UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-- -- --
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 1, 2001
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
--------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 237-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of voting common stock held by non-affiliates of the
Registrant, based on the closing price of the Class A common stock on September
24, 2001 as reported on the Nasdaq National Market, was approximately
$147,548,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The Registrant does not have any
non-voting common equity outstanding.
26,694,182
(Number of shares of class A common stock outstanding as of September 24, 2001)
37,661,665
(Number of shares of class B common stock outstanding as of September 24, 2001)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders (the Definitive Proxy Statement), to be filed with the
SEC within 120 days of July 1, 2001, are incorporated by reference into Part III
of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended July 1, 2001
INDEX
PART I
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management 35
Item 13. Certain Relationships and Related Transactions 35
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 36
Signatures 38
1
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE COMPANY'S CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM,
INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
AS MORE FULLY DESCRIBED ELSEWHERE IN THIS REPORT. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
Item 1. BUSINESS
The Company
With one of the most recognized brands in gift retailing, 1-800-FLOWERS.COM,
Inc. provides a broad range of thoughtful gift products including flowers,
plants, gourmet foods, candies, gift baskets and other unique gifts to customers
around the world via: the Internet at (www.1800flowers.com); by calling
1-800-FLOWERS(R) (1-800-356-9377) 24 hours a day, 7 days a week; or by visiting
one of its Company-owned or franchised stores. The Company's product line is
extended by the merchandise sold through its subsidiaries which include The Plow
& Hearth, Inc. ("Plow & Hearth(R)"), (phone: 1-800-627-1712 and web:
www.plowhearth.com) a direct marketer of home decor and garden merchandise,
GreatFood.com, Inc. ("GreatFood.com(R)") (www.greatfood.com) an online retailer
of gourmet food products, and The Children's Group, Inc., a direct marketer of
children's gifts, operating under the HearthSong(R) (www.hearthsong.com) and
Magic Cabin Dolls(R) (www.magiccabindolls.com) brands. 1-800-FLOWERS.COM(R)
currently maintains strategic online relationships with AOL Time Warner ("AOL"),
Yahoo! Inc. ("Yahoo!"), and Microsoft Corporation ("Microsoft") among others.
The Company's website recently earned "Best of the Web" honors from Forbes
magazine.
As of July 1, 2001, the Company had sold its products to approximately 12.1
million customers since 1996, of which approximately 3.0 million were added in
the previous twelve months. The Company offers over 2,700 varieties of fresh-cut
and seasonal flowers, plants and floral arrangements and more than 7,800 stock
keeping units ("SKUs") of gifts, gourmet foods and home and garden products,
including garden accessories and casual lifestyle furnishings, as well as over
4,000 items for children, comprised of unique toys, games and educational
products. The Company is committed to providing its customers the best possible
shopping experience through superior service and a 100% satisfaction guarantee.
In 1992, Teleway, Inc. was formed under the laws of the State of Delaware and
acquired a majority of the outstanding shares of the common stock of
800-FLOWERS, Inc., a Texas corporation, under which entity the telemarketing
business was operated. In 1995, Teleway, Inc. changed its name to 1-800-FLOWERS,
Inc. and in 1996, 800-FLOWERS, Inc. was merged into 1-800-FLOWERS, Inc.
Subsequently, in 1999, 1-800-FLOWERS, Inc. changed its name to
1-800-FLOWERS.COM, Inc.
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, a nationwide network of 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 and further expanded its gourmet food line through its November
1999 acquisition of GreatFood.com. Most recently, in June 2001, the Company
completed its acquisition of selected assets from subsidiaries of Foster &
Gallagher, Inc., adding unique and educational children's toys and games to the
Company's product offerings (such acquisition hereinafter referred to as the
"Children's Group").
The Company's Strategy
The Company has built its brand as a source for thoughtful gift products and
expects to introduce new products and services consistent with this mission. As
such, the Company's objective is to be the leading provider of flowers,
specialty or other socially expressive gifts, gourmet foods and products for the
home and garden. The key elements of its strategy to achieve this objective are:
Aggressively Extend the Company's Brand. 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 most recently, children's toys and games. This
extension of product offerings has enabled the Company to increase the frequency
of purchases by existing customers who have come to trust the 1-800-FLOWERS.COM
brand, as well as attract a significant number of new customers.
The Company believes its brand is characterized by:
o Convenience. All of the Company's product offerings can be purchased either
via the Company's toll-free telephone number from their home or office 24
hours a day, seven days a week, or via the web for those customers who
prefer a visual representation of their product selection. 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 the Company owned distribution centers in Madison, Virginia
and Vandalia, Ohio and brand-name vendors who ship directly to the
Company's customers. In excess of 80% of these fulfillment points are
connected by the Company's proprietary "BloomLink(R)" communication system,
an internet based system through which orders and related information is
transmitted.
o Selection. Over the course of a year, the Company offers over 2,700
varieties of fresh-cut and seasonal flowers, plants and floral
arrangements, and more than 7,800 SKUs of gifts, gourmet foods and home and
garden products, including garden accessories and casual lifestyle
furnishings, as well as over 4,000 items for children, comprised of unique
and educational toys and games.
o Customer Service. The Company ensures that customer service, whether
online, via the telephone, or in one of its retail stores is of the highest
caliber. The Company operates three customer service facilities to ensure
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 the 1-800-FLOWERS.COM 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 significant
and loyal customer base through cost-effective customer retention programs.
As part of the Company's continuing effort to broaden its product offerings and
serve the thoughtful gifting needs of its customers, the Company intends to
market other high-quality brands in addition to 1-800-FLOWERS. 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 June 2001, the Company acquired
the Children's Group, with two brands of unique and educational children's toys
and games. In fiscal 2000 the Company acquired GreatFood.com and TheGift.com,
Inc. ("TheGift"), online retailers of gourmet foods and specialty gift products,
respectively. In addition, the Company has formed strategic relationships with
Lenox, Incorporated to enable the Company's customers to purchase a selected
line of collectible and precious gift products and with Finlay Fine Jewelry
Corporation, which is a provider of fine jewelry products on the Company's Web
site.
Expand its Product Offerings. The Company's wide selection of products creates
the opportunity to have a relationship with customers who purchase products 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 principal floral, gift, gourmet food, home and garden and children's
toys, as well as other 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, product manufacturers or, where
appropriate, acquire businesses with complementary product lines.
Enhance its Customer Relationships. The Company intends to enhance its
relationships with its customers, encouraging more frequent and more 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 July 1, 2001, the Company's total database of customers numbered
approximately 12.1 million, 4.0 million of which have transacted business with
the Company online.
In addition, the Company believes it has a significant opportunity to expand its
corporate accounts and intends to focus greater resources on developing
customized plans for its corporate customers, such as its existing programs with
IBM, JPMorgan Chase and Liberty Mutual, to meet their gifting needs and those of
their employees.
Increase the Number of Online Customers. To increase the number of customer
orders placed through its cost-effective Web site, the Company intends to
continue to:
o actively promote its Web site through Web portals and online networks;
o aggressively 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
developing 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 purchasing 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 floral and gift counselor, into a
transaction processing system which captures the required customer and recipient
information. The system then selects a vendor to fulfill the customer's order
and electronically transmits the necessary information for fulfillment. In
addition, the Company's customer service representatives are electronically
linked to this system, enabling them to assist in order fulfillment and
subsequently track various customer and/or order information. During the past
several years, the Company has invested heavily in building a scalable
technology platform to support the Company's growing order volume. During the
latter half of fiscal 2001, the Company began realizing the cost savings
generated by bringing its Web-hosting and development capabilities in-house,
which also provided improved operational flexibility and additional back-up
capacity and system redundancy. Although the Company will continue to make
significant investments and use the best available technologies in order to
improve its operations, the Company intends on leveraging its existing
infrastructure capabilities, thereby allowing for a reduction in overall
technology spending, while providing resources to focus on customer specific
projects to ensure that our customers are provided the best possible shopping
experience. In particular, the Company intends to:
o continue to improve functionality, speed and ease of use of its Web site;
o enhance order tracking and delivery confirmation capabilities;
o provide improved search options and gift reminder programs;
o improve its ability to analyze its database of customer and recipient
information and conduct personalized one-to-one marketing;
o further expand the functionality and features of BloomLink; and
o integrate the Vandalia, Ohio distribution facility's warehouse management
system, acquired in June 2001 as part of the Company's acquisition of the
Children's Group, to improve product flow and shipping capabilities.
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 through one of approximately 1,500 fulfillment centers in BloomNet.
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 able 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
members for their high-quality products, superior customer service and order
fulfillment and delivery capabilities.
The Company fulfills most of its gift basket and gourmet food items primarily
through members of BloomNet or third-party vendors that ship products directly
to the customer by next-day or other delivery methods chosen by the customer.
The Company selects its third-party vendors based upon the quality of their
products, their reliability and their ability to meet volume requirements. The
Company primarily packages and ships its home and garden products, from its
advanced 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 distribution center.
During fiscal 2001, the Company entered into Order Fulfillment Agreement(s) with
selected BloomNet members to operate LFC's to facilitate the fulfillment of the
Company's floral and gift orders, while further improving the Company's ability
to control product quality and branding.
To ensure reliable and efficient communication of online and telephonic orders
to its BloomNet members and third party gift vendors, in January 1998, the
Company created BloomLink, a proprietary Internet-based communications system.
At July 1, 2001, approximately 80% of the BloomNet members and 100% of gift
vendors had adopted BloomLink. 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 with its vendors and BloomNet member florists
and increasing the number of BloomLink installations in their stores;
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 operations that support its gift, gourmet food, home
and garden and children's product lines;
o integrating the Company's Vandalia, Ohio distribution facility within the
Company's existing fulfillment network to improve shipping rates and
delivery capabilities.
The Company's Products
The Company offers a wide range of products, including fresh-cut and seasonal
flowers, floral arrangements, gifts, 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 July 1, 2001, July 2,
2000, and June 27, 1999 the flowers category represented 59.3%, 67.6% and 75.3%
of total net revenues, respectively.
Over the course of a year, the Company's product selection consists of:
Greetings. Through its relationship with Cardstore.com, the Company provides the
ability to send printed and personalized greeting cards with hundreds of fun and
creative ways to express emotions, offer congratulations, or just keep in touch.
Flowers. The Company offers more than 2,000 varieties of fresh-cut and seasonal
flowers and floral arrangements for all occasions and holidays, available for
same-day delivery.
Plants. The Company also offers approximately 700 varieties of popular plants to
brighten the home and/or office, and accent the gardens and landscapes.
Gifts Baskets. The Company offers more than 300 beautiful and innovative gift
basket assortments.
Gourmet Food. Through its GreatFood.com brand, the Company currently offers more
than 500 carefully selected gourmet food and sweet products from around the
world, including candies, chocolates, nuts, cookies, fruit, imported cheeses and
giftable surf-and-turf dinners.
Unique and Specialty Gifts. The Company offers 1,000 specially selected gift
items, including plush toys, balloons, bath and spa items, candles, wreaths,
ornaments, home accessories, giftware and fine jewelry.
Home and Garden. Through its Plow & Hearth brand, the Company offers more than
4,000 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 2,000 gardening items, including
tools and accessories, pottery, nature-related products, books and related
products.
Children's Gifts. Through the HearthSong and Magic Cabin Dolls brands the
Company offers over 4,000 products, including environmentally friendly toys,
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.
The Company's Web Sites
The Company offers floral, gift, gourmet food and home and garden products
through its 1-800-FLOWERS.COM Web site (www.1800flowers.com). Customers may come
to the Web site directly or may be referred to the Company by one of the
Company's portal relationships. These relationships include AOL
(keyword:flowers), Yahoo! and Microsoft and approximately 40,000 members of its
online affiliate program, which the Company initiated in February 1999. The
Company also offers home and garden products through the Plow & Hearth Web site
(www.plowhearth.com), gourmet food products through GreatFood.com
(www.greatfood.com) and children's gifts through its Hearthsong
(www.hearthsong.com) and Magic Cabin Dolls (www.magiccabindolls.com) Web sites.
As of July 1, 2001, approximately 4.0 million customers had made a purchase
through the Company's online sales channel.
The Company's Web site allows customers to easily browse and purchase its
products, promotes brand loyalty and encourages repeat purchases by providing an
inviting customer experience. The Company's Web site offers 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 site to be fast, secure and easy to use and to
enable customers to order products with minimal effort. The Company's
1-800-FLOWERS.COM Web site includes 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
also has a "Gift Finder" search tool, that provides popular gift ideas for each
occasion. Most recently, the Company added online order tracking capabilities,
which allows customers to quickly and easily view the delivery status of their
purchase, as well as a "Delivery Wizard" that 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 "My Assistant"
area of the Company's Web site enables customers to establish their floral and
gift preferences, which personalizes and simplifies their visits. "My Assistant"
members are also provided with an online address book for names and addresses of
their gift recipients, access to their purchasing history and e-mail
notification of special promotions and events at the Company's local retail
stores. 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 Gifting Consultants. 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
consultants who can answer product questions, provide gifting suggestions or
resolve order issues.
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.com, TheGift.com, Hearthsong and Magic Cabin Dolls brands through
internal development, co-branding arrangements, strategic relationships and/or
acquisitions of complementary businesses. The Company markets and promotes its
brand and products as follows:
The Company's Strategic Online Relationships. The Company promotes its products
through strategic relationships with leading Web portals and online networks.
The Company's relationships include, among others:
o AOL. The Company has worked with AOL since 1994. On September 1, 2000, the
Company entered into a new five-year, $22.1 million interactive marketing
agreement with AOL commencing October 1, 2001 and ending August 31, 2005.
Under the terms of the new agreement, the Company will continue as the
exclusive marketer of fresh-cut flowers across six AOL properties including
AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City, and ICQ.
o Yahoo!. The Company's products, advertisements and links to its Web site
are prominently featured on Yahoo!'s online shopping channel.
o Microsoft. The Company's products, advertisements and links to its Web site
are prominently featured on Microsoft's online shopping channel.
