safe and secure shopping experience within its Web site through the use of secure server software, which encrypts the customer's credit card number to protect against interception as the information is transmitted over the Internet.
Privacy. The Company recognizes the importance of maintaining the privacy of its customers. The Company uses the information gathered on its Web site from time to time to send promotional materials and to enhance the customer's shopping experience. The Company periodically makes certain information available to selected third parties for direct marketing purposes. However, customers may elect not to receive promotional information and/or instruct the Company not to make their information available to third parties. The Company's current online privacy policy, which is updated to continuously reflect current industry guidelines, is set forth on its Web site.
Marketing and Promotion
The Company's marketing and promotion strategy is designed to strengthen the
1-800-FLOWERS.COM brands, build customer loyalty, increase the number of customers, encourage repeat purchases and develop additional product revenue opportunities. The Company also intends to develop and market other high-quality brands in addition to its current 1-800-FLOWERS.COM, Plow & Hearth, GreatFood, The Popcorn Factory, HearthSong and Magic Cabin brands through internal development, co-branding arrangements, strategic relationships and/or acquisitions of complementary businesses. The most recent example of this was this year's introduction of the Company's "Mama Moore's" brand of baked goods. The Company markets and promotes its brands and products as follows:
Direct Mail and Catalogs. The Company uses its direct mail promotions and catalogs to increase the number of new customers and to introduce additional products to its existing customers. Through the use of the Plow & Hearth, HearthSong, The Popcorn Factory and Magic Cabin catalogs the Company cross-promotes its floral and gift products to its non-floral customers and the Company similarly cross-promotes its non-floral products to its floral and gift customers in the 1-800-FLOWERS gift catalog. In addition to providing a direct sale mechanism, the Company believes that these catalogs will attract additional customers to the Company's Web sites. For the year ended June 27, 2004, the Company mailed in excess of 100 million branded catalogs.
Traditional Media. The Company utilizes traditional media, including television, radio, print and outdoor advertising, to market its brand and products. Traditional media allows the Company to reach a large number of customers and to target particular market segments.
The Company's Strategic Online Relationships. The Company promotes its products through strategic relationships with leading internet portals, search engines and online networks. The Company's relationships include, among others, AOL, Yahoo!, Microsoft, Google and Overture.
The Company's Online Affiliate Program. In addition to securing alliances with frequently visited Web sites, the Company developed an affiliate network that includes thousands of Web sites operated by third parties. Affiliates may join this program through the Company's Web site and their participation may be terminated by them or by the Company at any time. These Web sites earn commissions on purchases made by customers referred from their sites to the Company's Web site. The affiliates include such Web sites as Ebates.com, Looksmart.com and Shopathomeselect.com.
E-mails. The Company is able to capitalize on its customer database of approximately 23.9 million customers (12.0 million of which have transacted business with the Company within the past 36 months), 9.7 million of which have transacted business with the Company on-line (6.7 million of which have transacted business with the Company online within the past 36 months), by utilizing cost-effective, targeted e-mails to notify customers of product promotions, remind them of upcoming gifting occasions and convey other marketing messages.
Co-Marketing and Promotions. The Company has established a number of co-marketing relationships and promotions to advertise its products. For example, the Company has established co-marketing arrangements with American, United and Delta Airlines, as well as Upromise, Capital One, American Express, VISA and MasterCard, among others.
Fulfillment Operations
The Company's customers primarily place their orders either online or over the telephone. The Company's development of a hybrid fulfillment system which enables the Company to offer same-day, next-day and any-day delivery, combines the use of BloomNet(R) (independent florists operating retail flower shops and LFC's, Company-owned stores and fulfillment centers, and franchise stores), with
the Company-owned distribution centers and brand-name vendors who ship directly to the Company's customers. While providing a significant competitive advantage in terms of delivery options, the Company's fulfillment system also has the added benefit of reducing the Company's capital investments in inventory and infrastructure. Fulfillment of products is as follows:
Flowers. A majority of the Company's floral orders are fulfilled through BloomNet(R). The Company selects retail florists for BloomNet(R) based upon the historical volume of floral deliveries in a particular geographic area, the number of BloomNet(R) florists currently serving the area and the florist's design staff, facilities, quality of floral processing, and ability to fulfill orders in sufficient volume and delivery capabilities. The Company regularly monitors BloomNet(R) florists' performance and adherence to the Company's quality standards to ensure proper product branding and packaging.
By fulfilling floral orders through BloomNet(R), the Company is able to deliver floral products on a same-day, next-day or any day basis to ensure freshness and to meet the customers' need for prompt delivery. Because the Company selects these florists and receives customer feedback on their performance in fulfilling orders, it is able to ensure consistent product quality and presentation and offer a greater variety of arrangements, which the Company believes creates a better experience for its customers and gift recipients.
The Company's relationships with its BloomNet(R) members are non-exclusive. Many florists, including many BloomNet(R) florists, also are members of other floral fulfillment organizations. The BloomNet(R) agreements generally are cancelable by either party with ten days notification and do not guarantee any orders, dollar amounts or exclusive territories from the Company to the florist. As of June 27, 2004, the Company had entered into approximately 60 Order Fulfillment Agreements with selected BloomNet(R) members to operate LFC's, providing coverage of all significant population centers across the United States. Generally, these agreements provide for a three-year term, terminable upon 30 days notice upon breach and immediately by the Company in the event of certain specified defaults by the operator of the LFC. In consideration of the operator's satisfactory performance, the Company agrees to use reasonable efforts to forward orders with a specified minimum merchandise value during each year of the agreement. The Company has not granted an exclusive territory to any operator.
In certain instances, the Company is required to fulfill orders through non-BloomNet(R) members, and transmits these orders to the fulfilling florist using the communication system of an independent wire service or via telephone. Additionally, the Company offers its customers an alternative to florist designed products through its "Fresh From Our Growers" program. In this program, the Company ships overnight via common carrier to its customers from growers and through its fulfillment centers.
As of June 27, 2004, the Company operates 19 floral retail stores, located primarily in the New York and Los Angeles metropolitan areas and 8 fulfillment centers. In addition, the Company has 73 franchised stores, located primarily in California and Texas. Company-owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs.
Plants, Gift Baskets, Gourmet Food, Premium Popcorn and Unique Gifts. The Company's plants, gift baskets, gourmet food, premium popcorn and unique gifts are shipped directly to the customer by members of BloomNet(R), third-party product suppliers or through its Madison, Virginia, Vandalia, Ohio and Lake Forest, Illinois fulfillment centers using next-day or other delivery option selected by the customer. The Company's business is not dependent on any single third-party supplier.
Home and Garden and Children's Toys. The Company fulfills purchases of home and garden merchandise from its Madison, Virginia and Vandalia, Ohio fulfillment center or by third-party product suppliers using next-day or other delivery
option selected by the customer. In fiscal 2004, the Company shipped approximately 2.3 million packages from these facilities which employ advanced technology for receiving, packaging, shipping and inventory control.
Technology Infrastructure
The Company believes it has an advanced technology platform. Its technology infrastructure, primarily consisting of the Company's Web site, transaction processing, customer databases and telecommunications systems, is built and maintained for reliability, security, scalability and flexibility. To minimize the risk of service interruptions from unexpected component or telecommunications failure, maintenance and upgrades, the Company has built full back-up and system redundancies into those components of its systems that have been identified as critical. In recent years the Company installed an Oracle-based order processing and database management system; developed BloomLink(R), upgraded its telecommunications network, including its call management system and internalized its Web-hosting and development capabilities. The Company plans to continue to invest in technologies that will improve and expand its e-commerce and telecommunication capabilities.
The Company's transaction processing system captures customer profile and history in a customized Oracle database and selects the florist, third-party vendor, or Company-owned warehouse to fulfill the order. Through the use of customized software applications, the Company is able to retrieve, sort and analyze customer information to enable it to better serve its customers and target its product offerings.
The Company's customer service centers and third-party outsourcers are connected electronically to its transaction processing system to permit the rapid transmission of, and access to, critical order and customer information. In addition, BloomLink(R) electronically connects the Company to its BloomNet(R) members and non-floral vendors.
The Company's operations center is located in its headquarters in Westbury, New York. The Company provides comprehensive facility management services, including human and technical monitoring of all production servers, 24 hours per day, seven days per week.
Seasonality
The Company's quarterly results may experience seasonal fluctuations. Due to the Company's expansion into gift, home, gourmet and other related products, the Thanksgiving through Christmas holiday season, which falls within the Company's second fiscal quarter, generates the highest proportion of the Company's annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother's Day, Administrative Professionals Week and Easter, revenues also rise during the Company's fiscal fourth quarter, in relation to its fiscal first and third quarters.
