UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 27, 2005 or ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File No. 0-26841 1-800-FLOWERS.COM, Inc. (Exact name of registrant as specified in its charter) DELAWARE 11-3117311 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 Stewart Avenue, Westbury, New York 11590 --------------------------------------------- (Address of principal executive offices)(Zip code) (516) 237-6000 -------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( ) The number of shares outstanding of each of the Registrant's classes of common stock: 28,859,752 ---------- (Number of shares of Class A common stock outstanding as of May 2, 2005) 36,864,465 ---------- (Number of shares of Class B common stock outstanding as of May 2, 2005) 1-800-FLOWERS.COM, Inc. TABLE OF CONTENTS INDEX Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - March 27, 2005 (Unaudited) and June 27, 2004 1 Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended March 27, 2005 and March 28, 2004 2 Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 27, 2005 and March 28, 2004 3 Notes to Consolidated Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 Part II. Other Information Item 1. Legal Proceedings 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits 17 Signatures 18 PART I. - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) March 27, June 27, 2005 2004 ------------- -------------- (unaudited) Assets Current assets: Cash and equivalents $71,601 $ 80,824 Short-term investments 20,279 22,550 Receivables, net 13,263 9,013 Inventories 28,658 19,625 Deferred income taxes 18,522 16,463 Prepaid and other 3,282 1,517 ------------- ------------ Total current assets 155,605 149,992 Property, plant and equipment, net 40,904 42,460 Investments 5,865 8,260 Goodwill 42,553 34,529 Other intangibles, net 2,108 2,598 Deferred income taxes 10,693 13,548 Other assets 7,944 10,165 ------------- ------------ Total assets $265,672 $261,552 ============= ============ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $67,018 $ 63,266 Current maturities of long-term debt and obligations under capital leases 2,867 3,022 ------------- ------------ Total current liabilities 69,885 66,288 Long-term debt and obligations under capital leases 3,913 6,062 Other liabilities 2,856 2,812 ------------- ------------ Total liabilities 76,654 75,162 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - - Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,739,486 and 29,428,143 shares issued at March 27, 2005 and June 27, 2004, respectively 297 295 Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465 shares issued at March 27, 2005 and June 27, 2004 421 421 Additional paid-in capital 257,910 255,829 Retained deficit (63,099) (67,047) Deferred Compensation (1,228) - Treasury stock, at cost-326,023 and 52,800 Class A shares at March 27, 2005 and June 27, 2004, respectively and 5,280,000 Class B shares (5,283) (3,108) ------------- ------------ Total stockholders' equity 189,018 186,390 ------------- ------------ Total liabilities and stockholders' equity $265,672 $261,552 ============= ============ See accompanying notes. 1 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended --------------------------------- --------------------------------- March 27, March 28, March 27, March 28, 2005 2004 2005 2004 ---------------- ---------------- --------------- ---------------- Net revenues $157,033 $134,069 $484,561 $442,411 Cost of revenues 97,947 79,429 283,291 253,072 ---------------- ---------------- --------------- ---------------- Gross profit 59,086 54,640 201,270 189,339 Operating expenses: Marketing and sales 45,813 37,693 148,546 133,301 Technology and development 4,160 3,576 10,556 10,510 General and administrative 9,864 7,872 25,420 23,228 Depreciation and amortization 3,350 3,572 11,016 11,332 ---------------- ---------------- --------------- ---------------- Total operating expenses 63,187 52,713 195,538 178,371 ---------------- ---------------- --------------- ---------------- Operating (loss) income (4,101) 1,927 5,732 10,968 Other income (expense): Interest income 570 269 1,227 684 Interest expense (116) (182) (381) (601) Other 55 (5) 80 (218) ---------------- ---------------- --------------- ---------------- Total other income (expense), net 509 82 926 (135) ---------------- ---------------- --------------- ---------------- (Loss) income before income taxes (3,592) 2,009 6,658 10,833 Income tax (benefit) (1,546) 66 2,710 358 ---------------- ---------------- --------------- ---------------- Net (loss) income $(2,046) $1,943 $3,948 $10,475 ================ ================ =============== ================ Net (loss) income per common share: Basic $(0.03) $0.03 $0.06 $0.16 ================ ================ =============== ================ Diluted $(0.03) $0.03 $0.06 $0.15 ================ ================ =============== ================ Weighted average shares used in the calculation of net (loss) income per common share: Basic 66,102 66,016 66,124 65,891 ================ ================ =============== ================ Diluted 66,102 68,984 67,565 68,876 ================ ================ =============== ================ See accompanying notes. 