The Company's Online Affiliate Program. In addition to securing alliances with
frequently visited Web sites, in February 1999 the Company established an
affiliate network that has grown to approximately 40,000 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 by referring customers from their sites to the
Company's Web site. The affiliates include Barnes&Noble.com, Upromise.com,
Ebates.com, iWon.com, BizRate.com, SchoolPop.com and Juno.com.
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.
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
catalogs, the Company has cross-promoted its floral and gift products to its
home and garden customers and the Company similarly cross-promotes the home and
garden products to its floral and gift customers. The same cross-promotional
efforts are being planned for the HearthSong and Magic Cabin Dolls brands, as
the customer profiles for these brands match well with the Company's already
established brands. For the year ended July 1, 2001, the Company mailed in
excess of 60 million branded catalogs, primarily Plow & Hearth, Plow & Hearth
Country Home and the 1-800-FLOWERS.COM. In addition to providing a direct sale
mechanism, the Company believes that these catalogs will attract additional
customers to the Company's Web sites.
E-mails. The Company is able to capitalize on its customer database of
approximately 12.1 million customers, 4.0 million of which have transacted
business with the Company on-line, 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 and
Delta airlines as well as OfficeMax, American Express, VISA and MasterCard,
among others.
Fulfillment Operations
The Company's customers primarily place their orders either online or over the
telephone. Fulfillment of products is as follows:
Flowers. A majority of the Company's floral orders are fulfilled through
BloomNet. The Company selects retail florists for BloomNet based upon the
historical volume of floral purchases in a particular geographic area, the
number of BloomNet florists currently serving the area and the florist's design
staff, facilities, quality of floral processing, ability to fulfill orders in
sufficient volume and delivery capabilities. Prior to being accepted into
BloomNet, a retail florist must be approved by the Company's internal selection
committee. The Company regularly monitors performance and adherence to the
Company's quality standards to ensure proper product branding and packaging.
By fulfilling floral orders through BloomNet, the Company is able to deliver
floral products on a same-day or next-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 members are non-exclusive. Many
florists, including many BloomNet florists, also are members of other floral
fulfillment organizations. The BloomNet 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 July 1,
2001, the Company had entered into 16 Order Fulfillment Agreements with selected
BloomNet members to operate LFC's. 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 excess of 80% of BloomNet is connected to the Company electronically via
BloomLink, an Internet-based electronic communications system. Where the Company
is not connected via BloomLink, the Company utilizes the communication system of
an independent wire service to transmit an order to the fulfilling florist. In
addition, the Company ships overnight to its customers directly from growers and
through its fulfillment centers.
As of July 1, 2001, the Company owns and operates 40 retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 7 fulfillment
centers. In addition, the Company has 75 franchised stores, located primarily in
California. Company owned stores serve as local points of fulfillment and enable
the Company to test new products and marketing programs. The Company does not
expect to increase the number of owned or franchised retail stores.
Plants, Gift Baskets, Gourmet Food and Unique Gifts. The Company's plants, gift
baskets, gourmet food and unique gifts are shipped directly to the customer by
members of BloomNet, third-party product suppliers or through its Madison,
Virginia fulfillment center using next-day or other delivery method selected by
the customer. The Company's business is not dependent on any one of these
third-party suppliers.
Home and Garden and Children's Toys. The Company fulfills purchases of home and
garden merchandise from its Madison, Virginia fulfillment center or by
third-party product suppliers using next-day or other delivery method selected
by the customer. In fiscal 2001, the Company shipped approximately 1.4 million
packages from this facility which employs advanced technology for receiving,
packaging, shipping and inventory control. In September 2000, the Company
completed the installation of a new warehouse management system to increase its
capacity and reduce operating costs. During fiscal 2002, the Company will be
integrating its Vandalia, Ohio children's toys' distribution facility into the
Company's overall fulfillment plan. The additional capacity in Vandalia will
improve product flow and shipping capabilities and eliminates the current need
to expand the Madison, Virginia facility.
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, and upgraded its telecommunications network, including its call
management system. The Company plans to continue to invest in technologies that
will improve and expand its e-commerce and telecommunication capabilities.
During the latter half of fiscal 2001, the Company brought its Web-hosting and
development capabilities in-house, which should result in future cost savings,
while also providing improved operational flexibility and additional back-up
capacity and system redundancy. The Company's back-up site is hosted by Fry
Multimedia, a hosting and online services company headquartered in Ann Arbor,
Michigan.
The Company's transaction processing system selects the florist or vendor to
fulfill the order and captures customer profile and history in a customized
Oracle database. 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 has
acquired technology applications that have significantly expanded its ability to
analyze and use this information.
All of 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 electronically connects the Company in excess of 80% of
BloomNet and 100% of its 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.
Competition
Although the capital markets and economic factors have had an impact on many
startups in the e-commerce arena, 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. Some of these 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 many other providers of
floral products, none of which is dominant. 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 speciality 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 its brand strength, 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 few laws or regulations directly
applicable to e-commerce. Legislatures are 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",
"TheGift.com", "HearthSong" and "Magic Cabin Dolls." The Company also has rights
to numerous domain names, including www.1800flowers.com, www.800flowers.com,
www.flowers.com, www.plowhearth.com, www.greatfood.com, www.hearthsong.com and
www.magiccabindolls.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. In addition, the Company may fail to successfully integrate
licensed technology into its operations.
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,
servicemarks, 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 marks 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 July 1, 2001, the Company had a total of approximately 2,400 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service 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.
Additional Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only ones the Company
faces. Additional risks and uncertainties not presently known to the Company or
that are currently deemed immaterial may also impair its business operations. If
any of the following risks actually occur, the Company's business, financial
condition or results of operations may suffer.
The Company expects to incur a loss during fiscal 2002, which may reduce the
trading price of its Class A common stock. The Company expects to incur
significant operating and capital expenditures in order to:
o expand the 1-800-FLOWERS.COM brand through marketing and other promotional
activities;
o expand its product offering; and
o enhance the Company's technological infrastructure and order fulfillment
capabilities.
Although the Company has been profitable in the past, management expects that
the Company will incur a loss during the fiscal year ending June 30, 2002 as a
result of these and other expenditures. However, the Company does expect to
achieve positive Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) for the fiscal year ending June 30, 2002. No assurances can be made
that positive EBITDA can be achieved on this schedule or in the foreseeable
future. In order to achieve and maintain positive EBITDA and/or profitability,
the Company will need to generate revenues exceeding historical levels and/or
reduce operating expenses. Management cannot assure you that the Company will
generate revenues or reduce operating expenses sufficiently to achieve positive
EBITDA and/or profitability. Even if the Company does achieve positive EBITDA
and/or profitability, it may not sustain or increase positive EBITDA and/or
profitability on a quarterly or annual basis in the future.
The Company's quarterly operating results may significantly fluctuate and you
should not rely on them as an indication of its future results. The Company's
future revenues and results of operations may significantly fluctuate due to a
combination of factors, many of which are outside of management's control. The
most important of these factors include:
o seasonality;
o the retail economy;
o the timing and effectiveness of marketing programs;
o the timing of the introduction of new products and services;
o the timing and effectiveness of capital expenditures;
o the Company's ability to enter into or renew marketing agreements with
Internet companies; and
o competition.
The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue in
relation to its expenses, operating results would suffer. The Company's
operating results for any particular quarter may not be indicative of future
operating results. You should not rely on quarter-to-quarter comparisons of
results of operations as an indication of the Company's future performance. It
is possible that results of operations may be below the expectations of public
market analysts and investors. This could cause the trading price of the
Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the Company may
vary with general economic conditions. If general economic conditions
deteriorate and the Company's customers have less disposable income, consumers
may spend less on its products and its quarterly operating results may suffer.
The Company's operating results may suffer if revenues during the Company's peak
seasons do not meet its expectations. Sales of the Company's products are
seasonal, concentrated in the second calendar quarter, due to Mother's Day,
Administrative and Professionals' Week and Easter, and the fourth calendar
quarter, due to the Thanksgiving and Christmas holidays. In anticipation of
increased sales activity during these periods, the Company hires a significant
number of temporary employees to supplement its permanent staff and the Company
increases its inventory levels. If revenues during these periods do not meet the
Company's expectations, it may not generate sufficient revenue to offset these
increased costs and its operating results may suffer.
If the Company's customers do not find its expanded product lines appealing,
revenues may not grow and net income may decrease. The Company's business
historically has focused on offering floral and floral related gift products.
Although the Company has been successful in the introduction of its expanded
product lines including plants, gift baskets, gourmet food, unique or specialty
gifts and home and garden categories, it expects to continue to incur
significant costs in marketing these new products. If the Company's customers do
not find its expanded product lines appealing, the Company may not generate
sufficient revenue to offset its related costs and its results of operations may
be negatively impacted.
If the Company fails to develop and maintain its brand, it may not increase or
maintain its customer base or its revenues. The Company must develop and
maintain the 1-800-FLOWERS.COM brands to expand its customer base and its
revenues. In addition, the Company has introduced and acquired other brands in
the past, and may continue to do so in the future. The Company believes that the
importance of brand recognition will increase as it expands its product
offerings. Many of the Company's customers may not be aware of the Company's
non-floral products. The Company intends to maintain its expenditures for
creating and maintaining brand loyalty and raising awareness of its additional
product offerings. However, if the Company fails to advertise and market its
products effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
will also depend on its success in providing its customers high-quality products
and a high level of customer service. If the Company's customers do not perceive
its products and services to be of high quality, the value of the
1-800-FLOWERS.COM brands would be diminished and the Company may lose customers
and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate
a significant amount of traffic could limit the growth of the Company's
business. The Company expects that while a greater percentage of its online
customers will continue to come to its Web site directly, it will also rely on
third party Web sites with which the Company has strategic relationships,
including AOL, Yahoo! and the Microsoft for traffic. If these third-parties do
not attract a significant number of visitors, the Company may not receive a
significant number of online customers from these relationships and its revenues
from these relationships may decrease or not grow. There continues to be strong
competition to establish relationships with leading Internet companies, and the
Company may not successfully enter into additional relationships, or renew
existing ones beyond their current terms. The Company may also be required to
pay significant fees to maintain and expand existing relationships. The
Company's online revenues may suffer if it fails to enter into new relationships
or maintain existing relationships or if these relationships do not result in
traffic sufficient to justify their costs.
If local florists and other third-party vendors do not fulfill orders to the
Company's customers' satisfaction, its customers may not shop with the Company
again. In many cases, floral orders placed by the Company's customers are
fulfilled by local independent florists, a majority of which are a part of
BloomNet. The Company does not directly control any of these florists. In
addition, many of the non-floral products sold by the Company are manufactured
and delivered to its customers by independent third-party vendors. If customers
are dissatisfied with the performance of the local florist or other third-party
vendors, they may not utilize the Company's services when placing future orders
and its revenues may decrease.
If a florist discontinues its relationship with the Company, the Company's
customers may experience delays in service or declines in quality and may not
shop with the Company again. Many of the Company's arrangements with local
florists for order fulfillment may be terminated with 10 days notice. If a
florist discontinues its relationship with the Company, the Company will be
required to obtain a suitable replacement located in the same area, which may
cause delays in delivery or a decline in quality, leading to customer
dissatisfaction and loss of customers.
If a significant amount of customers are not satisfied with their purchase, the
Company will be required to incur substantial costs to issue refunds, credits or
replacement products. The Company offers its customers a 100% satisfaction
guarantee on its products. If customers are not satisfied with the products they
receive, the Company will either send the customer another product or issue the
customer a refund or a credit. The Company's net income would decrease if a
significant number of customers request replacement products, refunds or credits
and the Company is unable to pass such costs onto the supplier.
Increased shipping costs and labor stoppages may adversely affect sales of the
Company's non-floral products. Non-floral products are delivered to customers
either directly from the manufacturer or from the Company's distribution
facilities in Virginia and Ohio. The Company has established relationships with
the United States Postal Service, Federal Express, United Parcel Service and
other common carriers for the delivery of these products. If these carriers were
to raise the prices they charge to ship the Company's goods, its customers might
choose to buy comparable products locally to avoid shipping charges. In
addition, these carriers may experience labor stoppages, which could impact the
Company's ability to deliver products on a timely basis to its customers and
adversely affect its customer relationships.
If the Company fails to continuously improve its Web site, it may not attract or
retain customers. If potential or existing customers do not find the Company's
Web site a convenient place to shop, the Company may not attract or retain
customers and its sales may suffer. To encourage the use of the Company's Web
site, it must continuously improve its accessibility, content and ease of use.
Customer traffic and the Company's business would be adversely affected if
competitors' Web sites are perceived as easier to use or better able to satisfy
customer needs.
Competition in the floral, plant, gift basket, gourmet treat, specialty gift,
children's toys and games and home and garden industries is intense and a
failure to respond to competitive pressure could result in lost revenues. There
are many companies that offer products in these categories. In the floral
category, the Company's competitors include:
o retail floral shops, some of which maintain toll-free telephone numbers;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty gift retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, specialty gift, children's toys
and home and garden categories are highly competitive. Each of these categories
encompasses a wide range of products and is highly fragmented. Products in these
categories may be purchased from a number of outlets, including mass merchants,
retail specialty shops, online retailers and mail-order catalogs.
Competition is intense and the Company expects it to increase. Increased
competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
If the Company does not accurately predict customer demand for its products, it
may lose customers or experience increased costs. In the past, the Company did
not need to maintain a significant inventory of products. However, as the
Company expands the volume of non-floral products offered to its customers, the
Company will be required to increase inventory levels and the number of products
maintained in its warehouses. Because the Company has limited experience
offering many of its non-floral products through its Web site, the Company may
not predict inventory levels accurately. If the Company overestimates customer
demand for its products, excess inventory and outdated merchandise could
accumulate, tying up working capital and potentially resulting in reduced
warehouse capacity and inventory losses due to damage, theft and obsolescence.