Competition
The growing popularity and convenience of e-commerce has continued to give rise to established businesses on the Internet. In addition to selling their products over the Internet, many of these retailers sell their products through a combination of channels by maintaining a Web site, a toll-free phone number and physical locations. Additionally, several of these merchants offer an expanding variety of products and some are attracting an increasing number of customers. Certain mass merchants have expanded their offerings to include competing products and may continue to do so in the future. These mass merchants, as well as other potential competitors, may be able to:
o undertake more extensive marketing campaigns for their brands and services;
o adopt more aggressive pricing policies; and o make more attractive offers to potential employees, distributors and retailers.
In addition, the Company faces intense competition in each of its individual product categories. In the floral industry, there are various providers of floral products, none of which is dominant in the industry. The Company's competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o supermarkets, mass merchants and specialty retailers with floral departments.
Similarly, the plant, gift basket, gourmet food, unique gifts, children's toys and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products, is highly fragmented and is served by a large number of companies, none of which is dominant. Products in these categories may be purchased from a number of outlets, including mass merchants, telemarketers, retail specialty shops, online retailers and mail-order catalogs.
The Company believes the strength of its brands, product selection, customer relationships, technology infrastructure and fulfillment capabilities position it to compete effectively against its current and potential competitors in each of its product categories. However, increased competition could result in:
o price reductions, decreased revenues and lower profit margins; o loss of market share; and o increased marketing expenditures.
These and other competitive factors may adversely impact the Company's business and results of operations.
Government Regulation and Legal Uncertainties
The Internet is rapidly evolving and there are laws and regulations directly applicable to e-commerce. Legislatures are also considering an increasing number of laws and regulations pertaining to the Internet, including laws and regulations addressing:
o user privacy; o pricing; o content; o connectivity; o intellectual property; o distribution; o taxation; o liabilities; o antitrust; and o characteristics and quality of products and services.
Further, the growth and development of the market for online services may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services. This could decrease the demand for the Company's services and increase
its cost of doing business. Moreover, the applicability to the Internet of existing laws regarding issues like property ownership, taxes, libel and personal privacy is uncertain. Any new legislation or regulation that has an adverse impact on the Internet or the application of existing laws and regulations to the Internet could have a material adverse effect on the Company's business, financial condition and results of operations.
States or foreign countries might attempt to regulate the Company's business or levy additional sales or other taxes relating to its activities. Because the Company's products and services are available over the Internet anywhere in the world, multiple jurisdictions may claim that the Company is required to do business as a foreign corporation in one or more of those jurisdictions. Failure to qualify as a foreign corporation in a jurisdiction where the Company is required to do so could subject it to taxes and penalties. States or foreign governments may charge the Company with violations of local laws.
Intellectual Property and Proprietary Rights
The Company regards its service marks, trademarks, trade secrets, domain names and similar intellectual property as critical to its success. The Company has applied for or received trademark and/or service mark registration for, among others,"1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com", "The Popcorn Factory", "TheGift.com", "HearthSong" and "Magic Cabin". The Company also has rights to numerous domain names, including www.1800flowers.com, www.800flowers.com, www.flowers.com, www.plowandhearth.com, www.greatfood.com, www.thepopcornfactory.com, www.hearthsong.com and www.magiccabin.com. In addition, the Company has developed transaction processing and operating systems as well as marketing data, and customer and recipient information databases.
The Company relies on trademark, unfair competition and copyright law, trade secret protection and contracts such as confidentiality and license agreements with its employees, customers, vendors and others to protect its proprietary rights. Despite the Company's precautions, it may be possible for competitors to obtain and/or use the Company's proprietary information without authorization or to develop technologies similar to the Company's and independently create a similarly functioning infrastructure. Furthermore, the protection of proprietary rights in Internet-related industries is uncertain and still evolving. The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. The Company's means of protecting its proprietary rights in the United States or abroad may not be adequate.
The Company intends to continue to license technology from third parties, including Oracle, Microsoft, MCI and AT&T, for its communications technology and the software that underlies its business systems. The market is evolving and the Company may need to license additional technologies to remain competitive. The Company may not be able to license these technologies on commercially reasonable terms or at all.
Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes infringements and misappropriations will continue to occur in the future. The Company intends to police against infringement or misappropriation. However, the Company cannot guarantee it will be able to enforce its rights and enjoin the alleged infringers from their use of confusingly similar trademarks, service marks, telephone numbers and domain names.
In addition, third parties may assert infringement claims against the Company. The Company cannot be certain that its technologies or its products and services do not infringe valid patents, trademarks, copyrights or other proprietary rights held by third parties. The Company may be subject to legal proceedings and claims from time to time relating to its intellectual property and the intellectual property of others in the ordinary course of its business. Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running the Company's business.
Employees
As of June 27, 2004, the Company had a total of approximately 2,500 full and part-time employees. During peak periods, the Company substantially increases the number of customer service, manufacturing and retail and fulfillment personnel. The Company's personnel are not represented under collective bargaining agreements and the Company considers its relations with its employees to be good.
Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known to the Company or that are currently deemed immaterial may also impair its business operations. If any of the following risks actually occur, the Company's business, financial condition or results of operations may suffer.
The Company has incurred losses in recent years, and although the Company returned to profitability during fiscal 2003, no assurances can be made that positive net income will continue to be achieved in the future. In order to maintain profitability, the Company will need to continue to generate sufficient revenues and maintain and/or reduce operating expenditures. Management cannot assure you that the Company will generate revenues or reduce operating expenses sufficiently to maintain profitability. Even if the Company does continue to be profitable, it may not sustain or increase profitability on a quarterly or annual basis in the future.
The Company's quarterly operating results may significantly fluctuate and you should not rely on them as an indication of its future results. The Company's future revenues and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management's control. The most important of these factors include:
o seasonality; o the retail economy; o the timing and effectiveness of marketing programs; o the timing of the introduction of new products and services; o the timing and effectiveness of capital expenditures; o the Company's ability to enter into or renew online marketing agreements; and o competition.
The Company may be unable to reduce operating expenses quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue without a corresponding reduction to its expenses, operating results may suffer. The Company's operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company's future performance. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of the Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the Company may vary with general economic conditions. If general economic conditions deteriorate further and the Company's customers have less disposable income, consumers may spend less on its products and its quarterly operating results may suffer.
The Company's operating results may suffer if revenues during the Company's peak seasons do not meet its expectations. Sales of the Company's products are seasonal, concentrated in the fourth calendar quarter, due to the Thanksgiving and Christmas-time holidays, and the second calendar quarter, due to Mother's Day and Administrative Professionals' Week. In anticipation of increased sales activity during these periods, the Company hires a significant number of temporary employees to supplement its permanent staff and the Company increases its inventory levels. If revenues during these periods do not meet the Company's expectations, it may not generate sufficient revenue to offset these increased costs and its operating results may suffer.
If the Company's customers do not find its expanded product lines appealing, revenues may not grow and net income may decrease. The Company's business historically has focused on offering floral and floral-related gift products. Although the Company has been successful in its expanded product lines including plants, gift baskets, popcorn, gourmet food, unique or specialty gifts, home and garden accessories and children's gifts, it expects to continue to incur significant costs in marketing these products. If the Company's customers do not continue to find its product lines appealing, the Company may not generate sufficient revenue to offset its related costs and its results of operations may be negatively impacted.
If the Company fails to develop and maintain its brands, it may not increase or maintain its customer base or its revenues. The Company must continue to develop and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its revenues. In addition, the Company has introduced and acquired other brands in the past, and may continue to do so in the future. The Company believes that the importance of brand recognition will increase as it expands its product offerings. Many of the Company's customers may not be aware of the Company's non-floral products. If the Company fails to advertise and market its products effectively, it may not succeed in establishing its brands and may lose customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands will also depend on its success in providing its customers high-quality products and a high level of customer service. If the Company's customers do not perceive its products and services to be of high quality, the value of the 1-800-FLOWERS.COM brands would be diminished and the Company may lose customers and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate a significant amount of traffic could limit the growth of the Company's business. Although the Company expects a significant portion of its online customers will continue to come to its Web site directly, it will also rely on third party Web sites with which the Company has strategic relationships, including AOL Time Warner, Yahoo!, Overture, Google and Microsoft Corporation, for traffic. If these third-parties do not attract a significant number of visitors, the Company may not receive a significant number of online customers from these relationships and its revenues from these relationships may decrease or remain flat. There continues to be strong competition to establish or maintain relationships with leading Internet companies, and the Company may not successfully enter into additional relationships, or renew existing ones beyond their current terms. The Company may also be required to pay significant fees to maintain and expand existing relationships. The Company's online revenues may suffer if it fails to enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs.
If local florists and other third-party vendors do not fulfill orders to the Company's customers' satisfaction, customers may not shop with the Company again. In many cases, floral orders placed by the Company's customers are fulfilled by local independent florists, a majority of which are a member of BloomNet(R). The Company does not directly control any of these florists. In addition, many of the non-floral products sold by the Company are manufactured and delivered to its customers by independent third-party vendors. If customers
are dissatisfied with the performance of the local florist or other third-party vendors, they may not utilize the Company's services when placing future orders and its revenues may decrease.