2 1-800-FLOWERS.COM, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended -------------------------------- March 27, March 28, 2005 2004 --------------- -------------- Operating activities: Net income $3,948 $10,475 Reconciliation of net income to net cash provided by operations: Depreciation and amortization 11,016 11,332 Deferred income taxes 2,710 - Bad debt expense 249 401 Stock compensation expense 101 - Other non-cash items - 170 Changes in operating items: Receivables (3,785) (1,880) Inventories (8,703) (2,761) Prepaid and other (1,765) (1,106) Accounts payable and accrued expenses 1,765 (5,756) Other assets 1,840 2,207 Other liabilities 44 74 --------------- -------------- Net cash provided by operating activities 7,420 13,156 Investing activities: Purchase of investments (84,593) (34,072) Sale of investments 89,259 48,696 Acquisition of business (9,674) - Capital expenditures, net of non-cash expenditures (8,106) (5,866) Other 143 187 --------------- -------------- Net cash (used in) provided by investing activities (12,971) 8,945 Financing activities: Acquisition of treasury stock (2,175) - Proceeds from employee stock options/purchase plan 754 1,389 Repayment of notes payable and bank borrowings (967) (834) Payment of capital lease obligations (1,284) (1,288) --------------- -------------- Net cash used in financing activities (3,672) (733) --------------- -------------- Net change in cash and equivalents (9,223) 21,368 Cash and equivalents: Beginning of period 80,824 49,079 --------------- -------------- End of period $71,601 $70,447 =============== ============== See accompanying notes. 3 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 27, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2005. The balance sheet information at June 27, 2004 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2004. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Employee Stock Incentive Plans The Company accounts for its stock option plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no stock-based compensation is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant and the related number of shares granted is fixed at that point in time. The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Three Months Ended Nine Months Ended ------------------------------ ------------------------------ March 27, March 28, March 27, March 28, 2005 2004 2005 2004 -------------- -------------- -------------- --------------- (in thousands, except per share data) Net (loss) income - As reported $(2,046) $1,943 $3,948 $10,475 Less: Stock based compensation (a) 4,218 1,759 7,907 5,598 -------------- -------------- -------------- --------------- Net (loss) income - Pro forma $(6,264) $ 184 $(3,959) $ 4,877 ============== ============== ============== =============== Net (loss) income per share: Basic - As reported $(0.03) $0.03 $0.06 $0.16 Basic - Pro forma $(0.09) $0.00 $(0.06) $0.07 Diluted - As reported $(0.03) $0.03 $0.06 $0.15 Diluted - Pro forma $(0.09) $0.00 $(0.06) $0.07 (a) In March 2005, the Company accelerated the vesting of all unvested stock options awarded to employees and officers which had an exercise price greater than $10.00 per share. Options to purchase approximately 1.9 million shares became exercisable immediately as a result of the vesting acceleration. Assuming that the Company adopts SFAS 123R, "Share-Based Payment," as expected in the first quarter of fiscal 2006, the decision to accelerate the vesting of the identified stock options will result in the Company not being required to recognize share-based compensation expense, of approximately $2.1 million in fiscal 2006 and $0.9 million in fiscal 2007. The Company sought to balance the 4 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) benefit of eliminating the requirement to recognize compensation expense in future periods with the need to continue to motivate employee performance through previously issued, but currently unvested, stock option grants. With those factors being considered, management determined it to be appropriate to only accelerate those unvested stock options where the strike price was reasonably in excess of the Company's then current stock price. The effect of accelerating the vesting for all unvested shares with exercise prices greater than $10.00 per share was an increase to the pro-forma stock based employee compensation expense for the three and nine months ended March 27, 2005 of $3.8 million ($0.06 per basic and diluted share). The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model were as follows: Three months ended ----------------------------- March 27, March 28, 2005 2004 ------------- -------------- Weighted average fair value of options granted $4.10 $5.91 Risk-free interest rate 3.86% 3.95% Expected life (in years) 5.0 5.0 Expected volatility 57.0% 70.0% Expected dividend yield 0.0% 0.0% Comprehensive Income For the three and nine months ended March 27, 2005 and March 28, 2004, the Company's comprehensive income was equal to the respective net income for each of the periods presented. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for, and will be adopted by the Company beginning with the first quarter of fiscal 2006. The Company currently uses the Black-Scholes model to value its options and is currently assessing which model will be used in the future, as well as the impact that SFAS 123R will have on its results of operations and financial position. See Employee Stock Incentive Plans, above for information related to the pro forma effect on reported net income and net income per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, "Acounting for Stock Based Compensation," to stock-based employee compensation. 5 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Note 2 - Net (Loss) Income Per Common Share The following table sets forth the computation of basic and diluted net (loss) income per common share: Three Months Ended Nine Months Ended ---------------------------------- ---------------------------------- March 27, March 28, March 27, March 28, 2005 2004 2005 2004 ----------------- --------------- ---------------- ---------------- (in thousands, except per share data) Numerator: Net (loss) income $(2,046) $1,943 $3,948 $10,475 ================= =============== ================ ================ Denominator: Weighted average shares outstanding 66,102 66,016 66,124 65,891 Effect of dilutive securities: Employee stock options - 2,968 1,441 2,985 ----------------- --------------- ---------------- ---------------- Adjusted weighted-average shares and assumed conversions 66,102 68,984 67,565 68,876 ================= =============== ================ ================ Net (loss) income per common share: Basic $(0.03) $0.03 $0.06 $0.16 Diluted $(0.03) $0.03 $0.06 $0.15 Note 3 - Goodwill and Intangible Assets The change in the net carrying amount of goodwill is as follows: March 27, 2005 ---------------- (in thousands) Goodwill - beginning of year $34,529 Acquisition of Winetasting Network 7,499 Other 525 ----------- Goodwill - end of period $42,553 =========== 6 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The Company's other intangible assets consist of the following: March 27, 2005 June 27, 2004 ---------------------------------------- --------------------------------------- Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period Amount Amortization Net Amount Amortization Net --------------- ------------ --------------- ----------- ----------- --------------- ----------- (in thousands) Intangible assets with determinable lives Investment in licenses 14 - 16 years $ 4,927 $3,357 $1,570 $4,927 $3,115 $1,812 Customer lists 3 years 910 885 25 910 657 253 Other 5 years 194 157 37 194 137 57 ------------ --------------- ----------- ----------- --------------- ----------- 6,031 4,399 1,632 6,031 3,909 2,122 Trademarks with - 476 - 476 476 - 476 indefinite lives ------------ --------------- ----------- ----------- --------------- ----------- Total identifiable intangible assets $6,507 $4,399 $2,108 $6,507 $3,909 $2,598 ============ =============== =========== =========== =============== =========== Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.1 million, fiscal 2006 - $0.3 million, fiscal 2007 - $0.3 million, fiscal 2008 - $0.3 million, fiscal 2009 - $0.3 million, and thereafter - $0.3 million. Note 4 - Long-Term Debt The Company's long-term debt and obligations under capital leases consist of the following: March 27, June 27, 2005 2004 ---------------- ----------- (in thousands) Commercial notes and revolving credit lines $4,576 $5,504 Seller financed acquisition obligations 45 85 Obligations under capital leases 2,159 3,495 ----------- ----------- 6,780 9,084 Less current maturities of long-term debt and obligations under capital leases 2,867 3,022 ----------- ----------- $3,913 $6,062 =========== =========== Note 5 - Income Taxes At the end of each interim reporting period, the Company makes an estimate of the effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. Income taxes have been included in the accompanying financial statements on the basis of an estimated annual effective rate of 40.7%. The primary reason that the tax rate differs from the 35% statutory federal corporate income tax rate is due to state income tax expense. Note 6 - Acquistion of The Winetasting Network On November 15, 2004, the Company acquired The Winetasting Network, a Napa Valley, California based distributor and direct-to-consumer wine marketer, for $9.4 million, including acquisition costs and the retirement of $2.4 million of 7 long-term debt. The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The preliminary allocation of the 1-800-FLOWERS.COM, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) purchase price consists of the following (in thousands): Net current assets $(870) Other non-current assets 80 Plant and equipment 798 Deferred tax assets 1,914 Goodwill 7,499 ----------- Total purchase price $9,421 =========== Note 7 - Commitments and Contingencies Legal Proceedings From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its consolidated financial position, results of operations or liquidity. Note 8 - Subsequent Event - Acquisition of Cheryl & Co On March 28, 2005, the Company completed its acquisition of Cheryl & Co., Inc., a Westerville, Ohio-based manufacturer and direct marketer of premium cookies and related baked gift items, with annual revenues of approximately $33 million during its most recent year ended January 29, 2005. The purchase price of approximately $42.0 million, including acquisition costs, was funded utilizing the Company's available cash and investment balance, and included $6.3 million used to retire Cheryl & Co.'s outstanding debt. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements Certain of the matters and subject areas discussed in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company's current expectations, assumptions, estimates and projections about its business and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those more fully described under the caption "Risk Factors that May Affect Future Results" within the Company's Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Overview For more than 25 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice" (sm) - has been providing customers across the nation with the freshest flowers and finest selection of plants, gift baskets, gourmet foods and confections, and plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers the best of both worlds: exquisite, florist-designed arrangements individually created by some of the nation's top floral artists and hand-delivered the same day, and spectacular flowers shipped Fresh From Our Growers (sm). Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a Company-operated or franchised store. Gift advisors are available 24/7, and fast and reliable delivery is offered same day, any day. As always, 100 percent satisfaction and freshness is guaranteed. The 1-800-FLOWERS.COM collection of brands also includes home decor and garden merchandise from Plow & Hearth(R) (1-800-627-1712 or www.plowandhearth.com); premium popcorn and specialty treats from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or wwwcherylandco.com); gourmet foods from GreatFood.com(R) (www.greatfood.com); children's gifts from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com) and wine gifts from the WineTasting Network(R) (www.ambrosiawine.com and www.winetasting.com). Results of Operations Net Revenues Three Months Ended Nine Months Ended ----------------------------------------------- --------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change --------------- ---------------- -------------- --------------- -------------- -------------- (in thousands) Net revenues: Telephonic $52,424 $50,851 3.1% $199,580 $204,596 (2.5)% Online 91,638 74,521 23.0% 252,410 214,335 17.8% Retail/fulfillment 12,971 8,697 49.1% 32,571 23,480 38.7% -------------- ---------------- --------------- -------------- Total net revenues $157,033 $134,069 17.1% $484,561 $442,411 9.5% ============== ================ =============== ============== Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. The Company grew its combined telephonic and online revenue by 14.9% and 7.9%, respectively, during the three and nine months ended March 27, 2005, due to an increase in order volume resulting from: (i) the Company's strong brand name recognition, (ii) continued leveraging of its existing customer base, (iii) increased spending on its marketing and selling programs, designed to improve customer 9 acquisition and accelerate top-line growth, (iv) the impact of Easter holiday, which fell in the third quarter of fiscal 2005, compared to the fourth quarter during fiscal 2004, and (v) the continued improvement in the sale of home decor gift items which increased 7.4% during the three months ended March 27, 2005, continuing the turnaround which began during the Company's fiscal second quarter. During the three and nine months ended March 27, 2005, non-floral gift products accounted for 35.0% and 50.6%, respectively, of total combined telephonic and online net revenues, consistent with the same periods of the prior year. The Company fulfilled approximately 2,432,000 and 7,474,000 orders through its combined telephonic and online sales channels during the three and nine months ended March 27, 2005 an increase of 18.5% and 9.1%, respectively. Order volume through the Company's online sales channel increased by 26.8% and 18.3% during the three and nine months ended March 27, 2005, respectively, in comparison to the prior year periods, as a result of improved conversion of qualified traffic through the Company's websites, increased marketing efforts through search engines and affiliates, and the continued migration of customers from the Company's telephonic sales channel, as well as the aforementioned shift in the timing of the Easter Holiday. The Company's telephonic sales channel experienced a 4.9% increase in order volume during the three months ended March 27, 2005 as a result of improvement in the sale of home