If the Company underestimates customer demand, it may disappoint customers who
may turn to its competitors. Moreover, the strength of the 1-800-FLOWERS.COM
brand could be diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
rise or flowers may be unavailable and the Company's revenues and gross margins
could decline. A variety of factors affect the supply of flowers in the United
States and the price of the Company's floral products. If the supply of flowers
available for sale is limited due to weather conditions or other factors, prices
for flowers could rise and customer demand for the Company's floral products may
be reduced, causing revenues and gross margins to decline. Alternatively, the
Company may not be able to obtain high quality flowers in an amount sufficient
to meet customer demand. Even if available, flowers from alternative sources may
be of lesser quality and/or may be more expensive than those currently offered
by the Company.
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation against foreign
trade practices.
A failure to manage its internal operating and financial functions could lead to
inefficiencies in conducting the Company's business and subject it to increased
expenses. The Company's expansion efforts may strain its operational and
financial systems. To accommodate the Company's growth, it implemented new or
upgraded operating and financial systems, procedures and controls. Additionally,
the Company continues to improve its operating infrastructure through technology
initiatives and any failure to integrate these initiatives in an efficient
manner could adversely affect its business. In addition, the Company's systems,
procedures and controls may prove to be inadequate to support its future
operations.
The Company's franchisees may damage its brand or increase its costs by failing
to comply with its franchise agreements or its operating standards. The
Company's franchise business is governed by its Uniform Franchise Offering
Circular, franchise agreements and applicable franchise law. If the Company's
franchisees do not comply with its established operating standards or the terms
of the franchise agreements, the 1-800-FLOWERS.COM brand may be damaged. The
Company may incur significant additional costs, including time-consuming and
expensive litigation, to enforce its rights under the franchise agreements.
Additionally, the Company is the primary tenant on certain leases, which the
franchisees sublease from the Company. If a franchisee fails to meet its
obligations as subtenant, the Company could incur significant costs to avoid
default under the primary lease. Furthermore, as a franchiser, the Company has
obligations to its franchisees. Franchisees may challenge the performance of the
Company's obligations under the franchise agreements and subject it to costs in
defending these claims and, if the claims are successful, costs in connection
with their compliance.
If third parties acquire rights to use similar domain names or phone numbers or
if the Company loses the right to use its phone numbers, its brand may be
damaged and it may lose sales. The Company's Internet domain names are an
important aspect of its brand recognition. The Company cannot practically
acquire rights to all domain names similar to www.1800flowers.com., 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
brand.
Likewise, the phone number that spells 1-800-FLOWERS is important to the
Company's brand and its business. While the Company has obtained the right to
use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as
common "FLOWERS" misdials, it may not be able to obtain rights to use the
FLOWERS phone number as new toll-free prefixes are issued, or the rights to all
similar and potentially confusing numbers. If third parties obtain the phone
number which spells "FLOWERS" with a different prefix or a toll-free number
similar to FLOWERS, these parties may also confuse the Company's customers and
cause lost sales and potential damage to its brand. In addition, under
applicable FCC rules, ownership rights to telephone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS.
If the Company does not continue to receive rebates from wire services, its
results of operations could suffer. The Company has entered into arrangements
with independent wire service companies that provide it with rebates when it
settles its customers' floral orders utilizing their service. If the Company
cannot renew these arrangements or enter into similar arrangements on
commercially reasonable terms, its results of operations could suffer. In
addition, these companies may eliminate or modify the rebate structure they have
in place with the Company. Any adverse modification to these rebate structures
could also cause the Company's results of operations to suffer.
The Company's net sales and gross margins would decrease if it experiences
significant credit card fraud. A failure to adequately control fraudulent credit
card transactions would reduce its net sales and gross margins because it does
not carry insurance against this risk. The Company has developed technology to
help detect the fraudulent use of credit card information. Nonetheless, to date,
the Company has suffered losses as a result of orders placed with fraudulent
credit card data even though the associated financial institution approved
payment of the orders. Under current credit card practices, the Company is
liable for fraudulent credit card transactions because it does not obtain a
cardholder's signature.
A failure to integrate the systems and operations of any acquired business with
the Company's operations may disrupt its business. The Company has acquired
complementary businesses and may continue to do so in the future. If the Company
is unable to fully integrate the Children's Group acquisition, or any future
acquisition into its operations, its business and operations could suffer,
management may be distracted and its expenses may increase. Moreover, the
expected benefits from any acquisition may not be realized, resulting in lost
opportunities and loss of capital.
The Company's revenues may not grow if the Internet is not accepted as a medium
for commerce. The Company expects to derive an increasing amount of its revenue
from electronic commerce, and intends to extensively market its non-floral
products online. If the Internet does not continue to gain acceptance as a
medium for commerce, its revenues may not grow as the Company expects and its
business may suffer. A number of factors may inhibit Internet usage, including:
o inadequate network infrastructure;
o consumer concerns for Internet privacy and security;
o inconsistent quality of service; and
o lack of availability of cost-effective, high speed service.
If Internet usage grows, the infrastructure may not be able to support the
demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the Internet infrastructure. If these interruptions continue,
Internet usage may decline.
The Company's operating results may suffer due to political and social unrest or
disturbances. On September 11, 2001, terrorists attacked the World Trade Center
in New York and the Pentagon in Washington, D.C. While we have not yet fully
analyzed the impact that these events, or similar events, may have on our
business, like other American businesses, we could be adversely impacted if such
events cause a downturn in the economy, or other negative effects which cannot
now be anticipated.
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 reputation. In the past, particularly during
peak holiday periods, the Company has experienced significant increases in
traffic on its Web site and in its toll-free customer service centers. The
Company's operations are dependent on its ability to maintain its computer and
telecommunications systems in effective working order and to protect its systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. The Company's systems have in the past, and may in
the future, experience:
o system interruptions;
o long response times; and
o degradation in service.
The Company's business depends on customers making purchases on its systems, its
revenues may decrease and its reputation could be harmed if it experiences
frequent or long system delays or interruptions or if a disruption occurs during
a peak holiday season.
If AT&T and MCI do not adequately maintain the Company's telephone service, the
Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and MCI to provide telephone services to its
customer service centers. If AT&T and MCI experience system failures or fail to
adequately maintain the Company's systems, the Company would experience
interruptions and its customers might not continue to utilize its services. If
the Company loses its telephone service, it will be unable to generate revenue.
The Company's future success depends upon these third-party relationships
because it does not have the resources to maintain its telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms may disrupt the Company's operations or
require it to incur significant unanticipated costs.
Interruptions in FTD's Mercury system or a reduction in the Company's access to
this system may disrupt order fulfillment and create customer dissatisfaction. A
portion of the Company's customers' orders are communicated to the fulfilling
florist through FTD's Mercury system. The Mercury system is an order processing
and messaging network used to facilitate the transmission of floral orders
between florists. The Mercury system has in the past experienced interruptions
in service. If the Mercury system experiences interruptions in the future, the
Company would experience difficulties in fulfilling its customers' orders and
many of its customers might not continue to shop with the Company.
If the Company is unable to hire and retain key personnel, its business and
growth may suffer. The Company's success is dependent on its ability to hire,
retain and motivate highly qualified personnel. In particular, the Company's
success depends on the continued efforts of its Chairman and Chief Executive
Officer, James F. McCann, and its President, Christopher G. McCann. In addition,
the Company has recently hired or promoted several new members to its senior
management team to help manage its business and growth. The loss of the services
of any of the Company's executive management or key personnel, its failure to
integrate any of its new senior management into its operations or its inability
to attract qualified additional personnel could cause its business and growth to
suffer and force it to expend time and resources in locating and training
additional personnel.
Many governmental regulations may impact the Internet, which could affect the
Company's ability to conduct business. Any new law or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet or the Company's Web site. The Company expects there will be
an increasing number of laws and regulations pertaining to the Internet in the
United States and throughout the world. These laws or regulations may relate to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services
sold over the Internet. Moreover, the applicability to the Internet of existing
laws governing intellectual property ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing. This could decrease the demand for the
Company's products, increase its costs or otherwise adversely affect its
business.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of the Company's Internet business or its marketing efforts. The Federal
Trade Commission has proposed regulations regarding the collection and use of
personal identifying information obtained from individuals when accessing Web
sites, with particular emphasis on access by minors. These regulations may
include requirements that the Company establish procedures to disclose and
notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by the Company. These regulations
may also include enforcement and redress provisions. Moreover, even in the
absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of other companies that collect
information on the Internet. One investigation resulted in a consent decree
under which an Internet company agreed to establish programs to implement the
principles noted above. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts may adversely affect its ability to collect demographic and personal
information from users, which could adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may
damage its brand. Unauthorized use of the Company's intellectual property by
third parties may damage its brand and its reputation and may likely result in a
loss of customers. It may be possible for third parties to obtain and use the
Company's intellectual property without authorization. Third parties have in the
past infringed or misappropriated the Company's intellectual property or similar
proprietary rights. The Company believes infringements and misappropriations
will continue to occur in the future. Furthermore, the validity, enforceability
and scope of protection of intellectual property in Internet-related industries
is uncertain and still evolving. The Company may be unable to register its
intellectual property in some foreign countries and, furthermore, the laws of
some foreign countries are uncertain or do not protect intellectual property
rights to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be expensive
and, if the Company is not successful, could disrupt its ability to conduct
business. The Company cannot be certain that its products do not or will not
infringe valid patents, trademarks, copyrights or other intellectual property
rights held by third parties. The Company may be a party to legal proceedings
and claims relating to the intellectual property of others from time to time in
the ordinary course of its business. The Company may incur substantial expense
in defending against these third-party infringement claims, regardless of their
merit. Successful infringement claims against the Company may result in
substantial monetary liability or may materially disrupt its ability to conduct
business.
If states begin imposing broader guidelines to state sales and use taxes, the
Company may lose sales or incur significant expenses in satisfaction of these
obligations. In addition to the Company's retail store operations, the Company
collects sales or other similar taxes in states where the Company's telephonic
and interactive sales channels have applicable nexus. However, various states
have sought to impose state sales tax collection obligations on out-of-state
direct marketing companies such as 1-800-FLOWERS.COM. A successful assertion by
one or more states that the Company should have collected or be collecting sales
tax on the sale of its products in their states could result in additional costs
and corresponding price increases to its customers. Any imposition of state
sales and use taxes on the Company's products sold over the Internet may
decrease customers' demand for its products and revenue.
Recent federal legislation limits the imposition of U.S. state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom
Act, which places a three-year moratorium on state and local taxes on Internet
access, unless such tax was already imposed prior to October 1, 1998, and on
discriminatory taxes on e-commerce. There is a possibility that Congress may not
renew this legislation in 2001. If Congress chooses not to renew this
legislation, U.S. state and local governments would be free to impose new taxes
on electronically purchased goods. The imposition of taxes on goods sold over
the Internet by U.S. state and local governments would create administrative
burdens for the Company and could decrease future sales.
Product liability claims may subject the Company to increased costs. Several of
the products the Company sells, including perishable food products, 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 brand. Although the Company maintains insurance against product liability
claims, its coverage may be inadequate to cover any liabilities it may incur.
The Company's stock price may be highly volatile and could drop unexpectedly,
particularly because it has Internet operations. The price at which the
Company's Class A common stock will trade may be highly volatile and may
fluctuate substantially. The stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
of securities, particularly securities of companies with Internet operations. As
a result, investors may experience a material decline in the market price of the
Company's Class A common stock, regardless of the Company's operating
performance. In the past, following periods of volatility in the market price of
a particular company's securities, securities class action litigation has often
been brought against that company. The Company may become involved in this type
of litigation in the future. Litigation of this type is often expensive and
diverts management's attention and resources.
Item 2. PROPERTIES
The Company's headquarters and one of its customer service centers are located
in approximately 77,000 square feet of office space in Westbury, New York, under
a lease that expires in May 2005. The Company owns a 300,000 square foot
fulfillment center in Madison, Virginia, and a 200,000 square foot distribution
center in Vandalia, Ohio. The Company leases a total of approximately 30,400
square feet for its customer service centers in Ardmore, Oklahoma and Bethpage,
New York.
As of July 1, 2001, the Company leased approximately 225,000 square feet for
owned or franchised retail stores 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.
In order to accommodate increasing call volume requirements, while improving
operating efficiencies, in June 2000, the Company announced a redeployment plan
which includes the closure of certain retail stores in conjunction with its
strategic redeployment of its retail network of direct fulfillment centers and
the relocation of certain customer service centers. In November 2000, the
Company opened a new service center in Ardmore, Oklahoma to replace its
Marietta, Georgia facility, which was closed in October 2000. Construction of
another service center, scheduled to be completed in the second quarter of
fiscal 2002, has begun in Alamagordo, New Mexico, to replace its Phoenix,
Arizona and San Antonio, Texas service centers, which were closed in June 2001.
In addition, during fiscal 2001, the Company completed the planned conversion of
certain retail stores into direct fulfillment centers, while closing certain
other non-performing retail stores.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
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 period from August 3, 1999, the date
of the Company's initial public offering, through July 1, 2001.
High Low
-------------- --------------
Year ended July 1, 2001
July 3, 2000 - October 1, 2000 $ 6.13 $ 4.50
October 2, 2000 - December 31, 2001 $ 5.13 $ 2.55
January 1, 2001 - April 1, 2001 $ 8.13 $ 4.13
April 2, 2001 - July 1, 2001 $15.50 $ 5.96
Year ended July 2, 2000
August 3, 1999 - September 26, 1999 $23.19 $13.50
September 27, 1999 - December 26, 1999 $17.06 $11.75
December 27, 1999 - March 26, 2000 $13.00 $ 6.28
March 27, 2000 - July 2, 2000 $ 8.00 $ 4.25
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 24, 2001, there were approximately 68 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 24, 2001,
there were approximately 19 shareholders of record of the Company's Class B
common stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its Class A or
Class B common stock, and intends to retain future earnings, if any, to provide
funds to finance the expansion of its business. As a result, the Company does
not anticipate paying any cash dividends in the foreseeable future.
Recent Sale of Unregistered Securities
During the previous three years ended July 1, 2001, the Company issued the
following unregistered securities:
o May 20, 1999, the Company issued 1,127,546 shares of preferred stock to 11
investors for an aggregate amount of $117.6 million. The preferred stock
automatically converted to Class A common stock upon the consummation of
the initial public offering.