If a florist discontinues its relationship with the Company, the Company's customers may experience delays in service or declines in quality and may not shop with the Company again. Many of the Company's arrangements with local florists for order fulfillment may be terminated with 10 days notice. If a florist discontinues its relationship with the Company, the Company will be required to obtain a suitable replacement located in the same geographic area, which may cause delays in delivery or a decline in quality, leading to customer dissatisfaction and loss of customers.
If a significant amount of customers are not satisfied with their purchase, the Company will be required to incur substantial costs to issue refunds, credits or replacement products. The Company offers its customers a 100% satisfaction guarantee on its products. If customers are not satisfied with the products they receive, the Company will either replace the product for the customer or issue the customer a refund or credit. The Company's net income would decrease if a significant number of customers request replacement products, refunds or credits and the Company is unable to pass such costs onto the supplier.
Increased shipping costs and labor stoppages may adversely affect sales of the Company's non-floral products. Non-floral products are delivered to customers either directly from the manufacturer or from the Company's fulfillment centers located in New York, Virginia, Ohio and Illinois. The Company has established relationships with the United States Postal Service, Federal Express, United Parcel Service and other common carriers for the delivery of these products. If these carriers were to raise the prices they charge to ship the Company's goods, and the Company passes these increases on to its customers, its customers might choose to buy comparable products locally to avoid shipping charges. In addition, these carriers may experience labor stoppages, which could impact the Company's ability to deliver products on a timely basis to our customers and adversely affect its customer relationships.
If the Company fails to continuously improve its Web site, it may not attract or retain customers. If potential or existing customers do not find the Company's Web site a convenient place to shop, the Company may not attract or retain customers and its sales may suffer. To encourage the use of the Company's Web site, it must continuously improve its accessibility, content and ease of use. Customer traffic and the Company's business would be adversely affected if competitors' Web sites are perceived as easier to use or better able to satisfy customer needs.
Competition in the floral, plant, gift basket, gourmet treat, specialty gift, children's toys and games and home and garden industries is intense and a failure to respond to competitive pressure could result in lost revenues. There are many companies that offer products in these categories. In the floral category, the Company's competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o supermarkets, mass merchants and specialty gift retailers with floral departments.
Similarly, the plant, gift basket, gourmet food, specialty gift, children's toys and home and garden categories are highly competitive. Each of these categories encompasses a wide range of products and is highly fragmented. Products in these categories may be purchased from a number of outlets, including mass merchants, retail specialty shops, online retailers and mail-order catalogs.
Competition is intense and the Company expects it to increase. Increased competition could result in:
o price reductions, decreased revenue and lower profit margins; o loss of market share; and o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the Company's results of operations.
If the Company does not accurately predict customer demand for its products, it may lose customers or experience increased costs. In the past, the Company did not need to maintain a significant inventory of products. However, as the Company expands the volume of non-floral products offered to its customers, the Company will be required to increase inventory levels and the number of products maintained in its warehouses. If the Company overestimates customer demand for its products, excess inventory and outdated merchandise could accumulate, tying up working capital and potentially resulting in reduced warehouse capacity and inventory losses due to damage, theft and obsolescence. If the Company underestimates customer demand, it may disappoint customers who may turn to its competitors. Moreover, the strength of the 1-800-FLOWERS.COM brands could be diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could rise or flowers may be unavailable and the Company's revenues and gross margins could decline. A variety of factors affect the supply of flowers in the United States and the price of the Company's floral products. If the supply of flowers available for sale is limited due to weather conditions or other factors, prices for flowers could rise and customer demand for the Company's floral products may be reduced, causing revenues and gross margins to decline. Alternatively, the Company may not be able to obtain high quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternative sources may be of lesser quality and/or may be more expensive than those currently offered by the Company.
Most of the flowers sold in the United States are grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that this will continue in the future. The availability and price of flowers could be affected by a number of factors affecting these regions, including:
o import duties and quotas; o agricultural limitations and restrictions to manage pests and disease; o changes in trading status; o economic uncertainties and currency fluctuations; o severe weather; o work stoppages; o foreign government regulations and political unrest; and o trade restrictions, including United States retaliation against foreign trade practices.
The Company's franchisees may damage its brands or increase its costs by failing to comply with its franchise agreements or its operating standards. The Company's franchise business is governed by its Uniform Franchise Offering Circulars, franchise agreements and applicable franchise law. If the Company's franchisees do not comply with its established operating standards or the terms of the franchise agreements, the 1-800-FLOWERS.COM brands may be damaged. The Company may incur significant additional costs, including time-consuming and expensive litigation, to enforce its rights under the franchise agreements. Additionally, the Company is the primary tenant on certain leases, which the franchisees sublease from the Company. If a franchisee fails to meet its obligations as subtenant, the Company could incur significant costs to avoid default under the primary lease. Furthermore, as a franchiser, the Company has
obligations to its franchisees. Franchisees may challenge the performance of the Company's obligations under the franchise agreements and subject it to costs in defending these claims and, if the claims are successful, costs in connection with their compliance.
If third parties acquire rights to use similar domain names or phone numbers or if the Company loses the right to use its phone numbers, its brands may be damaged and it may lose sales. The Company's Internet domain names are an important aspect of its brand recognition. The Company cannot practically acquire rights to all domain names similar to www.1800flowers.com, or its other brands, whether under existing top level domains or those issued in the future. If third parties obtain rights to similar domain names, these third parties may confuse the Company's customers and cause its customers to inadvertently place orders with these third parties, which could result in lost sales and could damage its brands.
Likewise, the phone number that spells 1-800-FLOWERS is important to the Company's brand and its business. While the Company has obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common toll-free "FLOWERS" misdials, it may not be able to obtain rights to use the FLOWERS phone number as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells "FLOWERS" with a different prefix or a toll-free number similar to FLOWERS, these parties may also confuse the Company's customers and cause lost sales and potential damage to its brands. In addition, under applicable FCC rules, ownership rights to phone numbers cannot be acquired. Accordingly, the FCC may rescind the Company's right to use any of its phone numbers, including 1-800-FLOWERS (1-800-356-9377).
A lack of security over the Internet may cause Internet usage to decline and cause the Company to expend capital and resources to protect against security breaches. A significant barrier to electronic commerce over the Internet has been the need for secure transmission of confidential information and transaction information. Internet usage could decline if any well-publicized compromise of security occurred. Additionally, computer "viruses" may cause the Company's systems to incur delays or experience other service interruptions. Such interruptions may materially impact the Company's ability to operate its business. If a computer virus affecting the Internet in general is highly publicized or particularly damaging, the Company's customers may not use the Internet or may be prevented from using the Internet, which would have an adverse effect on its revenues. As a result, the Company may be required to expend capital and resources to protect against or to alleviate these problems.
Unexpected system interruptions caused by system failures may result in reduced revenues and harm to the Company's brand. In the past, particularly during peak holiday periods, the Company has experienced significant increases in traffic on its Web site and in its toll-free customer service centers. The Company's operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. The Company's systems have in the past, and may in the future, experience:
o system interruptions; o long response times; and o degradation in service.
The Company's business depends on customers making purchases on its systems, its revenues may decrease and its reputation could be harmed if it experiences frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season.
If AT&T and MCI do not adequately maintain the Company's telephone service, the Company may experience system failures and its revenues may decrease. The Company is dependent on AT&T and MCI to provide telephone services to its customer service centers. Although the Company maintains redundant telecommunications systems, if AT&T and MCI experience system failures or fail to adequately maintain the Company's systems, the Company may experience interruptions and its customers might not continue to utilize its services. If the Company loses its telephone service, it will be unable to generate revenue. The Company's future success depends upon these third-party relationships because it does not have the resources to maintain its telephone service without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt the Company's operations or require it to incur significant unanticipated costs.
Interruptions in FTD's Mercury system or Teleflora's Dove System or a reduction in the Company's access to these systems may disrupt order fulfillment and create customer dissatisfaction. A portion of the Company's customers' orders are communicated to the fulfilling florist through these third party systems. These systems are order processing and messaging networks used to facilitate the transmission of floral orders between florists. These systems have in the past experienced interruptions in service. If these systems experience interruptions in the future, the Company could experience difficulties in fulfilling some of its customers' orders and those customers might not continue to shop with the Company.
The Company's operating results may suffer due to economic, political and social unrest or disturbances. Like other American businesses, the Company is unable to predict what long-term effect, acts of terrorism, war, or similar unforeseen events, may have on its business. The Company's results of operations and financial condition could be adversely impacted if such events cause an economic slowdown in the United States, or other negative effects that cannot now be anticipated.
If the Company is unable to hire and retain key personnel, its business may suffer. The Company's success is dependent on its ability to hire, retain and motivate highly qualified personnel. In particular, the Company's success depends on the continued efforts of its Chairman and Chief Executive Officer, James F. McCann, and its President, Christopher G. McCann, as well as its senior management team which help manage its business. The loss of the services of any of the Company's executive management or key personnel or its inability to attract qualified additional personnel could cause its business to suffer and force it to expend time and resources in locating and training additional personnel.