decor gift items, as well as the impact of the shift in the timing of the Easter Holiday on the Company's Popcorn Factory products. During the nine months ended March 27, 2005, the revenue through the Company's telephonic sales channel decreased by 2.5% due to the migration of telephonic customers to the Company's websites. The Company's combined telephonic and online average order values of $59.24 and $60.47 during the three and nine months ended March 27, 2005, decreased 3.0% and 1.1% over the respective prior year periods, primarily as a result of product mix and increased promotional activity due to the highly competitive nature of the Valentine's holiday period. The online sales channel contributed 63.6% and 55.8% of total combined telephonic and online revenues during the three and nine months ended March 27, 2005, respectively, compared to 59.4% and 51.2% for the respective periods of the prior year. The Company intends to continue to drive revenue growth through its online sales channel, and continue the migration of its customers from the telephone to the Web for several important reasons: (i) online orders are less expensive to process than telephonic orders, (ii) online customers can view the Company's full range of gift offerings, including non-floral gifts, which in many cases yield higher gross margin opportunities, (iii) online customers can utilize all of the Company's services, such as the various gift search functions, order status check and reminder service, thereby deepening the relationship with its customers and leading to increased order rates, and (iv) when customers visit the Company online, it provides an opportunity to interact with them in an electronic dialog via cost efficient marketing programs. Retail/fulfillment revenues for the three and nine months ended March 27, 2005 increased in comparison to the same periods of the prior year, primarily as a result of increased membership and sales of product and service offerings to the Company's BloomNet(TM) network, as well as the incremental winery services revenue generated by the acquisition of The Winetasting Network in November 2004. In order to extend the Company's leadership position in the floral and thoughtful gift marketplace, the Company will continue to execute against its previously announced plan to increase its marketing spending during the remainder of fiscal 2005. In addition to increasing its presence in online media, as well as broadcast advertising, the Company will expand its BloomNet business-to-business floral operations, build out its technology platform, and increase the depth of its marketing programs and personnel within its recently acquired wine gift business in support of the Company's growing gourmet gift and gift basket product lines, which now includes Cheryl & Co., which was acquired on March 28, 2005. While the Company believes that these investments will impact the Company's earnings growth over the short term, over the longer term, the Company believes that this strategy will enable it to achieve sustainable double digit revenue growth and provide further leverage within its business model and therefore improved profitability. Gross Profit Three Months Ended Nine Months Ended --------------------------------------------- ---------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change -------------- --------------- ------------- --------------- --------------- ------------- (in thousands) Gross profit $59,086 $54,640 8.1% $201,270 $189,339 6.3 % Gross margin % 37.6% 40.8% 41.5% 42.8% 10 Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (primarily fees paid directly to florists), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues include labor and facility costs related to direct-to-consumer merchandise operations, as well as facility costs on properties that are sublet to the Company's franchisees. Gross profit increased during the three and nine months ended March 27, 2005, in comparison to the same periods of the prior year, as a result of increased revenue on the Company's online and retail fulfillment sales channels. Gross margin percentage during the three and nine months ended March 27, 2005 decreased in comparison to the prior year, by 320 and 130 basis points respectively, due to a combination of product mix, increased promotional discounting related to the highly competitive nature of the Valentine's holiday, as well as increased carrier fuel surcharges and shipping costs associated with the Monday placement of the Valentine's Holiday. During the remainder of fiscal 2005 the Company expects that its gross margin percentage will improve through a combination of operational efficiencies and continued growth of its higher margin specialty brands gift categories, including the recent acquisition of Cheryl & Co. Marketing and Sales Expense Three Months Ended Nine Months Ended ---------------------------------------------- -------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change --------------- --------------- ------------- -------------- --------------- ------------ (in thousands) Marketing