The issuances of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Rule 701 promulgated under Section 3(b) of the Securities Act. The recipients of
securities in each of these transactions represented their intention to acquire
the securities for investment only and not with view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and instruments issued in such transactions. All
recipients had adequate access, through their relationship with the Company, to
information about the Company.
Resales of Securities
51,008,251 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 24, 2001, 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.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended July
1, 2001, July 2, 2000 and June 27, 1999, and the consolidated balance sheet data
as of July 1, 2001 and July 2, 2000, 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 operations data for
the years ended June 28, 1998 and June 29, 1997, and the selected consolidated
balance sheet data as of June 27, 1999, June 28, 1998 and June 29, 1997, 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
operations and balance sheet data. The Company acquired the Children's Group in
June 2001, disposed of Floral Works in January 2000, acquired GreatFood.com and
TheGift.com in November 1999 and acquired Plow & Hearth in April 1998. 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. You should read this information together with the discussion in
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" and the Company's consolidated financial statements and notes to
those statements included elsewhere in this Annual Report on Form 10-K.
Years ended
-----------------------------------------------------------------------
July 1, July 2, June 27, June 28, June 29,
2001 2000 1999 1998 1997
------------- ------------- -------------- ------------ --------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Telephonic $ 230,723 $ 227,380 $ 201,467 $159,715 $142,734
Online 182,924 116,810 52,668 26,684 16,061
Retail/fulfillment 28,592 35,338 38,717 31,813 24,852
------------- ------------- -------------- ------------ --------------
Total net revenues 442,239 379,528 292,852 218,212 183,647
Cost of revenues 267,779 237,493 179,697 136,966 115,078
------------- ------------- -------------- ------------ --------------
Gross profit 174,460 142,035 113,155 81,246 68,569
Operating expenses:
Marketing and sales 154,321 155,353 89,126 53,037 44,681
Technology and development 16,853 16,809 8,067 1,794 1,411
General and administrative 27,043 28,975 15,748 15,832 12,338
Depreciation and amortization 21,716 16,479 8,385 4,168 3,287
------------- ------------- -------------- ------------ --------------
Total operating expenses 219,933 217,616 121,326 74,831 61,717
------------- ------------- -------------- ------------ --------------
Operating (loss) income (45,473) (75,581) (8,171) 6,415 6,852
Other income (expense), net 4,152 7,422 (1,183) 1,654 674
------------- ------------- -------------- ------------ --------------
(Loss) income before income taxes and
minority interests (41,321) (68,159) (9,354) 8,069 7,526
Benefit (provision) for income taxes - 1,286 2,715 (3,181) (3,135)
------------- ------------- -------------- ------------ --------------
(Loss) income before minority interests (41,321) (66,873) (6,639) 4,888 4,391
Minority interests - 43 (207) 186 (4)
------------- ------------- -------------- ------------ --------------
Net (loss) income (41,321) (66,830) (6,846) 5,074 4,387
Redeemable Class C common stock
dividends - - (5,215) (1,608) (1,462)
------------- ------------- -------------- ------------ --------------
Net (loss) income applicable to common
stockholders $ (41,321) $ (66,830) $ (12,061) $ 3,466 $ 2,925
============= ============= ============== ============ ==============
Net (loss) income per common share
applicable to common stockholders:
Basic $ (0.64) $ (1.10) $ (0.27) $ 0.08 $ 0.07
============= ============= ============== ============ ==============
Diluted $ (0.64) $ (1.10) $ (0.27) $ 0.07 $ 0.06
============= ============= ============== ============ ==============
Shares used in the calculation of
net (loss) income per common share:
Basic $ 64,197 $ 60,889 $ 44,035 $ 44,120 $ 44,140
============= ============= ============== ============ ==============
Diluted $ 64,197 $ 60,889 $ 44,035 $ 46,610 $ 46,740
============= ============= ============== ============ ==============
As of
------------- -------------- --------------- --------------- ---------------
July 1, 2001 July 2, 2000 June 27, 1999 June 28, 1998 June 29, 1997
------------- -------------- --------------- --------------- ---------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents $ 63,896 $111,624 $ 99,183 $ 8,873 $11,443
Working capital 27,409 82,129 85,619 1,950 1,975
Investments 16,284 1,918 984 1,383 2,854
Total assets 195,257 224,641 182,355 81,746 44,130
Long-term liabilities 16,029 12,947 37,766 35,359 9,456
Redeemable class C common stock - - - 17,692 16,084
Total stockholders' equity (deficit) 117,816 158,918 109,003 672 (2,670)
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 "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
1-800-FLOWERS.COM, Inc. is a leading multi-channel retailer of thoughtful gifts
for all occasions, offering an extensive array of fresh-cut flowers, plants,
gift baskets, gourmet food and candies, home decor, garden merchandise, unique
children's toys and other specialty products. With one of the most recognized
brands in retailing and a history of successfully integrating technologies and
business innovations, the Company has evolved into a "next age" retailer
providing convenient, multi-channel access for customers via the Internet,
telephone, catalogs and retail stores.
The Company's product offering reflects a carefully selected assortment of high
quality merchandise chosen for its unique "thoughtful gifting" qualities which
accommodate customer needs in celebrating a special occasion or conveying a
personal sentiment. Many products are available for same-day or overnight
delivery and all come with the Company's 100% satisfaction guarantee. In
addition to the Company's selection of thoughtful gifts, the Company's product
line is extended by its other brands which include Plow & Hearth, home decor and
garden merchandise (www.plowhearth.com), GreatFood.com, gourmet food products
(www.greatfood.com), and HearthSong (www.hearthsong.com) and Magic Cabin Dolls
(www.magiccabindoll.com), unique and educational children's toys and games.
A majority of the Company's floral orders are fulfilled through BloomNet
(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,
its proprietary Internet-based electronic communication system, or the
communication system of a third-party. Remittance to the fulfilling florist is
processed either through a third-party wire service that reconciles and effects
payments between sending and fulfilling florists, called a clearinghouse, or is
directly paid by the Company. When utilizing a third party wire service and
consistent with industry practice, the Company remits 80% of the value of the
merchandise sold to a wire service for settlement with the fulfilling florist.
It is customary for the wire service to retain a 7%-9% fee for its services. It
is also industry practice for the clearinghouse to credit back to the
originating florist a rebate for payments processed through the clearinghouse.
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 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.
As of July 1, 2001 the Company owned retail fulfillment operations consisted of
40 retail stores and 7 fulfillment centers. Retail fulfillment revenues also
include revenues attributable to the Company's Floral Works wholesale floral
subsidiary (through the date of its disposition in January 2000), fees paid to
the Company by members of its "BloomNet" network and royalties, fees and
sublease rent paid to the Company by its 75 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.
The Company expects to incur a loss for the full year of fiscal 2002 as a result
of the significant operating and capital expenditures required to achieve its
objectives. However, the Company expects to achieve positive EBITDA for the full
year of fiscal 2002. No assurances can be made that positive EBITDA can be
achieved on this schedule or in the foreseeable future. In order to achieve and
maintain positive EBITDA and/or profitability, the Company will need to generate
revenues exceeding historical levels and/or reduce operating expenditures. The
Company's prospects for achieving profitability must be considered in light of
the risks, uncertainties, expenses, and difficulties encountered by companies in
the rapidly evolving market of online commerce, including those described under
the caption "Additional Risk Factors that May Affect Future Results" and
elsewhere in this Annual Report.
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 2001 and 1999, which ended July 1, 2001 and
June 27, 1999, respectively, consisted of 52 weeks, while fiscal year 2000,
which ended July 2, 2000, consisted of 53 weeks. As such, a portion of the
increase in the Company's fiscal year 2000 revenues, and associated variable
expenses, as compared to fiscal year 1999, was attributable to the additional
week of activity during that period.
Net Revenues
Years Ended
--------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ ------------
(in thousands)
Net revenues:
Telephonic $230,723 1.5% $227,380 12.9% $201,467
Online 182,924 56.6% 116,810 121.8% 52,668
Retail/fulfillment 28,592 (19.1%) 35,338 (8.7%) 38,717
------------ ------------ ------------
$442,239 16.5% $379,528 29.6% $292,852
============ ============ ============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. Growth in
combined telephonic and online revenues during the years ended July 1, 2001 and
July 2, 2000 was due to an increase in order volume and average order value,
which resulted from more cost-efficient marketing efforts, strong brand name
recognition and the Company's continued expansion of its non-floral product
offerings, including a broad range of items such as plants, candies and gourmet
foods, as well as items for the home and garden and other specialty gifts.
Non-floral gift products accounted for 40.7 %, 32.4% and 24.7% of total combined
telephonic and online net revenues during the years ended July 1, 2001, July 2,
2000 and June 27, 1999, respectively.
The Company fulfilled approximately 6,513,000, 5,616,000 and 4,199,000 orders
through its combined telephonic and online sales channels during the fiscal
years ended July 1, 2001, July 2, 2000 and June 27, 1999, respectively,
representing increases of 16.0% and 33.7% during fiscal 2001 and 2000,
respectively. The growth was primarily the result of increases in online order
volume driven by traffic both directly to the Company's URL's ("Universal
Resource Locators") and through third party portals. Online orders derived
directly from the Company's URL's accounting for 71.4%, 69.0% and 45.9% of total
online orders during the fiscal years ended July 1, 2001, July 2, 2000 and June
27, 1999, respectively. Additionally, the Company's combined telephonic and
online sales channels average order value increased 3.6% to $63.51 and 1.3% to
$61.29 during the fiscal years ended July 1, 2001 and July 2, 2000,
respectively. Although net revenues generated from the Company's telephonic
sales channel increased during the fiscal years ended July 1, 2001 and July 2,
2000, demonstrating the benefit of offering our customers multiple channel
access to our products and services, the annual growth rate declined as a result
of the continuing migration of our customers to the Company's online sales
channel.
Revenue derived from the Children's Group, which is included in the Company's
results of operations since it was acquired on June 8, 2001, was immaterial in
relation to consolidated revenue for the fiscal year ended July 1, 2001.
The decrease in retail/fulfillment revenues for the years ended July 1, 2001 and
July 2, 2000 was primarily due to a reduction in floral wholesale net revenues
of $7.2 million and $5.1 million, respectively, as a result of the Company's
disposition of its Floral Works subsidiary in January 2000, partially offset by
an increase in net revenues resulting from the addition of three company-owned
retail locations during each of the fiscal years ended July 1, 2001 and July 2,
2000. The Company does not expect to materially increase its number of owned
retail stores in the foreseeable future.
Gross Profit
Years Ended
-----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------- ------------ ------------- -------------
(in thousands)
Gross profit $174,460 22.8% $142,035 25.5% $113,155
Gross margin % 39.4% 37.4% 38.6%
Gross profit consists of net revenues less cost of revenues which is comprised
primarily of florist fulfillment costs (fees paid directly to florists and fees
paid to wire services that serve as clearinghouses for floral orders, net of
wire service rebates), the cost of floral and non-floral merchandise sold from
inventory or through third parties, and associated costs including inbound and
outbound shipping charges. Additionally, cost of revenues 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. During the fiscal years ended July 1, 2001 and July 2, 2000, gross
profit increased as a result of increased order volume, average order value and
an improved gross margin percentage. The gross margin percentage increased 200
basis points during the fiscal year ended July 1, 2001, primarily as a result of
the Company's increased online service and shipping charges, which aligned them
with industry norms, and the continued growth in non-floral product sales, which
generate higher gross margins. In addition, the gross margin percentage during
the fiscal year ended July 1, 2001 was further improved by enhanced customer
service practices through the implementation of stricter product quality control
standards and enforcement methods which reduced credits/returns and replacements
on floral orders. Gross margin percentage during the fiscal year ended July 2,
2000 declined 120 basis points in comparison to the fiscal year ended June 27,
1999 due to certain introductory product pricing, and promotions related to the
Company's expansion into non-floral products, as well as higher credits/returns
and replacements on floral orders during the Valentine's and Mother's Day
holidays to increase customer satisfaction and loyalty. The gross margin
percentage during the fiscal years ended July 1, 2001 and July 2, 2000 was
negatively affected by the aforementioned increase in average order value on
florist fulfilled orders, which, while generating higher absolute gross profit
dollars, results in a lower gross margin percentage as the Company's fixed
service charge is spread over a higher sales price.
As the Company continues to expand its higher margin, non-floral business, the
Company expects that gross margin percentage during fiscal 2002, while varying
by quarter due to seasonal changes in product mix, will continue to increase.
Marketing and Sales Expense
Years Ended
----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ -------------
(in thousands)
Marketing and sales $154,321 (0.7)% $155,353 74.3% $89,126
Percentage of sales 34.9% 40.9% 30.4%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expenses decreased to 34.9% (33.3%, exclusive of
the non-recurring charge discussed below) of net revenues during the fiscal year
ended July 1, 2001, compared to 40.9% during the prior fiscal year, as a result
of volume related efficiencies and cost-effective advertising, coupled with the
Company's strong brand name and savings realized from successful renegotiations
of certain of its portal agreements. These renegotiations enabled the Company to
reduce portal expenses in fiscal 2001 despite a non-recurring charge of $7.3
million ($0.11 per diluted share) recorded by the Company in September 2000, as
a result of the modification of the Company's interactive marketing agreement
with one of the Company's portal providers. The Company subsequently entered
into a new five-year, $22.1 million agreement with the same portal partner,
thereby reducing the Company's continuing annualized expense with such partner
by $5.6 million. Despite the reduced spending, the Company added approximately
3.0 million new customers during fiscal 2001, as compared to approximately 2.7
million and 2.2 million new customers during the fiscal years 2000 and 1999,
respectively. The increases in marketing and sales expense during the fiscal
year ended July 2, 2000 were primarily attributable to higher discretionary
spending in traditional media advertising, relationship and direct marketing,
additions to the Company's marketing and merchandising staff, as well as
additional sales personnel in support of order fulfillment and customer service
activities, and additional online portal expenses associated with expanded
agreements with various portal providers. In addition, during June 2000, in
connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a redeployment charge of approximately $2.1
million. The principal reasons for the charge included the closure of certain
retail stores in connection with the Company's strategic redeployment of its
retail network of direct fulfillment centers and the relocation of certain
customer service centers, enabling the Company to meet increasing order volume
requirements, while reducing costs per order. The redeployment charge included
the estimated provision for the present value of future lease obligations and
related facility shut down costs in the amount of approximately $1.0 million
(charged to marketing and sales expense), and the estimated unrecoverable book
value of abandoned fixtures, equipment and leasehold improvements in the amount
of approximately $1.1 million (charged to depreciation and amortization-see
below).