Many governmental regulations may impact the Internet, which could affect the Company's ability to conduct business. Any new law or regulation, or the application or interpretation of existing laws, may decrease the growth in the use of the Internet or the Company's Web site. The Company expects there will be an increasing number of laws and regulations pertaining to the Internet in the United States and throughout the world. These laws or regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. This could decrease the demand for the Company's products, increase its costs or otherwise adversely affect its business.
Regulations imposed by the Federal Trade Commission may adversely affect the growth of the Company's Internet business or its marketing efforts. The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations may include requirements that the Company establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access, correct and delete personal information stored by the Company. These regulations may also include enforcement and redress provisions. Moreover, even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above. The Company may become a party to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts, or those of other governmental bodies, may adversely affect its ability to collect demographic and personal information from users, which could adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may damage its brands. Unauthorized use of the Company's intellectual property by third parties may damage its brands and its reputation and may likely result in a loss of customers. It may be possible for third parties to obtain and use the Company's intellectual property without authorization. Third parties have in the past infringed or misappropriated the Company's intellectual property or similar proprietary rights. The Company believes infringements and misappropriations will continue to occur in the future. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The Company may be unable to register its intellectual property in some foreign countries and, furthermore, the laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be expensive and, if the Company is not successful, could disrupt its ability to conduct business. The Company cannot be certain that the products it sells, or services it offers, do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. The Company may be a party to legal proceedings and claims relating to the intellectual property of others from time to time in the ordinary course of its business. The Company may incur substantial expense in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against the Company may result in substantial monetary liability or may materially disrupt its ability to conduct business.
The Company may lose sales or incur significant expenses should states be successful in imposing broader guidelines to state sales and use tax. In addition to the Company's retail store operations, the Company collects sales or other similar taxes in states where the Company's online and telephonic sales channels have applicable nexus. Our customer service and fulfillment networks, and any further expansion of those networks, along with other aspects of our evolving business, may result in additional sales and use tax obligations. A successful assertion by one or more states that we should collect sales or other taxes on the sale of merchandise could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on Internet sales. If any of these initiatives addressed the Supreme Court's constitutional concerns and resulted in a reversal of its current position, we could be required to collect additional sales and use taxes. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future sales.
Product liability claims may subject the Company to increased costs. Several of the products the Company sells, including perishable food products, home and garden products, or children's toys may expose it to product liability claims in the event that the use or consumption of these products results in personal injury. Although the Company has not experienced any material losses due to product liability claims to date, it may be a party to product liability claims in the future and incur significant costs in their defense. Product liability claims often create negative publicity, which could materially damage the Company's reputation and its brands. Although the Company maintains insurance against product liability claims, its coverage may be inadequate to cover any liabilities it may incur.
The Company's stock price may be highly volatile and could drop unexpectedly, particularly because it has Internet operations. The price at which the Company's Class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced price and volume fluctuations that have affected the market prices of securities, particularly securities of companies with Internet operations. As a result, investors may experience a material decline in the market price of the Company's Class A common stock, regardless of the Company's operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. The Company may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management's attention and resources.
Additional Information The Company's internet address is www.1800flowers.com. We make available, through the investor relations tab on our website located at www.1800flowers.com, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. All such filings on our investor relations website are available free of charge. The Company assumes no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events or otherwise, unless we are required to do so by law. A copy of this annual report on Form 10-K is available without charge upon written request to: Investor Relations, 1-800-FLOWERS.COM, Inc., 1600 Stewart Avenue, Westbury, NY 11590.
Item 2.
Item 2. PROPERTIES
In addition to the above properties, the Company leases approximately 267,000 square feet for owned or franchised retail stores and local fulfillment centers with lease terms typically ranging from 5 to 20 years. Some of its leases provide for a minimum rent plus a percentage rent based upon sales after certain minimum thresholds are achieved. The leases generally require the Company to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
Item 3.
Item 3. LEGAL PROCEEDINGS
There are various claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals were serving as executive officers of the Company and certain of its subsidiaries on September 7, 2004:
Name Age Position with the Company - ------------------------------ ----- ------------------------------------------ James F. McCann............ 53 Chairman of the Board and Chief Executive Officer Christopher G. McCann...... 43 Director and President T. Guy Minetti............. 53 Director and Vice Chairman Peter G. Rice.............. 59 President of The Plow & Hearth, Inc. William E. Shea............ 45 Senior Vice President of Finance and Administration,Treasurer, Chief Financial Officer Gerard M. Gallagher........ 51 Senior Vice President, General Counsel, Corporate Secretary Thomas G. Hartnett......... 41 Senior Vice President of Retail and Fulfillment Vincent J. McVeigh......... 44 Senior Vice President
Enzo J. Micali............. 44 Senior Vice President, Chief Technology Officer Monica Woo................. 48 Senior Vice President, Chief Marketing Officer
James F. McCann has served as the Company's Chairman of the Board and Chief Executive Officer since inception. Mr. McCann has been in the floral industry since 1976 when he began a retail chain of flower shops in the New York metropolitan area. Mr. McCann is a member of the board of directors of Gtech Corporation, Willis Holdings Group and Boyd's Collection, as well as the board of Hofstra University and Winthrop-University Hospital. James F. McCann is the brother of Christopher G. McCann, a Director and the President of the Company.
Christopher G. McCann has been the Company's President since September 2000 and prior to that had served as the Company's Senior Vice President. Mr. McCann has been a Director of the Company since inception. Mr. McCann serves on the board of directors of Neoware, Inc. and is a member of the Board of Trustees of Marist College. Christopher G. McCann is the brother of James F. McCann, the Company's Chairman of the Board and Chief Executive Officer.
T. Guy Minetti has been a Director of the Company since December 1993 and became the Company's Vice Chairman in September 2000. Mr. Minetti serves on the board of directors of Misonix, Inc., a medical device and industrial product company. In March 1989, Mr. Minetti founded Bayberry Advisors, an investment banking firm, and prior thereto, Mr. Minetti was a Managing Director at Kidder, Peabody & Company.
Peter G. Rice, President of The Plow & Hearth, Inc., was co-founder of The Plow & Hearth, Inc. and served as its President and Chairman of the Board since its inception in November 1980. Mr. Rice was founder of Blue Ridge Mountain Sports, a chain of retail backpacking/outdoor stores, and co-founder of Phoenix Products, a manufacturer of kayaks. He is a member of the Catalog Advisory Committee of the Direct Marketing Association and a past director of the New England Mail Order Association and of the U.S. Senate Productivity and Quality Award Board for Virginia.
William E. Shea has been our Senior Vice President of Finance and Administration and Chief Financial Officer since September 2000. Before holding his current position, Mr. Shea was our Vice President of Finance and Corporate Controller after joining us in April 1996. From 1980 until joining us, Mr. Shea was a certified public accountant with Ernst & Young LLP.
Gerard M. Gallagher has been our Senior Vice President, General Counsel and Corporate Secretary since August 1999 and has been providing legal services to the Company since its inception. Mr. Gallagher is the founder and a managing partner in the law firm Gallagher, Walker, Bianco and Plastaras, based in Mineola, New York, specializing in corporate, litigation and intellectual property matters since 1993. Mr. Gallagher is duly admitted to practice before the New York State Courts and the United States District Courts of both the Eastern District and Southern District of New York.
Thomas G. Hartnett has been our Senior Vice President of Retail and Fulfillment since September 2000. Before holding this position, Mr. Hartnett held various positions within the Company since joining the Company in 1991, including Controller, Director of Store Operations, Vice President of Retail Operations and most recently as Vice President of Strategic Development.
Vincent J. McVeigh has been our Senior Vice President since October 2000. Before holding this position, Mr. McVeigh held various positions within the Company
since joining the Company in 1991, including Bloomnet Manager, Director of Call Center Operations and as Vice President of Merchandising.
Enzo J. Micali has been our Chief Technology Officer since December 2000. Prior to joining the Company, Mr. Micali served as Chief Technology Officer for InsLogic. Prior to joining InsLogic, Mr. Micali spent 12 years in various technology management positions with J.P. Morgan Chase & Co., formerly Chase Manhattan.
Monica L.Woo has been our Senior Vice President, Chief Marketing Officer, since January 2004. Prior to joining the Company, Ms. Woo had founded a successful consulting practice focusing on growth strategies for such multi-national clients as Deutsche Bank, Northwest Airlines and Campbell's Soup. Prior to that, Ms. Woo was the President of Bacardi Global Brands, Inc., of Bacardi Limited. Before holding this position, Ms. Woo had assumed a number of senior executive positions in the financial services and consumer packaged goods sectors, including the Global Marketing Director of Citibank On-line and the Citibank Private Bank, and the Sr. Vice President, European Marketing Director of Diageo PLC.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
1-800-FLOWERS.COM's Class A common stock trades on The Nasdaq National Stock Market under the ticker symbol "FLWS." There is no established public trading market for the Company's Class B common stock. The following table sets forth the reported high and low sales prices for the Company's Class A common stock for each of the fiscal quarters during the fiscal years ended June 27, 2004 and June 29, 2003.