and sales $45,813 $37,693 21.5% $148,546 $133,301 11.4% Percentage of net revenues 29.2% 28.1% 30.7% 30.1% Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal agreements, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company's departments engaged in marketing, selling and merchandising activities. Marketing and sales expenses increased during the three and nine months ended March 27, 2005, compared to the same periods of the prior year, as a result of the Company's efforts to increase new customer acquisition and accelerate top-line growth through increased spending in online and broadcast advertising, as well as adding personnel to expand its Bloomnet business-to-business floral operations. Partially funding the increased spending during the highly competitive Valentine's Day holiday period were volume related operating efficiencies, and a continued reduction of order processing costs. As a result of the Company's cost-efficient customer retention programs, of the 1,878,000 and 4,817,000 customers who placed orders during the three and nine months ended March 27, 2005, approximately 57.8% and 48.6% represented repeat customers, compared to 56.6% and 47.7%, in the respective prior year periods. In addition, as a result of the strength of the Company's brands, combined with its cost-efficient marketing programs, the Company added approximately 792,000 and 2,476,000 new customers during the three and nine months ended March 27, 2005, respectively. During the remainder of fiscal 2005, the Company expects to increase its marketing and sales spending in order to accelerate its rate of new customer acquisition, while also leveraging its already significant customer base through cost effective, customer retention initiatives. Such spending will include an increasing presence in online search and affiliate relationships, as well as in direct marketing and broadcast advertising programs. In addition, the Company plans to continue to add personnel to grow its BloomNet membership and support the anticipated growth of its recently acquired wine business. As a result, over the short term the Company expects that marketing and sales expense will increase as a percentage of net revenues, enabling the Company to accelerate revenue growth and thereby extend the Company's leadership in the floral and thoughtful gift marketplace. Technology and Development Expense Three Months Ended Nine Months Ended ---------------------------------------------- -------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change --------------- --------------- ------------- -------------- --------------- ------------ (in thousands) Technology and development $4,160 $3,576 16.3% $10,556 $10,510 0.4% Percentage of net revenues 2.6% 2.7% 2.2% 2.4% 11 Technology and development expense consists primarily of payroll and operating expenses of the Company's information technology group, costs associated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company's order entry, customer service, fulfillment and database systems. During the three and nine months ended March 27, 2005, technology and development expense increased in comparison to the same periods of the prior year, primarily as a result of the incremental expenses associated with the acquisition of The Winetasting Network in November 2004. During the three and nine months ended March 27, 2005, the Company expended $5.6 million and $15.6 million on technology and development, of which $1.4 million and $5.0 million has been capitalized. Although over the longer term, the Company believes that it will continue to demonstrate its ability to leverage its IT platforms, during the remainder of fiscal 2005, the Company intends to improve the technology infrastructure of its wine business, as well as the recently acquired Cheryl & Co. cookies and baked gifts business, and therefore expects that technology and development spending as a percentage of net revenues will be consistent with, or slightly higher than in the prior year. General and Administrative Expense Three Months Ended Nine Months Ended ---------------------------------------------- -------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change --------------- --------------- ------------- -------------- --------------- ------------ (in thousands) General and administrative $9,864 $7,872 25.3% $25,420 $23,228 9.4% Percentage of net revenues 6.3% 5.9% 5.2% 5.3% General and administrative expense consists of payroll and other expenses in support of the Company's executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses. General and administrative expense increased during the three and nine months ended March 27, 2005 in comparison to the same periods of the prior year, primarily as a result of the incremental expenses associated with the acquisition of The Winetasting Network and compliance with the Sarbanes-Oxley Act. Although the Company believes that its current general and administrative infrastructure is sufficient to support existing requirements, as a result of the incremental expenses associated with the Company's wine gift