In order to continue to execute its business plan, the Company expects to
continue to invest in its marketing and sales efforts to acquire new customers,
while also leveraging its already significant customer base through cost
effective, customer retention initiatives. Such spending will be within the
context of the Company's overall marketing plan, which is continually evaluated
and revised to reflect the results of the Company's market research, including
changing economic conditions, and seeks to determine the most cost-efficient use
of the Company's marketing dollars. Such evaluation includes the ongoing review
of the Company's strategic relationships with its internet portal providers to
ensure that such relationships continue to generate cost-effective incremental
volume. As such, although the Company expects spending will increase due to the
incremental marketing efforts of the recently acquired Children's Group,
spending as a percentage of net revenues is expected to continue to decrease in
comparison to prior years.
Technology and Development Expense
Years Ended
----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ -------------
(in thousands)
Technology and development $16,853 0.3% $16,809 108.4% $8,067
Percentage of sales 3.8% 4.4% 2.8%
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. As a result of cost efficiencies realized by
bringing Web-hosting and development capabilities in-house during fiscal 2001,
the Company was able to maintain its technology and development spending at a
level consistent with the prior year, while at the same time enhancing the
content and functionality of the Company's web sites, as well as improving the
performance of the Company's fulfillment and database systems. Internalizing the
Company's hosting and development functions also provided for improved
operational flexibility and additional back-up and system redundancy. The
increase in technology and development expense during the fiscal year ended July
2, 2000, in comparison to prior year, was primarily attributable to development
costs incurred to enhance the content and functionality of the Company's Web
site and transaction processing systems, as well as additional payroll,
recruiting and related expenses associated with the staffing of the technology
department to accommodate the Company's growth. During the fiscal years ended
July 1, 2001, July 2, 2000 and June 27, 1999, the Company expended $30.7
million, $35.3 million and $16.2 million on technology and development, of which
$13.8 million, $18.5 million and $8.1 million have been capitalized,
respectively.
Although the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending, particularly in the areas of web site hosting and
development and database management, will decrease in comparison to prior fiscal
years as the Company continues to benefit from previous investments in its
current technology platform.
General and Administrative Expenses
Years Ended
----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ -------------
(in thousands)
General and administrative $27,043 (6.7%) $28,975 84.0% $15,748
Percentage of sales 6.1% 7.6% 5.4%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. The decrease in general and administrative
expenses during the fiscal year ended July 1, 2001, in comparison to the prior
fiscal year, was primarily the result of a $1.5 million charge recorded in
fiscal 2000 to account for the increase in the management put liability
associated with the Company's acquisition of the minority shareholders' interest
in Plow & Hearth. Exclusive of such prior fiscal year charge, general and
administrative expense decreased by $0.4 million over the prior fiscal year due
to various cost reduction initiatives, offset in part by increased insurance
costs. The increase in general and administrative expenses during the fiscal
year ended July 2, 2000 was the result of costs associated with additions to the
Company's management team and administrative increases associated with operating
as a public company. In addition, an increase of $3.1 million during the fiscal
year ended July 2, 2000 was attributable to the effect of the aforementioned
management put liability associated with the acquisition of Plow & Hearth.
During the fiscal year ended July 2, 2000, the Company recorded a charge of $1.5
million to increase the liability in accordance with the acquisition valuation
formula contained in the Plow & Hearth stockholders' agreement between the
Company, Plow & Hearth and Plow & Hearth management shareholders. Conversely, in
accordance with the agreement, during the fiscal year ended June 27, 1999, the
Company recorded a benefit of $1.6 million to reduce the related liability.
The Company believes that its current general and administrative infrastructure
is sufficient to support existing requirements and, as such, while increasing in
absolute dollars due primarily to the incremental costs associated with the
recently acquired Children's Group, general and administrative expenses is
expected to, on a seasonally adjusted basis, continue to decline as a percentage
of net revenues in fiscal year 2002.
Depreciation and Amortization
Years Ended
----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ -------------
(in thousands)
Depreciation and amortization $21,716 31.8% $16,479 96.5% $8,385
Percentage of sales 4.9% 4.3% 2.9%
The increases in depreciation and amortization expense during the years ended
July 1, 2001 and July 2, 2000 resulted from additional capital expenditures,
primarily in information systems hardware and software, as well as full year
amortization of goodwill resulting from the Company's acquisitions of
GreatFood.com and TheGift.com in November 1999. In addition, for the year ended
July 2, 2000, as described further within marketing and sales expense above, the
Company recorded a one-time charge of approximately $1.1 million, included
within depreciation and amortization, to reserve for the estimated unrecoverable
book value of abandoned fixtures, equipment and leasehold improvements
associated with the Company's service center and retail store redeployment plan.
The Company expects that depreciation and amortization will decrease in fiscal
year 2002 due to the planned early adoption of Financial Accounting Standards
Board Statement No. 142, Goodwill and Other Intangible Assets, which requires
the discontinuance of amortization of goodwill and other intangible assets with
indefinite useful lives. As such, any remaining goodwill related to the
Company's acquisitions will not be amortized, but instead reviewed for
impairment.
Other Income (Expense)
Years Ended
----------------------------------------------------------------------
July 1, July 2, June 27,
2001 % Change 2000 % Change 1999
------------ ------------ ------------ ------------ -------------
(in thousands)
Interest income $5,971 (30.9%) $8,645 508.8% $1,420
Interest expense (1,264) 12.5% (1,444) 44.7% (2,610)
Other, net (555) (351.1%) 221 3057.1% 7
------------ ------------ -------------
$4,152 (44.1%) $7,422 727.4% $(1,183)
============ ============ =============
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense
primarily attributable to the Company's capital leases and other long-term debt.
The decrease in interest income during the fiscal year ended July 1, 2001 was
primarily due to the decline in invested cash balances which were used to fund
the Company's operations and capital expenditures, as well as a decline in the
Company's average rate of return on its investments. Additionally, in June 2001,
the Company recorded a non-recurring charge of $1.0 million (included above in
"Other, net") associated with the write-down of the Company's investment in a
technology partner, purchased in fiscal 2000. Offsetting this write-down was a
gain of $0.3 million, recognized by the Company in November 2000, on the sale of
its minority investment in American Floral Services, Inc. ("AFS"). The increase
in other income (expense) during the fiscal year ended July 2, 2000 was due to
the increase in invested cash balances resulting from the Company's initial
public offering in August 1999, and private placement which was completed in May
1999.
Income Taxes
Based on the utilization of loss carrybacks available during fiscal 2000 and
1999, the Company recorded tax benefits of $1.3 million and $2.7 million during
the fiscal years ended July 2, 2000 and the June 27, 1999, respectively. All
available loss carrybacks were fully utilized during fiscal 2000, and therefore
no similar benefit has been recorded during the fiscal year ended July 1, 2001.
The Company has provided a full valuation allowance on that portion of its
deferred tax assets, consisting primarily of net operating loss carryforwards,
that exceeded the amount of recoverable income taxes due to allowable carryback
claims.
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2001 and 2000. 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.
Three months ended
----------------------------------------------------------------------------------------------------
July 1, Apr. 1, Dec. 31, Oct. 1, July 2, Mar. 26, Dec. 26, Sept. 26,
2001 2001 2000 2000 2000 2000 1999 1999
----------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
(in thousands)
Net revenues:
Telephonic $ 61,607 $ 48,642 $ 79,182 $ 41,292 $ 66,800 $ 46,454 $ 76,909 $ 37,217
Online 62,655 47,139 47,708 25,422 47,105 29,718 28,271 11,716
Retail fulfillment 7,997 7,440 7,353 5,802 7,876 7,591 11,274 8,597
---------- ----------- ----------- ---------- ---------- ---------- ----------
Total net revenues 132,259 103,221 134,243 72,516 121,781 83,763 116,454 57,530
Cost of revenues 79,569 64,020 79,099 45,091 75,607 54,143 71,216 36,527
---------- ----------- ----------- ---------- ---------- ---------- ----------
Gross profit 52,690 39,201 55,144 27,425 46,174 29,620 45,238 21,003
Operating expenses:
Marketing and sales 36,715 32,251 50,827 34,528 43,582 35,507 50,448 25,816
Technology and development 3,492 4,253 4,482 4,626 4,810 4,097 3,833 4,069
General and administrative 6,062 6,969 6,617 7,395 7,025 6,773 7,249 7,928
Depreciation and amortization 6,012 5,383 5,280 5,041 6,277 4,487 3,422 2,293
---------- ---------- ----------- ----------- ---------- ---------- ----------
Total operating expenses 52,281 48,856 67,206 51,590 61,694 50,864 64,952 40,106
---------- ----------- ----------- ---------- ---------- ---------- ----------
Operating income (loss) 409 (9,655) (12,062) (24,165) (15,520) (21,244) (19,714) (19,103)
Other income (expense), net (183) 1,145 1,526 1,664 2,191 1,711 1,954 1,609
Income tax benefit - - - - 420 268 249 349
---------- ----------- ---------- ------------ ---------- ---------- ----------
Net income (loss) $ 226 $ (8,510) $ (10,536) $ (22,501) $(12,909) $(19,265) $(17,511) $(17,145)
========== =========== ========== =========== ========== ========== =========== ==========
Net income (loss) per share $ 0.00 $ (0.13) $ (0.16) $ (0.35) $ (0.20) $ (0.31) $ (0.28) $(0.31)
========== =========== ========== =========== ========== ========== =========== ==========
The Company's quarterly results may experience seasonal fluctuations. Prior to
the fiscal year ended July 1, 2001, revenues have historically been highest in
the fourth fiscal quarter, due to a number of major floral gifting occasions,
including Mother's Day, Administrative Professionals Week and Easter. Due to the
Company's expansion into gift, home, gourmet and other related products, sales
volume generated during the Thanksgiving through Christmas holiday season has
increased significantly from historical levels, and as such, the Company's
second fiscal quarter currently generates the highest proportion of the
Company's annual revenues.
Liquidity and Capital Resources
At July 1, 2001, the Company had working capital of $27.4 million, including
cash and equivalents of $63.9 million, compared to working capital of $82.1
million, including cash and equivalents of $111.6 million, at July 2, 2000. The
decrease in working capital resulted primarily from the funding of operations,
capital expenditures and the purchase of long-term investment grade securities.
Net cash used in operating activities of $12.6 million for the fiscal year ended
July 1, 2001 was primarily attributable to net losses, reduced by non-cash
charges of depreciation and amortization and working capital changes comprised
primarily of increases in accounts payable and accrued expenses, as well as
decreases in prepaid and other expenses due to the receipt of income tax
refunds, partially offset by increases in inventory associated with the
Company's expansion into non-floral product lines.
Net cash used in investing activities of $35.7 million for the fiscal year ended
July 1, 2001 was principally comprised of purchases of long-term investment
grade government and corporate securities, and capital expenditures for computer
hardware and software, including the development and implementation of a
scalable, Company-operated hosting facility, installation of a new
state-of-the-art inventory warehouse management system at the Company's
principal fulfillment center and the opening of a new 320 seat service center in
Ardmore, Oklahoma. In addition, in June 2001, the Company utilized $4.9 million
of cash to acquire the Children's Group. Such expenditures were partially offset
by the proceeds realized from the sale of the Company's investment in AFS in
November 2000. The Company expects that as it begins its return to positive cash
flow, that it will continue to reallocate available cash balances into longer
term securities in order to maximize the return on its investments.
Net cash provided by financing activities was $0.6 million for the fiscal year
ended July 1, 2001, resulting primarily from the net proceeds received upon the
exercise of employee stock options.
The Company's material capital commitments consist of:
o obligations outstanding under capital and operating leases as well as
commercial notes related to obligations arising from, and collateralized
by, the construction of the Company's warehousing/fulfillment facility in
Madison, Virginia; and
o an online marketing agreement with AOL. On September 1, 2000, the Company
entered into a new five year, $22.1 million interactive marketing agreement
with AOL that effectively extends and enhances the term of the Company's
previous agreement with AOL for an additional two years, through August
2005.
At July 1, 2001, the Company's significant known commitments for the subsequent
twelve months totaled approximately $17.7 million and were comprised of fees
related to online marketing agreements (including the new aforementioned AOL
agreement), rent and other expenses under its operating leases, interest expense
and the current portion of long term debt and capital lease obligations.
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.
The Company intends to continue to invest in support of its growth strategy.
These investments include continued advertising and marketing programs designed
to enhance the Company's brand name recognition, retain and acquire new
customers, expand its current product offerings and further develop its Web site
and operating infrastructure. The Company believes that current cash and
equivalents will be sufficient to meet these anticipated cash needs for at least
the next twelve months. However, any projection of future cash needs and cash
flows are subject to substantial uncertainty. If current cash and equivalents
that may be generated from operations are insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or debt
securities or to increase its lines of credit. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. In addition, the Company will, from time to time, consider the
acquisition of, or investment in, complementary businesses, products, services
and technologies, which might impact the Company's liquidity requirements or
cause the Company to issue additional equity or debt securities. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. SFAS No. 142
requires the discontinuance of amortization of goodwill and intangible assets
with indefinite useful lives, subject to an annual review for impairment. Other
intangible assets will continue to be amortized over their estimated useful
lives. The provisions of the statement will be adopted by the Company on July 2,
2001. Although the Company is in the process of assessing the impact of adopting
Statement No. 142, based upon its current level of goodwill and qualifying
intangible assets, management expects the adoption to reduce its fiscal 2002
annualized amortization expense by approximately $7.0 million.