Rights of Common Stock
Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one share basis. Each share of Class B common stock will automatically convert into one share of Class A common stock upon its transfer, with limited exceptions.
Holders
As of September 7, 2004, there were approximately 260 shareholders of record of the Company's Class A common stock, although the Company believes that there is a significantly larger number of beneficial owners. As of September 7, 2004, there were approximately 14 shareholders of record of the Company's Class B common stock.
Dividend Policy
Although the Company has never declared or paid any cash dividends on its Class A or Class B common stock, the Company anticipates that it will generate increasing free cash flow in excess of its capital investment requirements. As such, although the Company has no current intent to do so, the Company may
chose, at some future date, to use some portion of its cash for the purpose of cash dividends.
Resales of Securities
40,613,080 shares of Class A and Class B common stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market from time to time only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act. As of September 7, 2004, all of such shares of the Company's common stock could be sold in the public market pursuant to and subject to the limits set forth in Rule 144. Sales of a large number of these shares could have an adverse effect on the market price of the Company's Class A common stock by increasing the number of shares available on the public market.
Purchases of Equity Securities by the Issuer
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. Any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash. No repurchases were made during the fiscal year ended June 27, 2004.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, and the consolidated balance sheet data as of June 27, 2004 and June 29, 2003, have been derived from the Company's audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data for the years ended July 1, 2001 and July 2, 2000, and the selected consolidated balance sheet data as of June 30, 2002, July 1, 2001 and July 2, 2000, are derived from the Company's audited consolidated financial statements which are not included in this Annual Report on Form 10-K.
The following tables summarize the Company's consolidated statement of income and balance sheet data. The Company acquired The Popcorn Factory in May 2002, The Children's Group in June 2001, disposed of Floral Works in January 2000, and acquired GreatFood.com and TheGift.com in November 1999. The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition and up through the date of disposition. This information should be read together with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
Certain of the matters and subject areas discussed in this Annual Report on Form 10-K 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 "Business - Risk Factors that May Affect Future Results" and elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Annual Report on Form 10-K 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); and children's gifts from HearthSong(R) (http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com).
Most of the Company's floral orders are fulfilled through BloomNet(R) (comprised of independent florists operating retail flower shops and Local Fulfillment Centers ("LFC's"), Company-owned stores and fulfillment centers and franchise stores). The Company transmits its orders either through BloomLink(R), its proprietary Internet-based electronic communication system, or the communication system of a third-party. A portion of the Company's floral and gift merchandise; as well as its home and garden merchandise, non-floral gift products and gourmet food merchandise are shipped by the Company, members of BloomNet(R), or third parties directly to the customer using common carriers. Most of the Company's home and garden products are fulfilled from its Madison, Virginia fulfillment center or its Vandalia, Ohio distribution facility, while the Company's children's merchandise is fulfilled from its Vandalia facility. The Company's gourmet popcorn and related merchandise is fulfilled primarily from its Lake
Forest, Illinois manufacturing facility.
As of June 27, 2004, the Company-owned retail fulfillment operations consisted of 22 retail stores and 8 fulfillment centers. Retail fulfillment revenues also includes fees paid to the Company by, and the sale of wholesale products by the Company to, members of its BloomNet(R) network as well as royalties, fees and sublease rent paid to the Company by its 73 franchise stores. Company-owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs. As such, a significant percentage of the revenues derived from Company-owned stores and fulfillment centers represent fulfillment of its telephonic and online sales channel floral orders and are eliminated as inter-company revenues.
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2004, 2003 and 2002 which ended on June 27, 2004, June 29, 2003 and June 30, 2002, respectively, consisted of 52 weeks.
Net Revenues
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. The Company's combined telephonic and online revenue growth of 6.4% and 14.8% during the fiscal years ended June 27, 2004 and June 29, 2003, respectively, was 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 our marketing and merchandising efforts to enhance revenue growth in our floral gift category and in complimentary categories, including gourmet food gifts, such as the Popcorn Factory line of products acquired in May 2002, gift baskets, candy and children's gifts. This growth was offset, in part by, slower sales in the home and garden gift product line as a result of internal marketing and merchandising issues, as well as increasingly competitive market conditions. The Company has completed a review of this product line and has begun to implement a marketing plan to enhance product offerings, and the creative look and feel of its catalogs and website.
The Company fulfilled approximately 9,322,000, 8,681,000 and 7,172,000 orders through its combined telephonic and online sales channels during the fiscal years ended June 27, 2004, June 29, 2003, and June 30, 2002, respectively, representing increases of 7.4% and 21.0% over the respective prior fiscal years. The growth resulted primarily from increases in online order volume, which increased 15.6% and 24.1%, during the years ended June 27, 2004 and June 29, 2003, respectively, in comparison to prior years, driven by improved conversion of qualified traffic through the Company's Web sites, and through third-party portals, search engines and affiliates, and the continued migration of customers from the Company's telephonic sales channel. During the fiscal year ended June 29, 2003, telephonic order volume increased 17.7% over the comparative prior fiscal year, primarily as a result of the acquisition of the Company's gourmet
popcorn product line in May 2002. The Company's combined telephonic and online sales channel average order value decreased 1.0% and 5.1% to $61.20 and $61.79 during the fiscal years ended June 27, 2004 and June 29, 2003, respectively, primarily as a result of product sales mix, and, in fiscal 2003, the addition of the gourmet popcorn product line which has a lower average order value. The Company's online sales channel contributed 53.9%, 49.5% and 46.7% of the total combined telephonic and online revenues during the fiscal years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. 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 customers in an electronic dialog via cost efficient marketing programs.
In order to improve overall demand, in response to forecasted economic conditions and analysis of consumer buying patterns within the Company's available product offerings, during the fiscal year ended June 27, 2004, the Company reallocated its marketing spending, reducing the circulation of certain home and garden gift product catalogs and redirecting those funds to various online and media programs featuring floral gifts. As a result, during the fiscal year ended June 27, 2004, non-floral gift products accounted for 47.8% of total combined telephonic and online net revenues, compared to 49.5% and 45.8% during the years ended June 29, 2003 and June 30, 2002, respectively. The increase in the percentage of non-floral gift products sold during the fiscal year ended June 29, 2003 resulted from the expansion of candy, gift basket and gourmet foods, including the Popcorn Factory line in May 2002. In the future, the Company will continue to emphasize appropriate products and categories to match consumer preferences and economic conditions.
Retail/fulfillment revenues for the fiscal year ended June 27, 2004 increased compared to the prior year primarily as a result of enhancements to our BloomNet(R) network of fulfilling florists and to our Bloomlink communication system, as well as sales of wholesale products to its BloomNet(R) members. During the fiscal year ended June 29, 2003, retail/fulfillment revenues decreased as compared to the prior year primarily as a result of the sale, closure, or conversion of certain company-owned retail stores into franchised operations.
Gross Profit
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 fiscal years ended June 27, 2004 and June 29, 2003 as a result of increased order volume, and in fiscal 2003, as a result of an improved gross margin percentage. During the fiscal year ended June 27, 2004 gross margin percentage declined by 70 basis points over the prior fiscal year, 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. Gross margin percentage during the fiscal year ended June 29, 2003 increased over the comparative prior year due to several factors including: (i) increased non-floral product sales, which were further complemented by the acquisition of the Popcorn Factory product line in May 2002 which earns higher gross margins, (ii) improvements in product shipping costs, inventory management and product sourcing, (iii) increases in the Company's service charge, to align it with industry norms, and (iv) the Company's continued focus on customer service, whereby stricter control standards and enforcement methods reduced the rate of product credits/returns and replacements.
As the Company implements its plans 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. During 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 results achieved during the fiscal year ended June 27, 2004.
Marketing and Sales Expense
Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal agreements, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company's departments engaged in marketing, selling and merchandising activities. Marketing and sales expenses decreased as a percentage of net revenues as a result of volume related operating efficiencies and a reduction in order processing costs. During fiscal 2004, marketing and sales expense, as a percentage of net revenue, was further reduced as a result of a net reduction in advertising cost per order, resulting from the aforementioned shift in the mix of products being promoted by the Company, which enabled it to proportionately reduce the circulation of higher cost per order catalogs in favor of lower cost media and online advertising. As a result of the Company's cost efficient customer retention programs, of the 5.7 million customers who placed orders during the fiscal year ended June 27, 2004, approximately 45.3% represented repeat customers, compared to 42.4% in fiscal 2003 and 39.2% in fiscal 2002. In addition, as a result of the strength of the Company's brands, combined with its cost-efficient marketing programs, the Company added approximately 3.1 million new customers during the fiscal year ended June 27, 2004, consistent with the prior fiscal year.