product line and additional overhead added during a seasonally slow period for Cheryl & Co., during the remainder of fiscal 2005, the Company expects that its general and administrative expenses as a percentage of net revenue will increase in comparison to prior year. Depreciation and Amortization Expense Three Months Ended Nine Months Ended ---------------------------------------------- -------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change --------------- --------------- ------------- -------------- --------------- ------------ (in thousands) Depreciation and amortization $3,350 $3,572 (6.2)% $11,016 $11,332 (2.8)% Percentage of net revenues 2.1% 2.7% 2.3 % 2.6% Depreciation and amortization expense during the three and nine months ended March 27, 2005 decreased slightly in comparison to the same periods of the prior year, reflecting the impact of the Company's declining rate of capital additions, and the leverage of the Company's existing infrastructure. Although the Company believes that continued investment in its infrastructure, primarily in the areas of technology and development, including the improvement of the technology platform of the Company's wine business, but also for the anticipated expansion of Cheryl & Co.'s operations, is critical to attaining its strategic objectives, the Company expects that depreciation and amortization will continue to decrease as a percentage of net revenues. 12 Other Income (Expense) Three Months Ended Nine Months Ended -------------------------------------------- --------------------------------------------- March 27, March 28, March 27, March 28, 2005 2004 % Change 2005 2004 % Change -------------- --------------- ----------- --------------- --------------- ----------- (in thousands) Interest income $570 $269 111.9% $1,227 $684 79.4% Interest expense (116) (182) 36.3% (381) (601) 36.6% Other 55 (5) 1200.0% 80 (218) 136.7% -------------- --------------- ----------- --------------- --------------- $509 $82 520.7% $926 ($135) 785.9% ============== =============== =============== =============== Other income (expense) consists primarily of interest income earned on the Company's investments and available cash balances, offset by interest expense, primarily attributable to the Company's capital leases and other long-term debt. The increase in other income (expense) during the three and nine months ended March 27, 2005 was primarily attributable to higher interest income, resulting from an increase in average cash balances and interest rate returns, as well as lower interest expense due to maturing capital lease obligations. Additionally, during the nine months ended March 27, 2005, other income (expense) increased as a result of a loss incurred upon the conversion/relocation of a retail store into a local fulfillment center in the prior year period. Income Taxes During the three and nine months ended March 27, 2005, the Company recorded an income tax (benefit) provision of ($1.5) million and $2.7 million, respectively, based upon the Company's anticipated effective annualized income tax rate of approximately 41%. During the three and nine months ended March 28, 2004 the Company recorded a $0.1 million and $0.4 million income tax provision, respectively, for federal alternative minimum tax (AMT) and various state taxes resulting from state tax law changes that deferred the use of available net operating losses. Until the fourth quarter of the prior fiscal year, the Company had recorded a full valuation allowance on its deferred tax assets, consisting primarily of net operating loss carryforwards. At June 27, 2004, management of the Company reassessed the valuation allowance previously established against its net deferred tax assets. Based upon the Company's earnings history and projected future taxable income, management determined that it is more likely than not that the deferred tax assets would be realized, and, accordingly, at that time, the Company removed the valuation allowance. Liquidity and Capital Resources At March 27, 2005, the Company had working capital of $85.7 million, including cash and equivalents and short-term investments of $91.9 million, compared to working capital of $83.7 million, including cash and equivalents and short-term investments of $103.4 million, at June 27, 2004. In addition to its cash and short-term investments, at March 27, 2005 and June 27, 2004, the Company maintained approximately $5.9 million and $8.3 million, respectively, of long-term investments, consisting primarily of investment grade corporate and U.S. government securities. Net cash provided by operating activities of $7.4 million for the nine months ended March 27, 2005 was primarily attributable to the Company's net income as well as non-cash charges of depreciation and amortization and deferred income taxes, offset in part by seasonal changes in working capital, including receivables which increased in comparison to the prior year due to the timing of the Easter Holiday in relation to the Company's quarter end, and inventory, which increased in preparation for the upcoming