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
and, secondarily, its long-term debt arrangements. Under its current policies,
the Company does not use interest rate derivative instruments to manage exposure
to interest rate changes.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Annual Financial Statements: See Part IV, Item 14 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Proposal 1-Election of Directors," "Additional
Information" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
Item 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Executive Compensation" and "Additional
Information-Compensation of Directors."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Security Ownership by Management and Principal
Stockholders."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Certain Relationships and Related Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Upon written request, the Company will provide, without charge, a copy of this
Annual Report on Form 10-K, including the consolidated financial statements,
financial statement schedule and any exhibits for the Company's most recent
fiscal year. All requests should be sent to:
1-800-FLOWERS.COM, Inc.
Investor Relations
1600 Stewart Avenue
Westbury, New York 11590
(516) 237-6000
(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 Auditors F-1
Consolidated Balance Sheets as of July 1, 2001 and July 2, 2000 F-2
Consolidated Statements of Operations for the years ended
July 1, 2001, July 2, 2000 and June 27, 1999 F-3
Consolidated Statements of Stockholders' Equity for the years ended
July 1, 2001, July 2, 2000 and June 27, 1999 F-4
Consolidated Statements of Cash Flows for the years ended
July 1, 2001, July 2, 2000 and June 27, 1999 F-5
Notes to Consolidated Financial Statements F-6
(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
14(a)(3). Other than exhibits 10.23, 21.1 and 23.1, 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.
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.
4.3 Reserved
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.
10.4 Reserved
10.5 Reserved
10.6 Reserved
10.8 Reserved
10.9* Development and Hosting Agreement, dated as of June 18, 1999,
between Fry Multimedia, Inc. and 800-Gifthouse, Inc.
10.10 1997 Stock Option Plan, as amended.
10.11 Reserved
10.12 Reserved
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.
10.21 Reserved
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
21.1 Subsidiaries of the Registrant.
23.1 Consent of independent auditors.
24.1 Powers of Attorney (included in the signature page).
-------------------------------
* Confidential treatment granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
# 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:
There were no reports on Form 8-K filed during the quarter ended
July 1, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 28, 2001 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 28, 2001 By: /s/ James F. McCann
------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 28, 2001 By: /s/ William E. Shea
------------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial and
Accounting Officer)
Dated: September 28, 2001 By: /s/ Christopher G. McCann
------------------------------------
Christopher G. McCann
Director, President
Dated: September 28, 2001 By: /s/ David Beirne
------------------------------------
David Beirne
Director
Dated: September 28, 2001 By: /s/ Lawrence Calcano
------------------------------------
Lawrence Calcano
Director
Dated: September 28, 2001 By: /s/ Charles R. Lax
------------------------------------
Charles R. Lax
Director
Dated: September 28, 2001 By: /s/ T. Guy Minetti
------------------------------------
T. Guy Minetti
Director, Vice Chairman
Dated: September 28, 2001 By: /s/ Kevin J. O'Connor
------------------------------------
Kevin J. O'Connor
Director
Dated: September 28, 2001 By: /s/ Jeffrey C. Walker
------------------------------------
Jeffrey C. Walker
Director
Report of Independent Auditors
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 July 1, 2001 and
July 2, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended July 1, 2001. Our audits also included the financial statement schedule
listed in the index at Item 14(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 auditing standards generally accepted
in the 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 July 1, 2001 and July 2, 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended July 1, 2001, in conformity with accounting principles
generally accepted in the United States. 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
August 10, 2001
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
July 1, July 2,
2001 2000
------------- ------------
Assets
Current assets:
Cash and equivalents $ 63,896 $111,624
Receivables, net 8,209 8,382
Inventories 14,885 10,569
Prepaid and other 1,831 4,330
------------- ------------
Total current assets 88,821 134,905
Property, plant and equipment, net 49,861 40,854
Capitalized investment in leases 706 965
Goodwill and investment in licenses,
net of accumulated amortization of $17,685
in 2001 and $8,797 in 2000 29,197 38,040
Investments 16,284 1,918
Other assets 10,388 7,959
------------- ------------
Total assets $195,257 $224,641
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 58,481 $ 50,937
Current maturities of long-term debt and
obligations under capital leases 2,931 1,839
------------- ------------
Total current liabilities 61,412 52,776
Long-term debt and obligations under
capital leases 12,519 9,441
Other liabilities 3,510 3,506
------------- ------------
Total liabilities $ 77,441 $ 65,723
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued in 2001
and 2000 - -
Class A common stock, $.01 par value,
200,000,000 shares authorized, 26,586,875
and 26,362,068 shares issued in 2001 and
2000, respectively 266 264
Class B common stock, $.01 par value,
200,000,000 shares authorized, 43,028,525
and 43,141,645 shares issued in 2001 and
2000, respectively 430 431
Additional paid-in capital 238,906 239,476
Retained deficit (118,678) (77,357)
Deferred compensation - (788)
Treasury stock, at cost-52,800 Class A
and 5,280,000 Class B shares (3,108) (3,108)
------------- -------------
Total stockholders' equity 117,816 158,918
------------- -------------
Total liabilities and stockholders' equity $ 195,257 $224,641
============= =============
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Years ended
------------------------------------------
July 1, July 2, June 27,
2001 2000 1999
----------- ------------ -------------
Net revenues $442,239 $379,528 $292,852
Cost of revenues 267,779 237,493 179,697
----------- ------------ -------------
Gross profit 174,460 142,035 113,155
Operating expenses:
Marketing and sales 154,321 155,353 89,126
Technology and development 16,853 16,809 8,067
General and administrative 27,043 28,975 15,748
Depreciation and amortization 21,716 16,479 8,385
------------ ------------ -------------
Total operating expenses 219,933 217,616 121,326
------------ ------------ -------------
Operating loss (45,473) (75,581) (8,171)
Other income (expense):
Interest income 5,971 8,645 1,420
Interest expense (1,264) (1,444) (2,610)
Other, net (555) 221 7
------------ ------------ -------------
Total other income (expense) 4,152 7,422 (1,183)
------------ ------------ -------------
Loss before income taxes and
minority interests (41,321) (68,159) (9,354)
Benefit from income taxes - 1,286 2,715
------------ ------------- -------------
Loss before minority interests (41,321) (66,873) (6,639)
Minority interests in operations
of consolidated subsidiaries - 43 (207)
------------ ------------- -------------
Net loss (41,321) (66,830) (6,846)
Redeemable Class C common stock
dividends - - (5,215)
------------ ------------- --------------
Net loss applicable to common
stockholders $(41,321) $(66,830) $(12,061)
============ ============= =============
Basic and diluted net loss per common
share applicable to common
stockholders $(0.64) $(1.10) $(0.27)
============ ============= =============
Shares used in the calculation of basic
and diluted net loss per common share
applicable to common stockholders 64,197 60,889 44,035
============ ============= =============
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 1, 2001, July 2, 2000, and June 27, 1999
(in thousands, except share data)
Common Stock
-------------------------------------
Preferred Stock Class A Class B Additional
-------------------- ------------------ ------------------ Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- --------- --------- ------- --------- ------- --------
Balance at June 28, 1998 - $ 480,870 $5 48,849,927 $488 $1,739
Accrual of Redeemable Class C
common stock dividends - - - - - - -
Employee stock options - - - - - - 1,680
Amortization of deferred - - - - - - -
compensation
Issuance of Series A preferred
stock 1,127,546 117,573 - - - - (1,008)
Issuance of Class A common stock
in connection with redemption of - - 263,452 3 - - 2,744
Class C common stock
Issuance of Class B common stock
in connection with redemption of - - - - 84,768 - 884
Class C common stock
Conversion of Class B common stock
into Class A common stock - - 3,836,560 38 (3,836,560) (38) -
Conversion of Class A common stock
into Class B common stock - - (480,870) (5) 480,870 5 -
Total comprehensive loss - - - - - - -
--------- --------- --------- ------- --------- ------- --------
Balance at June 27, 1999 1,127,546 117,573 4,100,012 41 45,579,005 455 6,039
Exercise of stock options and - - 2,431,857 25 - - 98
warrants
Forfeiture of employee stock - - - - - - (315)
options
Amortization of deferred - - - - - - -
compensation
Conversion of preferred stock into
Class A common stock (1,127,546) (117,573) 11,275,460 113 - - 117,460
Issuance of common stock in
connection with Initial Public
Offering, net of issuance costs
of $11,236 - - 6,000,000 60 - - 114,704
Conversion of Class B common stock
into Class A common stock - - 2,437,360 24 (2,437,360) (24) -
Issuance of shares of common stock
in connection with the - - 117,379 1 - - 1,490
acquisition of TheGift.com
Total comprehensive loss - - - - - - -
--------- --------- --------- ------- --------- ------- --------
Balance at July 2, 2000 - - 26,362,068 264 43,141,645 431 239,476
Exercise of stock options - - 97,175 1 - - 299
Employee stock purchase plan - - 14,512 - - - 75
Amortization of deferred - - - - - - -
compensation
Forfeiture of employee stock options - - - - - - (944)
Conversion of Class B common stock
into Class A common stock - - 113,120 1 (113,120) (1) -
Total comprehensive loss - - - - - - -
--------- --------- --------- ------- --------- ------- --------
Balance at July 1, 2001 - $ - 26,586,875 $266 43,028,525 $430 $238,906
========= ========= ========= ======= ========= ======= ========
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 1, 2001, July 2, 2000, and June 27, 1999
(in thousands, except share data)
Accumulated
Other Retained Treasury Stock Total
Comprehensive Earnings Deferred ------------------ Stockholders'
Income (Loss) (Deficit) Compensation Shares Amount Equity
------------ --------- ------------ -------- --------- ------------
Balance at June 28, 1998 $14 $1,534 $ 5,332,800 $(3,108) $672
Accrual of Redeemable Class C
common stock dividends - (1,584) - - - (1,584)
Employee stock options - - (1,680) - - -
Amortization of deferred - - 210 - - 210
compensation
Issuance of Series A preferred
stock - - - - - 116,565
Issuance of Class A common stock
in connection with redemption of - (2,747) - - - -
Class C common stock
Issuance of Class B common stock
in connection with redemption of - (884) - - - -
Class C common stock
Conversion of Class B common stock
into Class A common stock - - - - - -
Conversion of Class A common stock
into Class B common stock - - - - - -
Total comprehensive loss (14) (6,846) - - - (6,860)
------------ --------- ------------ -------- --------- ----------
Balance at June 27, 1999 - (10,527) (1,470) 5,332,800 $(3,108) 109,003
Exercise of stock options and - - - - - 123
warrants
Forfeiture of employee stock - - 315 - - -
options
Amortization of deferred - - 367 - - 367
compensation
Conversion of preferred stock into
Class A - - - - - -
common stock
Issuance of common stock in
connection with Initial Public - - - - - 114,764
Offering, net of issuance costs
of $11,236
Conversion of Class B common stock
into - - - - - -
Class A common stock
Issuance of shares of common stock
in connection with the - - - - - 1,491
acquisition of TheGift.com
Total comprehensive loss - (66,830) - - - (66,830)
------------ --------- ------------ -------- --------- ----------
Balance at July 2, 2000 - (77,357) (788) 5,332,800 (3,108) 158,918
Exercise of stock options - - - - - 300
Employee stock purchase plan - - - - - 75
Amortization of deferred
compensation - - (156) - - (156)
Forfeiture of employee stock options - - 944 - - -
Conversion of Class B common stock
into Class A common stock - - - - - -
Total comprehensive loss - (41,321) - - - (41,321)
------------ --------- ------------ --------- --------- ----------
Balance at July 1, 2001 $ - $(118,678) $ - 5,332,800 $(3,108) $117,816
============ ========= ============ ========= ========= ==========
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
--------------- --------------- ---------------
Operating activities:
Net loss $(41,321) $(66,830) $ (6,846)
Reconciliation of net loss to net cash used in
operations:
Depreciation and amortization 21,716 16,479 8,385
Deferred income taxes - 1,321 (1,016)
Management put liability - 1,451 (1,631)
Bad debt expense 377 221 444
Minority interests - (43) 207
Credit to/amortization of deferred compensation (156) 367 210
Loss on disposal of equipment and other 743 560 364
Changes in operating items, excluding the effects of acquisitions:
Receivables (204) (838) (1,296)
Inventories (1,622) (3,574) (2,525)
Prepaid and other 2,499 166 (2,712)
Accounts payable and accrued expenses 7,226 20,663 4,203
Other assets (1,875) (4,699) (3,787)
Other liabilities (13) 344 715
--------------- --------------- ---------------
Net cash used in operating activities (12,630) (34,412) (5,285)
Investing activities:
Acquisitions, net of cash acquired (4,892) (25,515) -
Capital expenditures, net of non-cash
expenditures-$4,176, $1,445 and $3,009 in 2001, 2000 (15,791) (21,901) (11,960)
and 1999, respectively
Purchases of investments (16,284) (1,000) -
Proceeds from sales of investments 1,194 15 5,419
Proceeds from sale of business - 2,488 -
Notes receivable, net 76 222 178
--------------- --------------- ---------------
Net cash used in investing activities (35,697) (45,691) (6,363)
Financing activities:
Proceeds from issuance of preferred stock, net - - 101,636
Proceeds from issuance of common stock, net 375 115,899 -
Payment of deferred offering costs - - (1,019)
Redemption of Class C common stock - - (4,347)
Proceeds from bank borrowings 16,510 21,717 35,402
Repayment of notes payable and bank borrowings (14,827) (43,568) (28,075)
Payments of capital lease obligations (1,459) (1,504) (1,639)
--------------- --------------- ---------------
Net cash provided by financing activities 599 92,544 101,958
--------------- --------------- ---------------
Net change in cash and equivalents (47,728) 12,441 90,310
Cash and equivalents:
Beginning of year 111,624 99,183 8,873
--------------- --------------- ---------------
End of year $ 63,896 $111,624 $ 99,183
=============== =============== ===============
Supplemental Cash Flow Information:
- Interest paid amounted to $1,264, $1,457 and $2,723 for the years
ended July 1, 2001, July 2, 2000 and June 27, 1999, respectively.