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
Technology and development expense consists primarily of payroll and operating expenses of the Company's information technology group, costs associated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company's order entry, customer service, fulfillment and database systems. Technology and development expense decreased as a percentage of net revenue during the years ended June 27, 2004 and June 23, 2003, and in absolute spending in fiscal 2004, due to the Company's ability to internalize its development functions, thereby cost effectively enhancing the content and functionality of the Company's Web sites and improving the performance of the fulfillment and database systems, while adding improved operational flexibility and supplemental back-up and system redundancy. During the fiscal years ended June 27, 2004, June 29, 2003, and June 30, 2002, the Company expended $22.8 million, $22.2 million and $24.5 million on technology and development, of which $9.0 million, $8.3 million and $10.8 million, respectively, has been capitalized.
Although the Company believes that continued investment in technology and development is critical to attaining its strategic objectives, the Company expects that its spending in comparison to prior fiscal years will continue to decrease as a percentage of net revenues due to the expected benefits from previous investments in the Company's current technology platform.
General and Administrative Expenses
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. Although declining as a percentage of net revenues, general and administrative expenses increased during the fiscal years ended June 27, 2004 and June 29, 2003, in comparison to their respective prior years, primarily as a result of increased health and business insurance costs, partially offset by various cost reduction initiatives. The increase in fiscal 2003 was also attributable to the incremental costs associated with the acquisition of The Popcorn Factory in May 2002.
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
Depreciation and amortization expense decreased during the fiscal year ended June 27, 2004, in comparison to the prior year, due to the declining rate of capital additions, and that certain software components of the Company's order entry, customer service, fulfillment and database systems, are now fully depreciated. The increase in depreciation and amortization expense during the fiscal year ended June 29, 2003, in comparison to the prior fiscal year, was primarily the result of the incremental depreciation and amortization associated with The Popcorn Factory, which was acquired in May 2002.
Although the Company believes that continued investment in its infrastructure, primarily in the areas of technology and development, is critical to attaining its strategic objectives, the Company expects that depreciation and amortization will continue to decrease as a percentage of net revenues in comparison to prior years.
Other Income (Expense)
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 fiscal year ended June 27, 2004, in comparison to the prior fiscal year, resulted primarily from: (i) an increase in interest income resulting from higher invested cash balances generated from operations, and (ii) a reduction in interest expense associated with the refinancing of a series of fixed and variable rate mortgage and equipment notes in June 2003, partially offset by losses incurred upon closure/conversion of certain retail stores. The decrease in other income (expense) during the fiscal year ended June 29, 2003, in comparison to the prior fiscal year, was primarily due to a decline in interest income resulting from a decrease in cash and investment balances in order to fund capital expenditures and the acquisition of The Popcorn Factory in May 2002, as well as the decline of the Company's average rate of return on its investments, partially offset by the decline of interest expense due to the decline in interest rates on the Company's variable rate long-term debt.
Income Taxes
During the fiscal year ended June 27, 2004, the Company recorded an income tax benefit of approximately $19.2 million (net) due to the removal of the Company's valuation allowance on its deferred tax assets which consisted primarily of net operating loss carryforwards (see below), offset in part by income tax expense for federal alternative minimum tax and various state taxes resulting from state tax law changes that deferred the use of available net operating losses for state purposes.
At June 27, 2004, management of the Company reassessed the valuation allowance previously established against its net deferred tax assets. Based on 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. Accordingly, the Company removed the valuation allowance of approximately $30.0 million from its deferred tax assets resulting in the recognition of an income tax benefit of approximately $20.8 million, a reduction of goodwill of approximately $3.1 million, related to the acquired net operating losses of GreatFood.com, and an increase in additional paid-in-capital of approximately $6.1 million related to income tax benefits associated with employee stock option exercises. The favorable impact of the income tax benefit has distorted the trends in our net income and will impact the comparability of our net income with other periods. During fiscal 2005, the Company anticipates an effective rate of approximately 41%.
During the fiscal year ended June 29, 2003, the Company provided no income tax provision due to the availability of net operating loss carryforwards. During the fiscal year ended June 30, 2002, the Company recorded a tax benefit related to previously paid income taxes of approximately $0.7 million as a result of tax law changes which extended the period for which companies were allowed to carry-back losses.
At June 27, 2004, the Company's federal and state net operating loss carryforwards were approximately $72.1 million, which, if not utilized, will begin to expire in fiscal year 2020.
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2004 and 2003. The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly the Company's results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
The Company's quarterly results may experience seasonal fluctuations. Due to the Company's expansion into gift, home, gourmet and other related products, the Thanksgiving through Christmas holiday season, which falls within the Company's second fiscal quarter, generates the highest proportion of the Company's annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother's Day, Administrative Professionals Week and Easter, revenues also rise during the Company's fiscal fourth quarter, in relation to its fiscal first and third quarters.
Liquidity and Capital Resources
At June 27, 2004, the Company had working capital of $83.7 million, including cash and equivalents and short-term investments of $103.4 million, compared to
working capital of $26.9 million, including cash and equivalents and short-term investments of $61.2 million, at June 29, 2003. In addition to cash and short-term investments, at June 27, 2004 and June 29, 2003, the Company maintained approximately $8.3 million and $19.5 million of long-term investments, respectively, consisting primarily of investment grade corporate and U.S. government securities.
Net cash provided by operating activities of $42.1 million for the fiscal year ended June 27, 2004 was primarily attributable to earnings, adjusted for depreciation and amortization, deferred income taxes and other non-cash charges, which in total amounted to $35.8 million, as well as decreases in other assets, primarily related to recoverable income taxes.
Net cash used in investing activities of $9.6 million for the fiscal year ended June 27, 2004 was principally comprised of capital expenditures related to the Company's technology infrastructure.
Net cash used in financing activities was $0.8 million for the fiscal year ended June 27, 2004, resulting primarily from the repayment of amounts outstanding under the Company's credit facilities and long-term capital lease obligations, offset in part by the net proceeds received upon the exercise of employee stock options and employee stock purchase plan. The Company has a $5.0 million revolving line of credit, renewable November 30, 2004 (none outstanding at any point during the fiscal year ending June 27, 2004), available for working capital purposes.
At June 27, 2004, the Company's contractual obligations consist of:
(*) 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.
On September 16, 2001, the Company's Board of Directors approved the repurchase of up to $10.0 million of the Company's Class A common stock. Although no repurchases have been made as of June 27, 2004, any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position 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, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its 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 or franchisees to make required payments. If the financial condition of the Company's customers or franchisees 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 is 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 we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that we consider 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 7A.
Item 7A. 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 money market funds and 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 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Annual Financial Statements: See Part IV, Item 15 of this Annual Report on Form 10-K. Selected Quarterly Financial Data: See Part II, Item 7 of this Annual Report on Form 10-K.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A.
Item 9A. 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 Rule 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 June 27, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth in the Proxy Statement for the 2004 annual meeting of stockholders is incorporated herein by reference.
The Company maintains a Code of Ethics, which is applicable to all directors, officers and employees on the Investor Relations- Corporate Governance tab of the Company's website at 1800flowers.com. Any amendment or waiver to the Code of Ethics that applies to our directors or executive officers will be posted on our website or in a report filed with the SEC on Form 8-K. A copy of the Code of Ethics is a available without charge upon written request to: Investor Relations, 1-800-FLOWERS.COM, Inc., 1600 Stewart Avenue, Westbury, New York 11590.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The information set forth in the Proxy Statement for the 2004 annual meeting of stockholders is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth in the Proxy Statement for the 2004 annual meeting of stockholders is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in the Proxy Statement for the 2004 annual meeting of stockholders is incorporated herein by reference.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information set forth in the Proxy Statement for the 2004 annual meeting of stockholders is incorporated herein by reference.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Documents Filed as a Part of this Annual Report on Form 10-K:
(1) Index to Consolidated Financial Statements: Page ----
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of June 27, 2004 and June 29, 2003 Consolidated Statements of Income for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 Consolidated Statements of Stockholders' Equity for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 Consolidated Statements of Cash Flows for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 Notes to Consolidated Financial Statements
(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S-1
All other information and financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.
(3) Index to Exhibits
The following exhibits are required to be filed with this Report by Item 15 (a)(3). Other than exhibits 21.1, 23.1, 24.1, 31.1 and 32.1 which are filed herewith, the following exhibits are incorporated by reference to the exhibits of same number contained in the Company's registration statement on Form S-1 (No. 333-78985), dated August 2, 1999, except for exhibit 10.23, which is incorporated by reference to the exhibit of the same number contained in the Company's registration statement on Form S-8 (No. 333- 54590), dated January 30, 2001, and Exhibits 10.24 and 10.25, which are incorporated by reference to Registrant's Definitive Proxy Statement filed on October 27, 2003 (No. 000-26841).