selling season. Net cash used in investing activities of $13.0 million for the nine months ended March 27, 2005 was primarily attributable to acquisition of The Winetasting Network as well as capital expenditures, primarily related to the Company's technology infrastructure, offset in part by maturities of long-term investments. Net cash used in financing activities of $3.7 million for the nine months ended March 27, 2005, resulted primarily from the acquisition of the Company's Class A common stock, which was placed in treasury, as well as repayment of amounts outstanding under the Company's credit facilities and long-term capital lease obligations, offset in part by the net proceeds received from the exercise of employee stock options and purchase plan. 13 At March 27, 2005, the Company's contractual obligations consist of: Payments due by period ----------------------------------------------------------------------------------- (in thousands) Less than 1 1 - 3 3 - 5 More than 5 Total year years years years ----------- --------------- ------------ ------------- ---------------- Long-term debt $4,621 $1,268 $2,728 $625 - Capital lease obligations 2,159 1,599 560 - - Operating lease obligations 10,876 3,250 4,034 1,476 $2,116 Sublease obligations 9,236 2,453 3,688 1,994 1,101 Other cash obligations (*) 127 127 - - - Purchase commitments (**) 10,807 10,807 - - - ----------- --------------- ------------ ------------- ---------------- Total $37,826 $19,504 $11,010 $4,095 $3,217 =========== =============== ============ ============= ================ (*) Other cash obligations include $0.1 million of franchise lease guarantees. (**) Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial statements and results of operations are based upon the consolidated financial statements of 1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affects the Company's more significant judgments and estimates used in preparation of its consolidated financial statements. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company states inventory at the lower of cost or market. In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare that with inventory levels. It is possible that changes in consumer demand could cause a reduction in the net realizable value of inventory. Goodwill and Other Intangible Assets 14 Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is evaluated annually for impairment. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits consumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. The Company periodically evaluates acquired businesses for potential impairment indicators. Judgment regarding the existence of impairment indicators is based on market conditions and operational performance of the Company. Future events could cause the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. Capitalized Software The carrying value of capitalized software, both purchased and internally developed, is periodically reviewed for potential impairment indicators. Future events could cause the Company to conclude that impairment indicators exist and that capitalized software is impaired. Income Taxes The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company has recognized as a deferred tax asset the tax benefits associated with losses related to operations, which are expected to result in a future tax benefit. Realization of this deferred tax asset assumes that the Company will be able to generate sufficient taxable income so that these assets will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for years beginning after June 15, 2005, and will be adopted by the Company beginning with the first quarter of fiscal 2006. The Company currently uses the Black-Scholes model to value its options and is currently assessing which model will be used in the future, as well as the impact that SFAS 123R will have on its results of operations and financial position. See Employee Stock Incentive Plans, above for information related to the pro forma effect on reported net income and net income per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, "Acounting for Stock Based Compensation," to stock-based employee compensation. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in investment grade corporate and U.S. government securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended March 27, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 16 PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business. The Company is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, consolidated financial position, results of operations or liquidity. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS Exhibits. 31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1-800-FLOWERS.COM, Inc. ----------------------------------- (Registrant) Date: May 5, 2005 /s/ James F. McCann - ------------------------- ----------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Date: May 5, 2005 /s/ William E. Shea - ------------------------- ----------------------------------- William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer) 18