- The Company received tax refunds, net of income taxes paid of
approximately $1,613 and $472 for the years ended July 1, 2001 and
July 2, 2000, respectively, and paid income taxes, net of refunds, of
approximately $400 for the year ended June 27, 1999.
See accompanying notes.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 1, 2001
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. (1-800-FLOWERS.COM) is a leading multi-channel retailer
of thoughtful gifts, offering a broad range of flowers, gourmet food, candies,
gift baskets, and other specialty gift products to our customers around the
world. The Company has extended its product offerings through several of its
subsidiaries, including The Plow & Hearth, Inc. ("Plow & Hearth"), a direct
marketer of home decor and garden merchandise, GreatFood.com, Inc.
("Greatfood.com"), a source for gourmet products, and the Children's Group,
Inc., a direct marketer 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 2001 and 1999, which ended July 2, 2001 and
June 27, 1999, respectively, consisted of 52 weeks, while fiscal year 2000,
which ended on July 2, 2000, consisted of 53 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying financial statements and footnotes thereto have been
retroactively adjusted for a ten-for-one stock split effected in the form of a
stock dividend on July 28, 1999.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash and Equivalents
Cash and equivalents consist of demand deposits with banks, highly liquid money
market funds, 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 stated on the basis of cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets. Amortization of assets held under capital leases is calculated
using the straight-line method over the estimated useful life of the asset.
Amortization of leasehold improvements is 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. The useful lives
of property, plant and equipment are as
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
follows:
Life
----------------
Building 40 years
Leasehold improvements 5-20 years
Furniture, fixtures and equipment
(including computer equipment, software
development costs and telecommunication equipment) 3-10 years
Goodwill and Licenses
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired. Amortization expense relating to goodwill is amortized on a
straight-line basis over periods ranging from 3 to 20 years. (See Recent
Accounting Pronouncements.)
Licenses represent the fair value of franchise agreements acquired in
1-800-FLOWERS.COM's acquisition of Amalgamated Consolidated Enterprises, Inc.
and are amortized on a straight-line basis over a 16-year period. (See Recent
Accounting Pronouncements.)
Long-Lived Assets
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of an asset may not be recoverable. An impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
Assets to be disposed of are carried at the lower of their carrying value or
fair value, less costs to sell.
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.
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. In accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
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 July 1, 2001, July 2, 2000 and June 27, 1999, 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, 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 July 1, 2001 and July 2, 2000.
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.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, Accounting for Income Taxes.
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 services that serve as clearinghouses
for floral orders, net of wire service rebates), the cost of merchandise sold
from inventory or through third parties, and associated costs including inbound
and outbound shipping charges. Additionally, cost of revenues includes labor and
facility costs related to merchandise production associated with its
direct-to-consumer operations as well as facility costs on properties that are
sublet to the Company's franchisees.
Marketing and Sales
Marketing and sales expenses consist 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 related operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities.
The Company expenses all advertising costs at the time the advertisement is
first shown. Advertising expense (including the amortization of catalog costs of
$26.9 million, $21.8 million and $17.6 million for the years ended July 1, 2001,
July 2, 2000 and June 27, 1999, respectively) was $71.0 million, $79.5 million
and $42.2 million for the years ended July 1, 2001, July 2, 2000 and June 27,
1999, respectively.
Technology and Development
Technology and development expenses consist 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 life
of such software modifications are less than one year.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets separate from goodwill. SFAS No. 142
requires the discontinuance of amortization of goodwill and intangible assets
with indefinite useful lives, subject to an annual review for impairment. Other
intangible assets will continue to be amortized over their estimated useful
lives. The provisions of the statement will be adopted by the Company on July 2,
2001. Although the Company is in the process of assessing the impact of adopting
Statement No. 142, based upon its current level of goodwill and qualifying
intangible assets, management expects the adoption to reduce its fiscal 2002
annualized amortization expense by approximately $7.0 million.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform to
the presentation in the current fiscal year.
Note 3. Acquisitions and Disposition
Acquisition of Selected Assets of The Children's Group
On June 8, 2001, the Company completed its acquisition of selected assets from
subsidiaries of Foster & Gallagher, Inc., adding unique and educational
children's toys and games to the Company's product offering. The purchase price
of approximately $4.9 million included the acquisition of a fulfillment center
located in Vandalia, Ohio, inventory, and certain other assets, as well as, the
assumption of certain related liabilities. The acquisition was accounted for as
a purchase and, accordingly, acquired assets and liabilities are recorded at
their fair values, and the operating results of the Children's Group have been
included in the Company's consolidated results of operations since the date of
acquisition.
Acquisition of GreatFood.com, Inc.
On November 24, 1999, the Company completed its acquisition of GreatFood.com, an
online retailer of specialty and gourmet food products. The purchase price of
approximately $18.9 million was funded with a portion of the net proceeds
available from the Company's initial public offering. The acquisition has been
accounted for as a purchase and, accordingly, the operating results of
GreatFood.com have been included in the Company's consolidated results of
operations since the date of acquisition. The excess of the purchase price over
the fair market value of the net assets acquired, approximating $18.9 million,
is being amortized over three years. (See Note 2. Significant Accounting
Policies - Recent Accounting Pronouncements.)
Acquisition of TheGift.com, Inc.
On November 12, 1999, the Company completed its acquisition of TheGift.com, an
online retailer of specialty gift products. The purchase price of approximately
$1.5 million was funded through the issuance of 117,379 shares of the Company's
common stock, as determined based upon the average closing price of the
Company's common stock for the five days prior to the date of acquisition. The
acquisition has been accounted for as a purchase and, accordingly, the operating
results of TheGift.com have been included in the Company's consolidated results
of operations since the date of acquisition. The excess of the purchase price
over the fair market value of the net assets acquired, approximating $1.7
million, is being amortized over three years. (See Note 2. Significant
Accounting Policies - Recent Accounting Pronouncements.)
Disposition of Floral Works, Inc.
On January 12, 2000, the Company completed the sale of its Floral Works, Inc.
(Floral Works) subsidiary to a private investment firm. Floral Works is a
provider of wholesale floral bouquets to supermarkets and grocery store chains.
The sales price of $3.1 million approximated the Company's carrying value of the
subsidiary's net assets at the time of divestiture.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Children's Group, GreatFood.com, TheGift.com
and the sale of Floral Works had taken place at the beginning of fiscal year
1999. 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 acquisitions of Children's Group, GreatFood.com and
TheGift.com and the disposition of Floral Works taken place at the beginning of
the periods presented.
Years Ended
---------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
-------------- -------------- --------------
(in thousands, except per share data)
Net revenues (*) $ 475,188 $ 411,441 $313,370
Loss from operations $ (46,793) $ (86,301) $(19,976)
Net loss applicable to common
stockholders $ (43,047) $ (77,852) $(24,072)
Net loss per common share $ (0.67) $ (1.28) $ (0.55)
(*) Pre-acquisition operations related to the Children's Group include revenues
derived from six retail stores which were discontinued by the previous
owners at various times during fiscal 2001. Operating results associated
with these retail stores were not material to the consolidated operations
of the Company during such time. Also, pre-acquisition net revenues for
GreatFood.com and TheGift.com were not material to the Company's results of
operations.
Disposition of Minority Interest in American Floral Services, Inc.
On November 21, 2000, the Company sold its minority investment in American
Floral Services, Inc., a floral wire service, to Teleflora, Inc. The Company
received cash proceeds of $1.2 million and recorded a gain on sale of $0.3
million as a result of this transaction.
Acquisition of The Plow & Hearth, Inc.
In April 1998, 1-800-FLOWERS.COM acquired 88% of the issued and outstanding
shares of common stock (70% of the fully diluted equity due to the existence of
outstanding management stock options) of Plow & Hearth for approximately $16.1
million. Upon completion of the Company's initial public offering in August
1999, the Company satisfied its obligation under the Plow & Hearth management
put liability when it acquired the remaining outstanding shares of common stock
and stock options from the minority shareholders of Plow & Hearth for cash of
approximately $7.9 million, net of Plow & Hearth stock option exercise proceeds
of approximately $0.5 million. Accordingly, the incremental amount of funding
required to satisfy the management put liability, which was $6.3 million at June
27, 1999, was recorded in the Company's fiscal 2000 quarter ended September 26,
1999 as general and administrative expense and goodwill in the amounts of $1.5
million and $0.1 million, respectively.
The purchase price has been allocated to the assets acquired and the liabilities
assumed based on fair values at the date of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired of
$18.9 million has been recorded as goodwill and is being amortized over 20
years. (See Note 2. Significant Accounting Policies - Recent Accounting
Pronouncements.)
Note 4. Redeployment Charge
In June 2000, in connection with management's plan to reduce costs and improve
operating efficiencies, the Company recorded a redeployment charge of
approximately $2.1 million. The principal actions of the charge relate to the
Company's plan to close certain retail stores in connection with its strategic
redeployment of its retail network as direct fulfillment centers and the
relocation of certain customer service centers, enabling the Company to meet
increasing call volume requirements, while reducing costs per call. The major
components of the redeployment charge include the estimated unrecoverable book
value of abandoned fixtures, equipment and leasehold improvements in the amount
of approximately $1.1 million (charged to depreciation and amortization), and
the estimated provision for the future lease obligations and related facility
shut down costs in the amount of approximately $1.0 million (charged to
marketing and sales expense).
In November 2000, the Company opened a new service center in Ardmore, Oklahoma
to replace its Marietta, Georgia facility, which was closed in October 2000.
Construction of another service center, scheduled to be completed in the second
quarter of fiscal 2002, has begun in Alamagordo, New Mexico, to replace its
Phoenix, Arizona and San Antonio, Texas service centers, which were closed in
June 2001. In addition, during fiscal 2001, the Company completed the planned
conversion of certain retail stores into direct fulfillment centers, while
closing certain other non-performing retail stores. During fiscal 2001, $1.6
million was charged against the accrual, and at July 1, 2001, a balance of $0.5
million remains, consisting primarily of accruals for future lease commitments
related to the closed service center facilities.
Note 5. Property, Plant and Equipment
July 1, 2001 July 2, 2000
-------------- --------------
(in thousands)
Computer equipment $ 27,853 $ 23,085
Software development costs 23,659 17,222
Telecommunication equipment 5,559 5,798
Leasehold improvements 11,333 8,608
Building and building improvements 8,439 6,421
Equipment 5,732 3,427
Furniture and fixtures 3,207 2,684
Land 637 396
-------------- --------------
86,419 67,641
Accumulated depreciation and
amortization 36,558 26,787
-------------- --------------
$ 49,861 $ 40,854
============== ==============
Note 6. Long-Term Debt
July 1, 2001 July 2, 2000
-------------- --------------
(in thousands)
Commercial notes and revolving credit line (1-5) $8,153 $6,431
Seller financed acquisition obligations (6-7) 256 295
Obligations under capital leases (see Note 13) 7,041 4,554
-------------- --------------
15,450 11,280
Less current maturities of long-term debt and
obligations under capital leases 2,931 1,839
-------------- --------------
$12,519 $9,441
============== ==============
-----------
The following notes and credit lines relate to obligations arising from, and
collateralized by, the construction and operation of the Company's Plow & Hearth
facility in Madison, Virginia:
(1) $8,000,000 revolving credit line dated March 11, 2001, renewable annually,
(none outstanding at July 1, 2001 and July 2, 2000) bearing interest equal
to the monthly LIBOR Index plus 1.75% per annum (5.59% at July 1, 2001).
(2) $2,400,000 note dated June 13, 1997 ($2,095,000 outstanding at July 1,
2001), bearing interest at 8.19% per annum. The note is payable in 203
equal monthly installments of principal and interest commencing July 13,
1997.
(3) $1,460,000 note dated July 1, 1998 ($1,293,000 outstanding at July 1,
2001), bearing interest equal to the monthly Treasury Bill rate plus 2.1%
per annum (5.71% at July 1, 2001). The note is payable in 180 equal monthly
installments of principal and interest commencing November 1, 1998.
(4) $2,980,000 note dated May 12, 1999 ($2,780,000 outstanding at July 1,
2001), bearing interest at 7.61% per annum. The note is payable in 180
equal monthly installments of principal and interest commencing in October
15, 1999.
(5) $2,300,000 note dated August 8, 2000 ($1,985,000 outstanding July 1, 2001)
bearing interest at a fixed rate of 8.83% per annum. The note is payable in
60 equal monthly installments of principal and interest commencing
September 10, 2000.
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:
(6) $275,000 promissory note dated November 1, 1994 ($119,000 outstanding at
July 1, 2001), bearing interest at 8% per annum. The note is payable in 120
equal monthly installments of principal and interest commencing December 1,
1994.
(7) $160,000 non-interest bearing promissory note dated September 30, 1999
($137,000 outstanding at July 1, 2001). The note is payable in 8 monthly
installments commencing January 1, 2001.