Exhibit Description - ------- -----------
3.1 Third Amended and Restated Certificate of Incorporation. 3.2 Amendment No. 1 to Third Amended and Restated Certificate of Incorporation. 3.3 Amended and Restated By-laws. 4.1 Specimen class A common stock certificate. 4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of Incorporation and By-laws of the Registrant defining the rights of holders of Common Stock of the Registrant. 10.1 Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C. and 800-FLOWERS, Inc. 10.2 Investment Agreement, dated as of January 16, 1995, among Chemical Venture Capital Associates, Teleway, Inc. and James F. McCann. 10.3 Consent and Amendment No. 1 to Investment Agreement, dated as of May 20, 1999, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and James F. McCann. 10.10 1997 Stock Option Plan, as amended.
10.16 Investors' Rights Agreement, dated as of May 20, 1999, among 1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the persons designated as Investors on the signature pages thereto. 10.17 Stock Purchase Agreement, dated as of May 20, 1999, among 1-800-FLOWERS.COM, Inc., James F. McCann, Christopher G. McCann and the Investors listed on Schedule A thereto. 10.18 1999 Stock Incentive Plan. 10.19 Employment Agreement, effective as of July 1, 1999, between James F. McCann and 1-800-FLOWERS.COM, Inc. 10.20 Employment Agreement, effective as of July 1, 1999, between Christopher G. McCann and 1-800-FLOWERS.COM, Inc. 10.22 #Amended and Restated Interactive Marketing Agreement, made and entered into on September 1, 2000, by and between America Online, Inc. and 1-800-FLOWERS.COM, Inc. 10.23 Employee Stock Purchase Plan 10.24 2003 Long Term Incentive and Share Award Plan. 10.25 Section 16 Executive Officers Bonus Plan. 21.1 Subsidiaries of the Registrant. 23.1 Consent of independent auditors. 24.1 Powers of Attorney (included in the signature page). 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. - ---------------------------
# Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Exchange Act.
(b) Reports on Form 8-K: On May 3, 2004, the Company filed a report on Form 8-K which referenced its April 22, 2004, press release of the Company's results of operations and financial condition for its fiscal third quarter ended March 28, 2004.
On May 17, 2004, the Company issued a press release reporting its order volume for its fiscal 2004 Mother's Day Holiday.
On June 29, 2004, the Company issued a press release of its anticipated results of operations for its fiscal fourth quarter ended June 27, 2004.
On August 10, 2004, the Company filed a report on Form 8-K which referenced its August 5, 2004 press release of the Company's results of operations and financial condition for its fiscal fourth quarter and year ended June 27, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 9, 2004 1-800-FLOWERS.COM, Inc.
By: /s/ James F. McCann James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc. (the "Company"), hereby severally constitute and appoint James F. McCann and William E. Shea, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, to sign any and all amendments to this Annual Report, and other documents in connection therewith, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below:
Dated: September 9, 2004 By: /s/ James F. McCann James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer)
Dated: September 9, 2004 By: /s/ William E. Shea William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer)
Dated: September 9, 2004 By: /s/ Christopher G. McCann Christopher G. McCann Director, President
Dated: September 9, 2004 By: /s/ John J. Conefry, Jr. John J. Conefry, Jr. Director
Dated: September 9, 2004 By: /s/ Leonard J. Elmore Leonard J. Elmore Director
Dated: September 9, 2004 By: /s/ T. Guy Minetti T. Guy Minetti Director, Vice Chairman
Dated: September 9, 2004 By: /s/ Kevin J. O'Connor Kevin J. O'Connor Director
Dated: September 9, 2004 By: /s/ Mary Lou Quinlan Mary Lou Quinlan Director
Dated: September 9, 2004 By: /s/ Jeffrey C. Walker Jeffrey C. Walker Director
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of 1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of 1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of June 27, 2004 and June 29, 2003, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 27, 2004. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 1-800-FLOWERS.COM, Inc. and Subsidiaries at June 27, 2004 and June 29, 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 27, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York July 30, 2004
1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share data)
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data)
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years ended June 27, 2004, June 29, 2003 and June 30, 2002 (in thousands, except share data)
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Supplemental Cash Flow Information: - ------------------------------------ -Interest paid amounted to $663, $982 and $1,245 for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. -The Company received tax refunds, net of income taxes paid of approximately $1,476, $0 and $706 for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively.
See accompanying notes.
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading gift retailer, providing a broad range of thoughtful gift products including flowers, plants, gourmet foods, candies, gift baskets, and other unique gifts to our customers around the world. The 1-800-FLOWERS.COM family of brands also includes Plow & Hearth, a direct marketer of home decor and garden merchandise, GreatFood.com, a source for gourmet products, The Popcorn Factory, a manufacturer and direct marketer of premium popcorn and specialty food gifts, and HearthSong and Magic Cabin, direct marketers of unique children's toys and games. The Company operates in one business segment, providing its customers with convenient, multi-channel access via the Internet, telephone, catalogs and retail stores.
Note 2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30th. Fiscal years 2004, 2003 and 2002, which ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively, consisted of 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.
Cash and Equivalents
Cash and equivalents consist of demand deposits with banks, highly liquid money market funds, United States government securities, overnight repurchase agreements and commercial paper with maturities of three months or less when purchased.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets' estimated useful lives using the straight-line method. Amortization of leasehold improvements and capital leases are calculated using the straight-line method over the shorter of the lease terms, including renewal options expected to be exercised, or estimated useful lives of the improvements. Estimated useful lives are periodically reviewed, and where appropriate, changes are made prospectively. The Company's property plant and equipment is depreciated using the following estimated lives:
Buildings 40 years Leasehold Improvements 3-10 years Furniture, Fixtures and Equipment 3-10 years Software 3 years
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated annually in the Company's fiscal fourth quarter for impairment. To date, there has been no impairment of these assets.
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.
Deferred Catalog Costs
The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion with actual sales from the corresponding catalog over a period not to exceed 26-weeks. Included within other assets was $3.8 million and $2.6 million at June 27, 2004 and June 29, 2003, respectively, relating to prepaid catalog costs.
Investments
The Company considers all of its debt and equity securities, for which there is a determinable fair market value and no restrictions on the Company's ability to sell within the next 12 months, as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, there were no significant unrealized gains or losses. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis.
Fair Values of Financial Instruments
The recorded amounts of the Company's cash and equivalents, short-term investments, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of investments, including available-for-sale securities, is based on quoted market prices where available. The fair value of the Company's long-term obligations are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method, the Company's fair value of long-term obligations was not significantly different than the carrying values at June 27, 2004 and June 29, 2003.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents, investments and accounts receivable. The Company maintains cash and equivalents and investments with high credit, quality financial institutions. Concentration of credit risk with respect to accounts receivable are limited due to the Company's large number of customers and their dispersion throughout the United States, and the fact that a substantial portion of receivables are related to balances owed by major credit card companies. Allowances relating to consumer, corporate and franchise accounts receivable ($1.4 million and $1.3 million at
June 27, 2004 and June 29, 2003, respectively) have been recorded based upon previous experience and management's evaluation.
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.
Cost of Revenues
Cost of revenues consists 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 includes 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.
Marketing and Sales
Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, interactive marketing 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.
The Company expenses all advertising costs, with the exception of catalog costs (see Deferred Catalog Costs above) at the time the advertisement is first shown. Advertising expense was $91.1 million, $88.9 million and $69.6 million for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively.
Technology and Development
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. Costs associated with the acquisition or development of software for internal use are capitalized if the software is expected to have a useful life beyond one year and amortized over the software's useful life, typically three years. Costs associated with repair, maintenance or the development of Web site content are expensed as incurred as the useful lives of such software modifications are less than one year.
Stock-Based Compensation
The Company accounts for its employee stock option and stock purchase plans under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. Under APB No. 25, no stock-based compensation is reflected in net income, as all options granted under the plans had an exercise price equal to or greater than 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) 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 (see Note 9, "Stock Option Plans"):
(*) Note: During fiscal 2004, FAS 123 stock based compensation is net of the income tax benefit of 6.1 million, associated with the removal of the valuation allowance on deferred tax assets arising from employee stock option exercises.
Comprehensive Income (Loss)
For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, the Company's comprehensive income (losses) were equal to the respective net income (losses) for each of the periods presented.
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting of employee stock options) outstanding during the period. Diluted net loss per common share is computed using the weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is antidilutive.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform with the presentation in the current fiscal year.
Note 3. Acquisitions and Disposition
Acquisition of Selected Assets of The Popcorn Factory
On May 3, 2002, the Company extended the breadth of its gourmet food product assortment when it completed the acquisition of selected operating assets and liabilities of The Popcorn Factory, a manufacturer and direct marketer of premium popcorn and specialty food gifts. The purchase price of approximately $12.6 million, including $0.3 million of transaction costs, was comprised of $7.3 million used to retire The Popcorn Factory's outstanding debt and the issuance of 353,003 shares of the Company's Class A common stock, valued at approximately $5.0 million, based upon the average closing price of the Company's common stock on the date of and the two days preceding and following the closing of the transaction. The acquisition was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, and the operating results of The Popcorn Factory have been included in the Company's consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of net assets
acquired of $12.0 million was allocated to goodwill.
The purchase price allocation of The Popcorn Factory business resulted in the following condensed balance sheet of assets acquired and liabilities assumed.
(*) Approximately $12.0 million is expected to be deductible for tax purposes.
The Popcorn Factory acquisition resulted in $1.1 million in total intangible assets acquired, other than goodwill, with $0.2 million allocated to trademarks with indefinite lives. The remaining $0.9 million of acquired intangibles were allocated to customer list, and is being amortized over the asset's determinable useful life of 3 years.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been prepared as if the acquisition of The Popcorn Factory had taken place at the beginning of fiscal year 2002. The following unaudited pro forma information is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisition taken place at the beginning of the periods presented.
Note 4. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
The Company's intangible assets consist of the following:
The amortization of intangible assets for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 was $0.6 million, $0.9 million and $0.7 million, respectively. Future estimated amortization expense is as follows: 2005 - $0.6 million, 2006 - $0.3 million, 2007 - $0.3 million, 2008 - $0.3 million, and 2009 - - $0.3 million, and thereafter - $0.3 million.
Note 5. Property, Plant and Equipment
Note 6. Long-Term Debt
The following notes and credit lines relate to obligations arising from, and collateralized by, the underlying assets of the Company's Plow & Hearth facility in Madison, Virginia.
(1) $5,000,000 revolving credit line, renewable on November 30, 2004 (none outstanding at June 27, 2004), bearing interest equal to the monthly LIBOR Index plus 1.75% per annum (3.09% at June 27, 2004).
(2) $6,612,000 note dated June 27, 2003, ($5,504,000 outstanding at June 27, 2004), bearing interest at 5.44% per annum. The note, which resulted from the consolidation and refinancing of a series of fixed and variable rate mortgage and equipment notes in June 2003, is payable in 60 equal monthly installments of principal and interest commencing August 1, 2003.
The following notes relate to seller-financed acquisition obligations, all of which have been collateralized by either the stock or assets of various subsidiaries of the Company:
(3) $275,000 promissory note dated November 1, 1994 ($16,000 outstanding at June 27, 2004), bearing interest at 8% per annum. The note is payable in 120 equal monthly installments of principal and interest commencing December 1, 1994.
(4) $160,000 non-interest bearing promissory note dated September 30, 1999 ($69,000 outstanding at June 27, 2004). The note is payable in 8 annual installments commencing August 2000.
As of June 27, 2004, long-term debt maturities, excluding amounts relating to capital leases, are as follows:
Note 7. Income Taxes
Significant components of the income tax benefit are as follows:
A reconciliation of the U.S. federal statutory tax rate to the Company's effective tax rate is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred income tax assets (liabilities) are as follows:
At June 27, 2004, management of the Company reassessed the valuation allowance previously established against its net deferred income tax assets. Based on the Company's earnings history and projected future taxable income, management determined that it is more likely than not that the deferred income tax assets would be realized. Accordingly, the Company removed the valuation allowance of approximately $30.0 million from its deferred income tax assets resulting in the recognition of an income tax benefit of approximately $20.8 million, a reduction of goodwill of approximately $3.1 million, related to the acquired net operating losses of GreatFood.com, and an increase in additional paid-in-capital of approximately $6.1 million related to income tax benefits associated with employee stock option exercises.
During the fiscal year ended June 30, 2002, the Company recorded a benefit related to previously paid income taxes of approximately $0.7 million as a result of tax law changes which extended the period for which companies were allowed to carry-back losses.
At June 27, 2004, the Company's federal and state net operating loss carryforwards were approximately $72.1 million, which, if not utilized, will begin to expire in fiscal year 2020.
Note 8. Capital Stock
Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one share basis. Each share of Class B common stock will automatically convert into one share of Class A common stock upon its transfer, with limited exceptions.
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. Any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash. No repurchases had been made as of June 27, 2004.
Note 9. Stock Option Plans
In December 2003, the Company's Board of Directors and shareholders approved the 1-800-FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the "Plan"). The Plan is a broad-based, long-term incentive program that is intended to
attract, retain and motivate employees, consultants and directors to achieve the Company's long-term growth and profitability objectives, and therefore align stockholder and employee interests. The Plan provides for the grant to eligible employees, consultants and directors of stock options, share appreciation rights ("SARs"), restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and other share-based awards (collectively "Awards"). The Plan reserves 7,500,000 shares of Common Stock, which is approximately the amount of shares which had been previously available for issuance under the Company's 1999 Stock Incentive Plan. No further awards will be issued under the 1999 Stock Incentive Plan. During a calendar year i) the maximum number of shares with respect to which options and SARs may be granted to an eligible participant under the Plan will be 1,000,000 shares, and ii) the maximum number of shares with respect to which Awards intended to qualify as performance-based compensation other than options and SARs may be granted to an eligible participant under the Plan will be 500,000 shares.
The Plan is administered by the Compensation Committee or such other Board committee (or the entire Board) as may be designated by the Board (the "Committee"). Unless otherwise determined by the Board, the Committee will consist of two or more members of the Board who are nonemployee directors within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Committee will determine which eligible employees, consultants and directors receive awards, the types of awards to be received and the terms and conditions thereof. The Chief Executive Officer shall have the power and authority to make Awards under the Plan to employees and consultants not subject to Section 16 of the Exchange Act, subject to limitations imposed by the Committee.
At June 27, 2004, the Company has reserved approximately 17,415,000 shares of common stock for issuance under common stock option plans, including options previously authorized for issuance under the 1999 Stock Incentive Plan.
The following table summarizes activity in stock options:
The following table summarizes information about stock options outstanding at June 27, 2004:
Fair Value Disclosures
The exercise price of employee stock option grants is set at the closing price of the Company's common stock on the date of grant and the related number of shares granted is fixed at that point in time. Therefore, under the principles of APB No. 25, the Company does not recognize compensation expense associated with the grant of employee stock options. SFAS No. 123 requires the use of option valuation models to provide supplemental information regarding options granted after 1994.
The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model, were as follows:
Note 10. Employee Stock Purchase Plan
In December 2000, the Company's Board of Director's approved the 1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a non-compensatory employee stock purchase plan under Section 423 of the Internal Revenue Code, to provide substantially all employees who have completed six months of service, an opportunity to purchase shares of the Company's Class A common stock. Employees may contribute a maximum of 15% of eligible compensation, but in no event can an employee purchase more than 500 shares on any purchase date. Offering periods have a duration of six months, and the purchase price per share will be the lower of: (i) 85% of the fair market value of a share of Class A common stock on the last trading day of the applicable offering period, or (ii) 85% of the fair market value of a share of Class A common stock on the last trading day before the commencement of the offering period. At June 27, 2004, the Company has reserved approximately 3,098,000 shares of common stock for issuance under its ESPP. The share pool shall be increased on the first trading day of each calendar year, by a number equal to the lesser of (i) 1% of the total number of shares of common stock then
outstanding, or (ii) 750,000 shares of Class A common stock.
Note 11. Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employees who have attained the age of 21 are eligible to participate upon completion of one year of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceeding federal guidelines. On an annual basis the Company, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company's contributions based upon years of service. The Company made contributions of $0.3 million, $0.4 million and $0.3 million, for the years ended June 27, 2004, June 29 2003 and June 30, 2002, respectively.
Note 12. Commitments and Contingencies
Leases
The Company currently leases office, store facilities, and equipment under various operating leases through fiscal 2019. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company has also entered into leases that are on a month-to-month basis. All leases and subleases with an initial term of greater than one year are accounted for under SFAS No. 13, Accounting for Leases. These leases are classified as either capital leases, operating leases or subleases, as appropriate.
The Company leases certain computer, telecommunication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $18.4 million at June 27, 2004 and June 29, 2003, and accumulated amortization of $15.6 million and $14.1 million, respectively. In addition, the Company subleases land and buildings (which are leased from third parties) to certain of its franchisees. Certain of the leases, other than land leases which have been classified as operating leases, are classified as capital leases and have initial lease terms of approximately 20 years (including option periods in some cases).
The Company has a $5.0 million equipment lease line of credit with a bank. Interest under this line, which is renewable annually, is determined on the date of each commitment to borrow and is based on the bank's base rate on such date. At June 27, 2004, approximately $3.5 million is outstanding. The borrowings, which bear interest at rates ranging from 5.39% to 6.36% annually, are payable in 60 monthly installments of principal and interest commencing in February 2001. Borrowings under the line are collateralized by the underlying equipment purchased and an equal amount of pledged investments.
As of June 27, 2004, future minimum payments under non-cancelable capital lease obligations and
operating leases with initial terms of one year or more consist of the following:
At June 27, 2004, the aggregate future sublease rental income under long-term operating sub-leases for land and buildings and corresponding rental expense under long-term operating leases were as follows:
In addition to the above, the Company has agreed to provide rent guarantees for leases entered into by certain franchisees with third party landlords. At June 27, 2004, the aggregate minimum rent payable by franchisees guaranteed by the Company was approximately $0.2 million. Rent expense was approximately $8.4 million, $9.0 million, and $8.7 million for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 respectively.
Litigation
There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.