As of July 1, 2001, long-term debt maturities, excluding amounts relating to
capital leases, are as follows (in thousands):
Debt
Year Maturities
---- -------------
2002 $ 756
2003 820
2004 890
2005 942
2006 511
Thereafter 4,490
-------------
$8,409
=============
Note 7. Income Taxes
Significant components of the benefit for income taxes are as follows:
Years ended
-------------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
------------- -------------- ---------------
(in thousands)
Current:
Federal $ - $2,607 $1,699
State and local - - -
------------- -------------- ---------------
- $2,607 $1,699
Deferred - (1,321) 1,016
------------- -------------- ---------------
$ - $1,286 $2,715
============= ============== ===============
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit is as follows:
Years Ended
--------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
------------- -------------- --------------
Tax at U.S. statutory rates 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 4.9 3.9 4.3
Nondeductible goodwill amortization (6.8) (2.6) (4.8)
Dividends received deduction - - 0.2
Change in deferred tax asset valuation (33.0) (32.0) (2.8)
Other 0.9 (1.4) (1.9)
------------- -------------- --------------
0.0% 1.9% 29.0%
============= ============== ==============
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
July 1, 2001 July 2, 2000 June 27, 1999
-------------- -------------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 37,097 $ 20,909 $ 260
Accrued expenses and reserves 2,946 3,086 1,504
Valuation allowance (37,447) (22,098) (260)
Deferred tax liabilities:
Installment sales (61) (70) (147)
Tax in excess of book depreciation (2,535) (1,827) (36)
-------------- -------------- --------------
Net deferred tax assets $ - $ - $ 1,321
============== ============== ==============
At July 1, 2001, the Company's U.S. federal and state net operating loss
carryforwards for income tax purposes were approximately $92.7 million. If not
utilized, these net operating loss carryforwards will begin to expire in fiscal
year 2020. To the extent that net operating losses, when realized, relate to
stock option deductions of approximately $5.2 million, the resulting benefits
will be credited to additional paid-in capital.
Note 8. Capital Stock Transactions
Initial Public Offering
On August 6, 1999, the Company closed its initial public offering of its Class A
common stock, issuing 6,000,000 shares at a price of $21.00 per share. The
Company raised proceeds of approximately $114.8 million, net of underwriting
discounts, commissions and other offering costs of approximately $11.2 million.
In anticipation of its IPO, the Company amended and restated its certificate of
incorporation on July 7, 1999 to provide that all previously outstanding shares
of Class A common stock, of which the holders were entitled to one vote per
share, and Class B common stock, which contained no voting rights, convert into
a new series of Class B common stock entitled to 10 votes per share.
Additionally, a new series of Class A common stock was established that entitles
the holders to one vote per share. Each share of new Class B common stock shall
automatically convert into one share of new Class A common stock upon transfer,
with limited exceptions, and at the option of the holder.
Preferred Stock and Class C Common Stock Conversion
On May 20, 1999, the Company completed a private placement of 984,493 shares of
preferred stock, yielding net proceeds of $101.6 million. In connection with
this private placement, and pursuant to the terms of its 1995 investment
agreement with the Company's venture capital partner, the Company redeemed the
Class C common stock held by the venture capital partner for approximately $14.9
million and issued to it 263,452 shares of Class A common stock. The venture
capital partner used the redemption proceeds to purchase 143,053 shares of the
Company's preferred stock. Concurrent with the completion of the private
placement, the Company redeemed 84,768 shares of Class C common stock owned by
its Chief Executive Officer for $4.3 million and issued him 84,768 shares of
Class B common stock. During the fiscal year ended June 27, 1999, the Company
recorded a dividend in the amount of $5.2 million as a result of the issuances
of common stock in exchange for the redemption of all of the outstanding Class C
common stock, as well as for the accrual of the 10% cumulative dividend on the
Class C common stock through the date of redemption.
In accordance with the preferred stock purchase agreement, and effective with
the Company's IPO, each issued and outstanding share of preferred stock was
converted into ten shares of Class A common stock, resulting in the issuance of
11,275,460 shares of Class A common stock.
Exercise of Class A Common Stock Warrant
On February 22, 2000, the Company issued 2,370,607 shares of Class A common
stock, upon the exercise, for a nominal price per share, of a warrant issued to
the aforementioned venture capital partner pursuant to the terms of its 1995
investment agreement.
Stock Repurchase Plan
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.
Note 9. Stock Option Plan
In January 1997, the Company's board of directors approved 1-800-FLOWERS.COM's
1997 Stock Option Plan which authorized the granting to key employees, officers,
directors and consultants of the Company options to purchase an aggregate of
5,985,440 shares of 1-800-FLOWERS.COM's Class B common stock. On July 7, 1999,
the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive Plan was adopted by the
Company's board of directors. Pursuant to the terms of the plan, 9,900,000
shares of Class A common stock have been authorized for issuance, inclusive of
any unissued shares from the 1997 Stock Option Plan. Additionally, the shares
authorized automatically increase on the first trading day in January of each
calendar year, by an amount equal to 3% (1,925,615 shares and 1,852,172 shares
during fiscal 2001 and 2000, respectively) of the total number of shares of
common stock outstanding on the last trading day in December in the preceding
calendar year, but in no event will this annual increase exceed 2,000,000
shares. The components of the plan include a discretionary option grant program,
an automatic option grant program, a stock issuance program, and a salary
investment option grant program.
Options granted under the plans may be either incentive stock options or
non-qualified stock options. The exercise price of an option shall be determined
by the Company's board of directors or compensation committee of the board at
the time of grant, provided, however, that in the case of an incentive stock
option the exercise price may not be less than 100% of the fair market value of
such stock at the time of the grant, or less than 110% of such fair market value
in the case of options granted to a 10% owner of the Company's stock. The
vesting and expiration periods of options issued under the stock option plan are
determined by the Company's board of directors or compensation committee as set
forth in the applicable option agreement, provided that the expiration date
shall not be later than ten years from the date of grant.
In January 1999, the Company issued stock options to employees to purchase
200,000 shares of common stock at $2.00 per share, which was considered to be
the fair value of the common stock at that time. Such options vested at the rate
of 25% per year on the anniversary of the grant date. Soon thereafter, the
Company entered into discussions with an investor to purchase shares of common
stock at $10.43 per share. Accordingly, for accounting purposes, the Company
used such per share value to record a deferred compensation charge of $1.7
million associated with the January 1999 option grants, of which $0.4 million
and $0.2 million was amortized during the years ended July 2, 2000 and June 27,
1999, respectively. During the year ended July 1, 2001, the Company reversed
$0.2 million of amortization, representing previously amortized deferred
compensation expense associated with unvested stock options which were forfeited
upon the employee's separation from the Company.
The following table summarizes activity in stock options:
Years ended
--------------------------------------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
--------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------------ ---------- ------------ --------- ------------ ------------
Balance, beginning of
year $ 5,788,171 $8.53 $ 1,237,500 $1.73 $ 525,500 $1.36
Grants 2,143,925 $3.91 5,099,550 $10.57 712,000 $2.00
Exercises (97,175) $3.83 (61,250) $2.00 - -
Forfeitures (1,379,659) $10.52 (487,629) $13.38 - -
------------ ------------ ------------
Balance, end of year $ 6,455,262 $6.64 $ 5,788,171 $8.53 $1,237,500 $1.73
============ ============ ============
Weighted-average fair
value of options
issued during the year $2.21 $6.33 $0.90
The following table summarizes information about stock options outstanding at
July 1, 2001:
Weighted- Weighted-
Average Average
Options Options Remaining Exercise
Exercise Price Outstanding Exercisable Contractual Life Price
----------------- ------------ ------------- ---------------- ----------
$ 1.30- 1.61 500,500 481,125 5.7 years $1.34
2.00- 2.00 464,125 441,561 7.0 years $2.00
3.31- 4.88 3,821,915 466,230 9.1 years $4.26
5.06- 7.06 188,200 19,640 9.1 years $5.66
7.88- 11.30 76,000 5,000 9.5 years $7.88
12.38- 16.43 667,161 136,962 8.4 years $12.64
21.00- 21.00 737,361 275,098 8.0 years $21.00
------------- -------------
6,455,262 1,825,616 $6.64
============= =============
At July 1, 2001, the Company has reserved approximately 14,757,000 shares of
common stock for issuance under common stock option plans.
Fair Value Disclosures
Pro forma information regarding net income (loss) is required by SFAS No. 123,
Accounting For Stock-Based Compensation, which also requires that the
information be determined as if the Company had accounted for its stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing model
prior to the Company's initial public offering, and the Black-Scholes option
pricing model thereafter, with the following assumptions: risk free interest
rate of 5.35%, 6.15% and 6.00% in 2001, 2000 and 1999, respectively; no dividend
yield; 60%, 70% and 0% volatility in 2001, 2000 and 1999, respectively, and a
weighted-average expected life of the options of 5 years at date of grant.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma financial information is as follows:
Years ended
----------------------------------------------
July 1, 2001 July 2, 2000 June 27, 1999
-------------- -------------- --------------
(in thousands, except per share data)
Net loss applicable to common stockholders:
As reported $(41,321) $(66,830) $(12,061)
Pro forma (46,272) (71,766) (12,501)
Basic and diluted net loss per share applicable
to common stockholders:
As reported $(0.64) $(1.10) $(0.27)
Pro forma (0.72) (1.18) (0.28)
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. The maximum number of shares of Class A common stock that may be issued
under the ESPP is 1,300,000 shares. The share pool shall be increased on the
first trading day of each calendar year, beginning in 2002, 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. A total of 14,512
shares of Class A common stock have been issued under the ESPP.
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 $0.2 million, $0.1 million, and $0.1 million for
the years ended July 1, 2001, July 2, 2000, and June 27, 1999, respectively.
Note 12. Basic and Diluted Loss Per Share
The following sets forth the data used in the computation of basic and diluted
loss per common share:
Years ended
--------------------------------------
July 1, July 2, June 27,
2001 2000 1999
----------- ----------- -----------
(in thousands)
Numerator:
Net loss $(41,321) $(66,830) $ (6,846)
Redeemable Class C common stock dividends - - (5,215)
------------ ----------- -----------
Net loss applicable to common stockholders $(41,321) $(66,830) $(12,061)
============ =========== ===========
Denominator:
Denominator for basic and diluted loss per
share-weighted average common shares outstanding $ 64,197 $ 60,889 $ 44,035
============ =========== ===========
Net loss per common share is computed using the weighted-average number of
common shares outstanding. Shares associated with stock options and warrants,
prior to exercise, are not included in the computation as their inclusion would
be antidilutive. The shares of the Company's preferred stock were converted into
common stock upon completion of its initial public offering, and were excluded
from the diluted loss per share computation until such date, as this effect
would have been antidilutive.
Note 13. 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.
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 $15.5 million, and $11.5 million at July 1,
2001 and July 2, 2000, respectively, and accumulated amortization of $9.8
million and $8.2 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).
In January 2001, the Company obtained a $10.0 million equipment lease line of
credit with a bank. Interest under this line, which matures in January 2006, is
determined on the date of each commitment to borrow and is based on the bank's
base rate on such date. At July 1, 2001, the Company had financed $4.2 million
of equipment purchases through such lease line. The borrowings, which bear
interest at 6.35% 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 July 1, 2001, future minimum payments under non-cancelable capital lease
obligations, lease receipts due from franchisees (shown as Capitalized
Investment in Leases) and operating leases with initial terms of one year or
more consist of the following:
Obligations
Under Capitalized
Capital Investment Operating
Leases In Leases Leases
------------ ------------ ------------
(in thousands)
2002 $2,602 $ 320 $ 5,050
2003 2,076 210 4,779
2004 1,436 119 4,334
2005 1,164 53 3,626
2006 745 29 1,287
Thereafter 39 39 4,442
------------ ------------ ------------
Total minimum lease payments $8,062 $ 770 $23,518
============
Less amounts representing
interest (1,021) (64)
------------ ------------
Present value of net minimum
lease payments $7,041 $ 706
============ ============
At July 1, 2001, 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:
Sublease Sublease
Income Expense
------- -------
(in thousands)
2002 $ 2,541 $ 2,526
2003 1,915 1,903
2004 1,667 1,655
2005 1,346 1,337
2006 1,017 1,010
Thereafter 3,026 2,997
------ -------
$11,512 $11,428
======= =======
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 July
1, 2001, the aggregate minimum rent payable by franchisees guaranteed by the
Company was approximately $0.2 million.
Rent expense was approximately $8.4 million, $10.2 million, and $7.7 million for
the years ended July 1, 2001, July 2, 2000, and June 27, 1999 respectively.
Online Marketing Agreements
The Company has commitments under exclusive online marketing agreements with
various portal providers. Such online marketing costs are capitalized and
amortized on a straight-line basis over the term of the agreements.
On September 1, 2000, the Company entered into a new five-year $22.1 million
interactive marketing agreement with AOL commencing October 1, 2001 and ending
August 31, 2005. Under the terms of the new agreement, the Company will continue
as the exclusive marketer of fresh-cut flowers across six AOL properties
including AOL, AOL.com, CompuServe, Netscape Netcenter, Digital City and ICQ. As
a result of the modification of the previous agreement, the Company recorded a
one-time charge of approximately $7.3 million during its fiscal year 2001 first
quarter.
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.
1-800-FLOWERS.COM, INC.
Schedule II - Valuation and Qualifying Accounts
Additions
--------------------------------
Charged to
Description Balance at Costs Charged to Balance at
Beginning and Expenses Other Accounts- Deductions- End of
of Period Describe Describe Period
-------------- ------------- ----------------- ------------------ ---------------
Year ended July 1, 2001:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $ 926,000 $ 377,000 $ - $ (159,000) (a) $1,144,000
Valuation allowance on deferred tax
assets 22,098,000 - 15,349,000 (b)) - 37,447,000
--------------
------------ ----------------- ------------------ ---------------
$23,024,000 $377,000 $15,349,000 $ (159,000) $38,591,000
==============
============ ================= ================== ===============
Year ended July 2, 2000:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $1,482,000 $221,000 $ - $ (777,000) (a) $ 926,000
Valuation allowance on deferred tax
assets 260,000 - 21,838,000 (b) - 22,098,000
-------------- ------------- ----------------- ------------------ ---------------
$1,742,000 $221,000 $21,838,000 $ (777,000) $23,024,000
============== ============= ================= ================== ===============
Year ended June 27,1999:
Reserves and allowances deducted
from asset accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable $1,377,000 $444,000 $ - $ (339,000) (a) $1,482,000
Valuation allowance on deferred tax
assets - - 260,000 (b) - 260,000
-------------- ------------- ----------------- ------------------ ---------------
$1,377,000 $444,000 $ 260,000 $ (339,000) $1,742,000
============== ============= ================= ================== ===============
___________________________________
(a) Reduction in allowance due to write-off of accounts/notes receivable balances.
(b) Record a valuation allowance for deferred tax assets.
S-1